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International Tax Developments in 2011 Moving forward

January 2012 www.deloitte.com/in

Contents

Foreword International Tax Rulings - India Permanent Establishment Royalty & Fees for Technical/ Included Services Capital Gains Others International Tax Updates - India Tax Rulings- Outside India International Tax Developments Glossary Contacts

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International Tax Developments in 2011Moving forward

Foreword

The year 2011 witnessed substantial development in India on international tax matters. Judicial pronouncements by various forums indicate an approach towards substance rather than form, by reiterating some of the principles or laying down some newer approaches to interpret the international tax law. Further, the revenue authorities have been perceived as adopting an aggressive stance to safeguard tax collection in the face of weakening world economies and stiff international competition. On the international front as well, we have witnessed significant developments in curbing tax avoidance and monitoring of tax havens. Besides, an increasing number of exchange agreements are being entered into between the territories and the countries. To stem the uncertainties relating to interpretation of international tax between bilateral countries, an arbitration mechanism has been suggested to provide certainty and reconciliation on such matters. The OECD has been in the forefront of resolving some of the international tax issues by releasing discussion papers on contentious

aspects. We have also seen the UN release its 2011 version of the Model Convention and the Commentary after a gap of a decade. The UN is also considering taking further work in the area of tax treatment of services, as well as for several other articles of the UN Model. Analytical papers amongst other are proposed to be prepared on classification of hybrid entities; treatment of auxiliary/ancillary activities and taxation by electronic means. This document aims at compiling some of the international tax pronouncements outlining the thought processes, the continuing uncertainty in some areas, and the new approaches which hitherto were not conceived, but could provide the background to the understanding needed for adoption in future years. Additionally, some international cases of importance and developments from the OECD and UN have also been highlighted. We trust you shall find the same useful and we look forward to your suggestions and comments.

International Tax Rulings - India

Permanent Establishment
Under the India-Korea DTAA, the LO constituting the PE of the Head Office (HO) was engaged in activities such as identifying buyers, negotiating and agreeing pricing, and procuring purchase orders The taxpayer had set up an LO in India. Based on a survey and discussion with employees working at the LO, it was found that the LO was not into liaising; rather it was into full-fledged business activities. The LO identified, pursued and followed up with customers, negotiated and finalized prices, processed orders and provided payment and post-sale support. Further, the final pricing and margin was decided by the LO without referring it to the HO, and the contract was closed exclusively by the LO sales personnel. Though the HO received order forms, raised invoices and received payment from the customers, the LO constantly monitored and followed up the entire process. The revenue authorities held that the LO constituted a PE of the taxpayer in India under the DTAA. On appeal, the HC held that based on the facts of the case, the LO was actually carrying out commercial activities of procuring, identifying buyers, negotiating with buyers, agreeing to price and requesting them to place purchase orders. The HC noted that the said purchase orders would be forwarded to the HO, material would be dispatched to customers, and the LO would follow up on payments and provide sales support. The LO would hence be construed as a PE under Article 5 of the DTAA and, therefore, the business profits earned in India through this LO were liable to be taxed in India. Jebon Corporation v. ACIT [2011- TII-15-HC-KAR INTL] LO of a non-resident qualifies as its business connection and PE in India if the activities of the LO are not confined to the purchase of goods in India for the purpose of export The applicant, a company incorporated in the U.S., is engaged in the wholesale and retail business of active outdoors apparel with operations in North America, Europe and Asia. It established an LO in India for undertaking liaison activities in connection with purchase of goods in India. The LO also assists the applicant in purchase of goods from Egypt and Bangladesh and engages in quality and production monitoring of goods purchased from these countries. The purchases were invoiced by the Indian suppliers directly to the applicant who in turn sells the same to wholesale/retail customers outside India. The sale price is received by the applicant from its customers outside India. The specific activities of the LO in India as stated by the applicant are: Collect information and samples of various items from manufacturers on materials available in India Quality check various products at laboratories to see whether they adhere to the costing and quality parameters as prescribed by the applicant Quality check of various products at laboratories to see whether it adheres to the costing and quality parameters as prescribed by the applicant Coordinate and act as a channel of communication between the applicant and the Indian vendors On an application for an Advance ruling, the AAR ruled that in addition to the activities relating to the purchase of goods, the LO was carrying out various activities such as ensuring the choice of quality material, occasional quality testing, conveying of requisite design, picking out competitive sellers, etc. Further, the LO had facilitated the business of the applicant in Egypt and Bangladesh. The AAR observed that it would be unrealistic to state that all the activities other than the actual sale of the goods are not integral part of the business of the applicant and have no role in the profit being made by the applicant on the sale of its branded products. Further, all the profits cannot be said to have accrued outside India since the sales are made outside India. Considering the same, the operations of the applicant in India cannot be said to be confined to the purchase of goods only in India for the purpose of export. Hence the purchase/sourcing exemption available under the Act would not be applicable to the applicant. The LO would constitute a fixed place PE of the applicant in India under Article 5(1) of the India-USA DTAA since the applicant was carrying at least a part of its business through such office (except the selling activity). Further the activities of the LO are not limited only to purchase of goods or merchandise or for collection of information for the enterprise and cannot be classified as preparatory or auxiliary. Hence, the provisions for exclusion under Article 5(3)(d) and

International Tax Developments in 2011Moving forward

Article 5(3)( e) would not be applicable. Accordingly, the applicant shall be taxable in India but only in respect of the income which can be attributed to the operations carried out by the LO in India. Columbia Sportswear Company [(2011)12 taxmann. com 349 (AAR - New Delhi)] Profits from off-shore supply of equipment would not be taxable if transfer of title to purchaser takes place abroad LG Cable

handed over to the nominated bank where the Letter of Credit was opened. However, a part of the consideration for the supply was payable to the taxpayer only after operational acceptance on the erection and completion of the system. This could not be construed to mean that the title in the goods did not pass to the buyer outside India. Hence, the profits from the offshore supply of equipment accrued when the goods were sold. The HC observed that even under clause (a) of Explanation (1) to s. 9 (i) of the Act only such part of the income as is reasonably attributable to the operations carried out in India is deemed to arise in India. Further, although the taxpayer had a PE with regard to the onshore activities, the same would be of no relevance as the said PE had no role to play in the execution of the offshore supply contract and was set up for the sole purpose of enabling the performance of the onshore services contract. DIT v. LG Cable [(2011) 9 taxmann.com 51 (Delhi HC)] LO performing only pre-purchase function would not constitute a PE of Head Office The LO of the taxpayer used to negotiate the right quality, size and carat of the diamonds and prices from the suppliers for export. The selected diamonds were packed and sealed, and dispatched to the customs office. The LO had a dedicated employee to obtain the clearance from the approver and examiner of the Custom authorities. The revenue authorities considered the operations of the LO as being run through a PE and, hence, the income attributable thereon was taxable in India. The Tribunal observed that no quality change was brought by the LO while purchasing in India for export purposes. Further all the activities carried out by the LO are basic and preliminary requirement of the purchasing process/ operation and, hence, no income was assessable in India. ADIT v. M. Fabrikant and Sons Ltd. [ (2011) 9 Taxmann. com 286(Mum Trib)] Offshore supply of equipment not taxable in India; payment for software forming integral part of hardware is not taxable as royalty The taxpayer was in the business of supplying hardware and software for telecommunication services. These projects, undertaken on a turnkey basis, involved supply of hardware and software, installation and commissioning and after sales services. The taxpayer entered into agreements with various cellular phone operators for supply of hardware telecommunication

Offshore supply

Korea India

Onsite Services PGCIL

PE

The taxpayer, a Korean company, was awarded two contracts by the Power Grid Corporation of India Limited (PGCIL). One contract was for the onshore execution of the Fiber Optic Cabling Project, involving onshore services such as installation, testing and communication of the cabling system; the other was for offshore supply of equipment. The taxpayer offered to be taxed in India for the income attributable to activities carried out in India in connection with the onshore contract on a net income basis under Article 5 and 7 of the DTAA between India and Korea. In respect of the profit from the offshore supply contract, the taxpayer contented that the same was not liable to tax in India, since the title in the goods had entirely passed on to PGCIL outside India. On appeal, the HC observed that though the two contracts were entered into on the same day and between the same parties, they could not be considered as a composite contract. The contract provided for supply of equipment to be completed outside India, and the property in the goods to be transferred outside India. The sale was completed as soon as the goods were shipped at the port of shipment, and the shipping documents were

services. The primary issues for consideration were whether the sale of telecommunication equipment to cellular operators in India constituted a business connection under the provisions of the Act and whether payments made for software that was sold as part of the telecommunication equipment was taxable as royalty under the Act and India-Sweden DTAA. The HC observed that in a transaction for sale of goods, the determining factor would be as to where the property in goods passes. The place of negotiation of the contract; or place of signing or formal acceptance thereof; or overall responsibility of the taxpayer are not relevant circumstances. Further, the terms of the contract provide that the acceptance test was not material even for passing of the title and the risk, because even if such a test found out that the system did not confirm to the contractive parameters, the operators could call upon the taxpayer to cure the defect and/or claim damages. However, the operators did not have a right to reject the equipment on failure of the acceptance test. The HC held that since the sale of telecommunication equipment took place outside India; and the title in goods also passed outside India, the taxpayer has not earned any income in India through or from a business connection in India. On the question of royalty, the HC held that the supply of equipment in question was supply of goods. The consideration paid by the cellular operators would amount to royalty only if they had obtained all or any copyright rights in such software that is protected in India as literary work. A distinction must be made between the acquisition of a copyright right and a copyrighted article. Where the software is part of the hardware supplied and the software cannot be used independently, the software would be considered as merely facilitating the functioning of the telecommunication equipment, thereby forming a part of it. Thus, payment for the software forming part of the equipment could not be regarded as royalty. DIT v. Ericsson Radio System A.B. and Others [(2011) 16 taxmann.com 371 (Delhi)] Duration of different projects cannot be aggregated for determining the PE unless the contracts are inter-connected or artificially split The taxpayer, a non-resident company, entered into three contracts relating to (i) replacement of main deck with temporary deck, (ii) charter of hook up/

accommodation barge and (iii) charter of barge for power project with two different parties in India. The aggregate duration of work under these contracts was more than the threshold limit of nine months as prescribed under the Article 5(2)(i) of the India-Mauritius DTAA. However, none of the individual contracts was for a duration of more than nine months. The revenue authorities contended that the three contracts need to be aggregated and as the period would exceed the threshold time limit, the taxpayer would be construed as having a PE in India and, accordingly, assessable on the income attributable to the three contracts. The Tribunal observed that the expressions in the relevant definition clause of the India-Mauritius DTAA are in singular and there is no specific mention about aggregating the number of days spent on various sites, projects or activities. Further, the aggregation of duration of different contracts could be carried out if the contracts are interconnected or are artificially split to circumvent the duration test. In the absence of any finding to such extent, the aggregation of duration of different contracts could not be accepted and hence the taxpayer had no PE in India. ADIT (Int Tax) v. Valentine Maritime (Mauritius) Ltd [130 TTJ 417 (Mum. Trib)] Branch office of a non-resident company merely used for the purpose of remunerating employees seconded by the parent to work for the Indian subsidiary would not constitute a PE in India Whirlpool Corp., USA Subsidiary Taxpayer Subsidiary

Outside India Salary payment to employees Branch India Whirlpool India Limited (WIL)

The taxpayer is a subsidiary of Whirlpool Corporation, USA. Whirlpool Corporation, USA--which has a subsidiary company in India, Whirlpool India Ltd (WIL)--engaged in the business of manufacture and sale of consumer durable

International Tax Developments in 2011Moving forward

goods. The taxpayer opened a branch office in India with the objective of safeguarding the interest of the parent company in India, which had made investment in equity capital of WIL. The parent company also wanted to ensure that some senior level executives are placed in WIL to manage its affairs and, accordingly, some of the employees were deputed to the Indian subsidiary. Since WIL was incurring losses continuously, the payment of salaries to employees was made by the parent company through the branch of the taxpayer. The taxpayer filed its return declaring a loss, which was on account of payment of salaries to the employees seconded by the parent company. The salary expenses were met out of repatriation of foreign exchange from the USA and since there was no business activity of the branch in India, the loss was not claimed. The revenue authorities contented that the operations of the branch of the taxpayer were substantive business operations in terms of India, providing various services as well as managing the affairs of the parent company and hence its income was taxable in India. The Tribunal observed that the taxpayer has a fixed place of business in India in the form of the branch office although there seemed to be nothing on record to reflect that the business of the taxpayer has been conducted wholly or partly through this branch office. It was held that where the branch office of a U.S. company was to be used only for the purpose of remunerating employees seconded by the parent to work for the parents subsidiary in India, such branch office could not be considered as rendering any service and, hence, could not be considered as a PE. Whirlpool India Holdings Ltd v. DDIT (2011-TII-15-ITAT-DEL-INTL) Project office involved in co-ordination and execution of turnkey project constitutes a fixed place PE in India The taxpayer, along with Larsen & Toubro Limited, entered into an agreement with Oil and Natural Gas Corporation (ONGC) to carry out a project at ONGCs western offshore site in India. The scope of work for the above project included surveys (pre-engineering, pre-construction/pre-installation and post construction), design, engineering, procurement, fabrication, anticorrosion and weight coating, load out, tie down/sea fastening, tow out/sail out, transportation, installation, modifications at existing facilities, etc.

The agreement provided that this was a turnkey project, and it required the taxpayer to provide ONGC with an organization chart and a curriculum vitae of every project member involved, within a stipulated time of the commencement of work. The contract also provided that provisional progressive payments would be made by ONGC to the taxpayer on it furnishing a performance bank guarantee and obtaining the permission of the Reserve Bank of India (RBI) to establish a Project Office in India. Further, a Board Resolution passed by the taxpayer indicated that a Project Office was to be opened for the coordination and execution of the project. In the return of income filed for the Assessment Year 2007-08, the taxpayer did not offer income out of revenue earned by it on the activities carried outside India on the basis that only such part of income as was attributable to the operations carried out in India should be taxable in India. However, the revenue authorities held that the project office of the taxpayer constituted a PE in India under Article 5(1) of the India-Korea DTAA. Further, it was held that the contract with ONGC was not divisible in terms of activities to be performed in and outside India and, therefore, the profit arising from the activities performed outside India was chargeable to tax in India. On appeal the Tribunal in holding that the offshore activities were connected to such PE, observed that: The contract with ONGC was a composite contract (i.e., not divisible) starting right from surveys of pre-engineering, pre-construction/pre-installation, design engineering procurement, etc., till the startup and commissioning of the entire facilities and could be distinguished from the case of the SC ruling in Hyundai Heavy Industries (HHI) [291 ITR 482] wherein HHI had only a liaison office and the contract was a divisible contract for fabrication and installation. The payment schedule--referred to as provisional progressive payments--was to be made by ONGC to the taxpayer in accordance with the milestone payment formula and not with reference to the stages of work completed. The resolution and minutes of the meeting of the Board of Directors of the taxpayer, application to and the approval of the RBI to open a Project Office in India does not impose any restrictions on the scope of the activities of the Project Office. To the extent that the Project Office was involved in the execution of the agreement, it would constitute

a fixed place PE of the taxpayer in India under Article 5(1) of the DTAA from the day when the taxpayer was permitted by RBI to open such office. Article 5(3) of the DTAA dealing with Installation PE uses the words likewise encompasses which enhances the meaning of PE to building site, assembly or installation project. Article 5(3) extends the scope of the PE which cannot be read in isolation and also could not be considered as an exclusionary clause restricting the scope of Articles 5(1) and 5(2) of the DTAA. Hence where a PE is formed under Article 5(1) and 5(2), it would not be necessary for the non-resident entity to also fall under Article 5(3) to make it liable to be taxed in the source country. The project office had a vital role to play in the execution of the entire contract and, therefore, the exclusionary clause under Article 5(4) dealing with preparatory or auxiliary activities would not apply. Samsung Heavy Industries Co. Ltd vs. ADIT (Intl Tax) [(2011) 13 taxmann.com 14 (Delhi Trib)] Specific provisions contained in Article 5(3) of the India-Netherlands DTAA regarding construction PE would prevail over general provisions contained in Article 5(2) The taxpayer, a Dutch tax resident, entered into a subcontract for dredging and back filling works with Hyundai Heavy Industries. The taxpayer also opened an office in Mumbai to execute such work which lasted for less than six months. The taxpayer contented that the dredging activity, would be construed as a building site or construction, installation or assembly project, within Article 5(3) of the India-Netherlands DTAA and, accordingly, as the said activities did not exceed six months, the income earned therefrom was not subject to tax in India as it did not have a PE in India under Article 5(3) of the India-Netherlands DTAA. The revenue authorities contended that the office of the taxpayer in Mumbai constituted a PE under Article 5(2) of the IndiaNetherlands DTAA, and there was no necessity to look into the specific provision contained under Article 5(3) of the India-Netherlands DTAA. On appeal, the HC affirming the stand of the lower appellate authorities held that Article 5(3) of the IndiaNetherlands DTAA being a specific provision would prevail over the general provisions contained in Article 5(2). Accordingly, income earned from the dredging

activities was held as not liable to any tax in India. CIT v. BKI/HAM [(2011) 15 taxmann.com 102 (Uttarakhand HC)] Interest on income-tax refund earned by a PE is not effectively connected to the PE Clough Engineering Ltd

Have PE in India

Indian PE

Includes interest on refund Refund received from Income-tax department The taxpayer, a non-resident company, having a PE in India earned interest income on an income-tax refund. The taxpayer offered the same to tax as interest income. The revenue authorities held that the interest earned on the refund of the tax deducted at source was from the business receipts and was directly connected with the business and, hence, was taxable as business receipts. The Tribunal held that the real test is not whether the interest on the income tax refund is business income or not, but whether the indebtedness is effectively connected with the PE. As the tax was deducted at source from the PEs business receipts, the indebtedness was connected with the PE. On the other hand, it was the taxpayers onus to pay tax. Such collection of tax by force of law would not establish effective connection of indebtedness with the PE as ultimately it is only the appropriation of profit of the taxpayer and, hence, the interest earned on the income tax refund cannot be said to be effectively connected with the PE. Clough Engineering Ltd v. ACIT [(2011) 11 taxmann.com 70 (Delhi Trib -SB)] Merely a common directorship in foreign company and Indian company would not lead to a fixed place PE in India The taxpayer, a company incorporated in Singapore, entered into an agreement with Prasar Bharti (PB)

International Tax Developments in 2011Moving forward

to produce and broadcast live television signals of international quality, covering international cricket events. The Co-Chairman and a director of the parent, Nimbus Communications Ltd (NCL), were also holding positions as directors in the taxpayer. The taxpayer contended that it was wholly managed and controlled from Singapore and did not have any PE in India under the India-Singapore DTAA. Consequently, in the absence of a PE, the income received, being in the nature of business profits, was not taxable in India. The revenue authorities held that the taxpayer had a fixed place of business in India by virtue of office of its two directors being common with NCL and held that they were

carrying on business activities of the taxpayer, using NCLs office. The Tribunal observed that the agreement was signed by the taxpayer at Singapore, and all the activities relating to this agreement were carried out from Singapore. The holding of one board meeting in India would not lead to the conclusion that the control and management of foreign companys affairs are situated only in India. The Tribunal further observed that holding office in group companies in India by the directors of foreign company may not necessarily mean that they are carrying on business activities of foreign company in India. Hence,

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the taxpayer did not have any fixed place PE in India and the income was not chargeable to tax in India. Nimbus Sport International Pte Ltd v. DDIT (Intl. Tax) [2011-TII-178-ITAT-DEL]] Expression may also be taxed used in Article 7 permits only the State of Source to tax such income and the State of Residence is precluded from taxing such income The taxpayer, an Indian company, is in the business of contract drilling, offshore construction, exploration of mineral oil and gases, trading in petroleum products. During the Assessment Year 2003-04, the taxpayer had undertaken projects in the Sultanate of Oman and State of Qatar through branches located in these countries. The taxpayer excluded the profit from the Oman project and the loss from the Qatar project from the computation of taxable income in India, relying on the phrase may be taxed and may also be taxed appearing in Article 7(1) of the India-Oman DTAA and India-Qatar DTAA respectively. The revenue authorities however held that the taxpayer is a resident of India and has to be taxed on its entire global income in India. Thereupon, a relief can be claimed in terms of the provisions of the Act and the applicable DTAAs. Before the Tribunal, as far as exclusion of profits of the Oman PE are concerned, the revenue authorities admitted that the HC has upheld the orders of the Tribunal on an identical issue for earlier Assessment Years 1999-00 to 2001-02 and, therefore, the same was accepted. In respect of the losses of the Qatar PE, the Tribunal observed that the intention of the countries entering into a DTAA has to be taken into account. Article 10 (dividends) and Article 11 (interest) of the India-Qatar DTAA clearly provides the right to tax such income to both, the state of source and the state of residence. Wherever the parties to a DTAA have intended that income is to be taxed in both countries, they have specifically provided it in clear terms. In contrast, the expression may also be taxed in the other State, under article 7, permits only the State of Source to tax such income; and the State of Residence is precluded from taxing such income. Hence, the losses of Qatar PE of the taxpayer are to be excluded for tax purposes in India. DCIT v. Essar Oil Limited [(2011) 13 taxmann.com 151 (Mum. Trib.)]

Paragraph (1) and (2) of Article 5 of the DTAA have to be read harmoniously and if the time threshold prescribed by paragraph 2(i) for construction/ assembly activities is not breached there cannot be a basic rule/fixed place PE under Article 5(1) The taxpayer, a tax resident of Mauritius, entered into an agreement with BG Exploration & Production India Ltd (BG) for installing pipe lines in India in land and water. The installation was carried out through specialized vessels (ships) and personnel and was completed in less than 9 months. In assessment proceedings the taxpayer contended that since it is engaged in an assembly/installation work, the activities would be governed by the specific clause (i) of paragraph 2 of Article 5 of the India Mauritius DTAA. Further, since the activities carried out in India were for less than the 9-month threshold specified under Article 5(2)(i) of the DTAA, it did not have a PE in India. However, the revenue authorities held that the taxpayer constituted a PE in India as per Article 5(1) of the DTAA. On appeal, the Tribunal observed that the words construction and assembly appearing in Article 5(2) (i) have not been defined in the DTAA. The act of the taxpayer of putting together pieces of pipe lines in a desired manner would be considered as assembling pipe lines. On the interplay of paragraph (1) and (2) of Article 5 of the DTAA, the Tribunal observed that if it is construed that if the vessel of the taxpayer is held to be constituting a fixed place PE under Article 5(1) without taking into consideration the threshold specified under paragraph 5(2)(i) of 9 months, then the said paragraph would become otiose for the reason that all construction or assembly projects will have a fixed place of business. Paragraph (1) and (2) of Article 5 of the DTAA have to be construed harmoniously and if the construction/assembly activities of the taxpayer did not last for more than 9 months as specified under paragraph 5(2)(i), it could not be said to have a PE in India. GIL Mauritius Holdings Ltd vs. ADIT [(2011) 14 taxmann. com 77 (Delhi Trib)]

International Tax Developments in 2011Moving forward

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Royalty & Fees for Technical/Included Services


Payment for use of transponder capacity for up-linking/downlinking data does not constitute royalty The taxpayer, who was the owner and lessee of two satellites, was in the business of private satellite communication and broadcasting facilities using its satellites. The satellites were placed on a geosynchronous orbit allotted to the UK and did not use Indian orbits. Taxpayer entered into agreements with customers (not residents in India) to allow them the use of the transponder. The customers would uplink the signals containing TV programs, which were received by the taxpayers satellites. The satellites would then amplify the signals and relay them to various continents (including India) over which it had a footprint. The only activity the taxpayer performed was telemetry, tracking and control of the satellite, which was carried out from Hong Kong. There was no presence, facilities or assets of the taxpayer in India. The HC observed that since the taxpayer did not have any assets, facilities or presence in India and all operations were performed outside India, it did not amount to operations being carried out in India. Hence, the provisions of the Act were not attracted. Further, the HC held that just because the satellite had a footprint in India, it could not be said that the process took place in India and so payment for use of the satellites facilities could not be termed as royalty. Asia Satellite Telecommunications Co Ltd v. DCIT [2011- TII-05-HC-DEL-INTL] Payment to overseas telecommunication service provider towards provision of International Private Leased Circuit is royalty The taxpayer, a non-resident company, was engaged in providing international connectivity services largely in the Asia-Pacific region. When a customer required a leased line facility between his office in India and any overseas location, they would enter into two separate agreements. The first agreement was with the taxpayer for providing international connectivity and the other with Videsh Sanchar Nigam Limited (VSNL) for the Indian Half Circuit Services Connectivity. The taxpayer contended that it used telecom services equipment situated outside the territory of India to provide international connectivity services; it neither owned nor utilized any landing station in India for providing international half circuit services. As per the taxpayer, since it did not have a PE in India, payments received for international connectivity services were not taxable in India. The Tribunal held that as per the agreement entered into between the taxpayer and the Indian customers, the customers acquired significant economic or possessory interest in the equipment of the taxpayer to the extent of bandwidth hired by the customer. Further, it is a wellsettled position that physical possession of equipment is not a must. Thus, even if payment made by the Indian customer to the Singapore company was not royalty for use of equipment, it was royalty for use of process and, hence, the payment was held to be royalty income and subject to tax in India. Verizon Communications Singapore Pte Ltd v. ITO [(2011) 10 taxmann.com 93 (Chen Trib)] Consideration for uploading and display of banner advertisement on a portal run by a foreign company does not amount to royalty

Yahoo Holdings (Hong Kong) Ltd., Hong Kong

Consideration paid towards updating and display of banner advertisement on the portal of Yahoo Hong Kong

Yahoo India (P) Ltd.

The taxpayer paid for uploading and display of banner advertisement on the non-residents portal. The revenue authorities held that the said expense was in the nature of royalty and disallowed the expense on the ground that the taxpayer had not withheld taxes on the same.

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The Tribunal held that the banner advertisement hosting services did not involve use or right to use of any industrial, commercial or scientific equipment by the taxpayer and no such use was actually granted by the non-resident. The taxpayer had no right to access the portal of the non-resident and, hence, the payment was not in the nature of royalty and not taxable in India. Accordingly, there was no requirement to withhold tax on the payment, and the expense claimed was allowable as a deduction. Yahoo India Private Ltd v. DCIT [(2011) 140 TTJ 195 (Mum Trib)] Payment towards live feed for broadcasting of cricket matches played outside India, shall not be taxable in India Nimbus Sports International Pte. Ltd;

and, as such, was covered within Explanation 2 to section 9(1)(vi) of the Act, being in the nature of royalty. On the ground of business connection, the Tribunal observed the relevant criteria is the carrying out of business operations in India by a non-resident and not the earning of income by any resident from the use of any product acquired from the non-resident. Where the non-resident only allows some resident to exploit certain right vested in it on commercial basis, it cannot be said that the non-resident has carried out any business activity in India. The act of the taxpayer earning revenues from India cannot lead to a business connection of Nimbus in India as the transaction between the taxpayer and Nimbus was confined to receiving broadcasting right for a consideration. The transaction between the taxpayer and Nimbus was on a principal to principal basis. Further, Nimbus has provided license for the live broadcast of certain matches to the assessee for a definite consideration. The rights in such broadcast were vested with Nimbus. After the live broadcast by the taxpayer, Nimbus will continue to hold rights over such broadcast. The mere act of allowing the taxpayer (by Nimbus) to broadcast the matches live for a defined consideration would not constitute a business connection in India for Nimbus. On the ground of construing the payment as royalty, the Tribunal referring to the Copyright Act, held that copyright means exclusive right to use the work in the nature of cinematography. The question of granting exclusive right to do any work can arise only when such work has come into existence. In other words, the existence of work is a pre-condition and must precede the granting of exclusive right for doing of such work. Unless the work itself has been created, there cannot be any question of granting copyright of such work. The process of doing or creating the work itself cannot be simultaneous with the use of such work. It is only when the work has been created that its copyright could be conceived. On this basis, it was held that there is no copyright in live events and depicting the same cannot infringe any copyright. ADIT (Intl Tax) v. Neo Sports Broadcast Pvt. Ltd [(2011) 15 taxmann.com 175(Mum.Trib)]

Payment towards license

License for live broadcasting

Neo Sports Broadcast (P) Ltd. Neo Sports Broadcast Private Limited (Neo) filed an application under section 195(2) of the Act seeking permission for lower/nil deduction of income tax on the payments to be made to Nimbus Sports International Pte Ltd (Nimbus) in pursuance to the agreement for grant of license for live broadcast of cricket matches. The revenue authorities observed that without the receipt of signal of the matches to be played, no income would accrue to Nimbus. However, the matches were to be broadcasted on the Indian territory, and the income by way of advertisement revenue and subscription revenue were received by Nimbus. Therefore, it was held that there was a business connection in the case of Nimbus by way of the receipts in India. Further there was no distinction between payment made towards broadcasting of live matches and pre-recorded matches

International Tax Developments in 2011Moving forward

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Payment for service of processing and compiling customer applications not considered as fees for technical services The taxpayer entered into a data processing service agreement with a UK group company for assistance in processing and compiling applications from customers. The AAR observed that the services rendered by the UK Group Company are in the nature of routine date entry, application sorting, document handling and data capturing services. Further the rendering of services would continue till the parties decide to terminate the agreement, which would mean that there was no transfer of technology, skill or technical know-how. As there has been no transfer of technical skill or know-how, the payment could not be considered for services being in the nature of managerial, technical or consultancy services and, accordingly, do not fall within the purview of fees for technical services under the India-UK DTAA. Hence, the payments made by the taxpayer to the UK group company were not taxable in India and the taxpayer was not liable to withhold taxes. In re: RR Donnelley India Outsource Private Ltd [2011] 335 ITR 122 (AAR) Tax residency certificate issued by the Netherlands tax authorities sufficient evidence for beneficial ownership of the taxpayer The taxpayer, a non-resident company, received royalty for granting commercial exploitation rights of musical tracks to its associated concern in India. The taxpayer submitted the Tax Residency Certificate (TRC) issued by the Netherlands Tax Authorities, evidencing that the taxpayer is a resident of the Netherlands and is a beneficial owner of royalty income. The revenue authorities declined to accept the taxpayers contention that it had the beneficial ownership over the royalty income, and the rate of tax, as per the treaty, was applicable. The Tribunal held that the TRC provided sufficient evidence regarding the residential status of the taxpayer and beneficial ownership in terms of the circular No 789 issued by the tax authorities; - hence the taxpayer could be considered as the beneficial owner in respect of the royalty income. ADIT (Intl Tax) v. Universal International Music BV (2011-TII-22-ITAT-MUM-INTL)

Payment for shrink rapped software is taxable as royalty

US Co.

French Co.

Swedish Co.

Samsung Korea

India Import of shrink wrapped software Samsung India

The taxpayer, Samsung Electronics Co. Ltd, is engaged in the business of development and export of computer software. The taxpayer imported software products from the U.S., France and Sweden, and made payments to the non-resident suppliers, without deducting tax at source. The taxpayer contended that the software imported was a shrink-wrap product and was not customized. Hence, the payment did not constitute royalty under section 9(1)(vi) of the Act, and the relevant DTAA; hence, the taxpayer did not have the liability to withhold taxes at source. The revenue authorities contented that the payment made to the non-resident constituted royalty under section 9(1)(vi) and the relevant DTAA. This gave rise to an obligation to deduct tax at source under section 195(1) of the Act. The HC has held that the amount paid to a non-resident for the supply of off-the-shelf software would be construed as royalty in terms of the provisions of the Act and the applicable DTAA. The HC also disregarded any distinction between the payment for the right to copyright and the copyrighted article. The HC held that there was an obligation on the part of the taxpayer to deduct tax under section 195 of the ITA. CIT v. Samsung Electronics Co. Ltd - [2011] 16 taxmann.com 141 (Karnataka)

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In the absence of specific article for taxation of FTS in the DTAA, the same is covered under Other income of the DTAA article

Kolkata Port Trust Contract studies to improve the channel depth WPCL Payment towards sub-contract

The AAR further held that in the absence of specific article for taxation of FTS in the India-Sri Lanka DTAA, the above-mentioned income would be covered under Article 22 - Other income and would be taxable accordingly. In re: Lanka Hydraulic Institute Ltd [(2011) 337 ITR 47 (AAR)] Payment made for services relating to review of existing facilities would not amount to fees for included services The taxpayer was running a five star hotel, which subsequently became part of the Marriott Chain Hotel under a franchise granted by the International Licensing Company SARL (Marriott USA). For the expansion and upgrade of the hotels interior and exterior, landscaping etc., the taxpayer entered into agreements with various parties, including an American Company to provide the services. Payments for the said services were made to the parties without withholding taxes in India. The revenue authorities held that the taxpayer was liable to withhold taxes on these payments and accordingly disallowed the expenses as a deduction. The Tribunal observed that the American Company was to review the existing facilities and suggest improvements in order to bring it to the level of Marriotts standards. As per the scope of work, it appears that the services provided are in the nature of advisory and review services for improving the existing facilities. The services rendered do not qualify as fees for included services as they do not involve technical expertise and nor do they make available any technical know-how plan, design, etc. Hence, the fees paid will not fall within the ambit of fees for included services, and there was no obligation to withholding tax on the part of the taxpayer. ACIT v. Viceroy Hotels Ltd [2011-TII-97-ACTT-HYD-INTL]

Subcontract

Lanka Hydraulic Institute Ltd

The Kolkata Port Trust had awarded a contract to Water and Power Consultant Limited (WPCL), a Public Sector Undertaking under the Union Ministry of Water Resources, to undertake a study to improve the channel depth and restrict the quantity of dredging. WPCL subcontracted the study to a company incorporated in Sri Lanka through an agreement in February 2009. The AAR observed that the Lankan entity possesses the scientific experience in hydrology to study and adopt the required model. The services provided by the Lankan entity to WPCL are in the nature of providing know-how to WPCL on a long term basis. Accordingly, the consideration received was for the use of scientific work /model/plan and for the use of scientific equipment and scientific experience; therefore, such payment falls under the term royalties per India-Sri Lanka DTAA and are taxable in India.

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Capital Gains
Sale of shares of an Indian company by a Mauritius company was taxable in India since the Mauritius Company was not the owner of the shares Birla Group Grasim Ind. AT&T, Mauritius 51% Joint Venture Company 49% Idea Cellular Limited 49% Permitted transferee Beneficial Owner AT&T, USA October 2004, Cingular Wireless LLC acquired AT&T Wireless Services Inc. (which held shares of AT&T Mauritius) from AT&T USA and renamed it as New Cingular Wireless Services Inc. (NCWS). Subsequently, NCWS received an offer from an independent party to acquire its shareholding in Idea Cellular. However, as required under the shareholders agreement, NCWS offered for sale its holding in Idea Cellular to Birla Group and TIL (right of first refusal) which was accepted by the respective companies. Indian Rayon (on behalf of Birla Group) intended to purchase the shares of Idea Cellular from NCWS. Indian Rayon applied for determination of the withholding tax for making the remittance to AT&T Mauritius and received from the revenue authorities a nil withholding certificate on the basis of which it remitted the proceeds to AT&T Mauritius. TIL purchased from NCWS the shares of AT&T Mauritius (which held the balance shares in Idea Cellular). The HC ruled that the shares in Idea Cellular were held in the name of AT&T Mauritius. However, AT&T Mauritius was not the owner of the shares on account of the following: Under the JVA, 49% shares were to be held by AT&T USA which was allowed to transfer its shares to a permitted transferee. The shares were allotted to AT&T Mauritius as a permitted transferee. As per the JVA, AT&T USA was to carry on business in India by subscribing to the shares of Idea Cellular. AT&T USA had a right to appoint four directors to the board of Idea Cellular and to designate one board member as a Principle Founding Member. AT&T Mauritius was neither a party to the JVA nor was obliged to pay any amount under the JVA. The liability of AT&T USA under the JVA was discharged by AT&T Mauritius. AT&T Mauritius, the permitted transferee was bound by the JVA and could not independently exercise any of the rights flowing from the shares allotted in its name. The agreement for sale of shares of Idea Cellular was executed both by AT&T Mauritius and NCWS (successor to AT&T USA). AT&T Mauritius remitted the funds immediately to NCWS by way of dividend and repayment of loan.

License received from Department of Telecommunication for business operation Idea Cellular Ltd (Idea Cellular), an Indian company, was set up as a joint venture pursuant to a Joint Venture agreement (JVA) between AT&T Corp, USA (AT&T USA), and the Birla Group. Under the JVA, 51% shares were to be held by the Birla Group and 49% shares by AT&T USA. These shares could be held by the JV partners in their own name or through a permitted transferee. A permitted transferee could be any company which is a 100% subsidiary of the JV partners. The permitted transferee was no more than a representative of the JV partner. The JVA was legally binding on AT&T USA and was enforceable against it. The JV partners were allowed to transfer their shares to the permitted transferee and the transfer would be effective once the permitted transferee was bound by the terms of the JVA. Thus, 49% shares were allotted to AT&T Mauritius, a 100% subsidiary of AT&T USA, as a permitted transferee. Subsequently, Tata Industries Ltd (TIL) was inducted as a joint venture partner on account of merger of Tata Cellular with Idea Cellular and a fresh shareholders agreement was entered into by all the JV partners. In

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Though the shares were allotted to AT&T Mauritius, all rights of voting, management, right to sell, etc., were vested in AT&T USA under the JVA. It was held that in the absence of any document to show that AT&T Mauritius had entered into any transaction to subscribe to or purchase the shares of Idea Cellular in its own name, it could be concluded that the shares of Idea Cellular were in the name of AT&T Mauritius only as a permitted transferee of AT&T USA under the JVA and such allotment of shares did not confer any ownership to AT&T Mauritius. Since AT&T Mauritius was not the beneficial owner of shares of Idea Cellular, provisions of the India-Mauritius DTAA would not apply to the transaction of sale of shares of Idea Cellular. Similarly, Circular 789 allowing benefits of India-Mauritius DTAA on the basis of a Tax Residency Certificate and the decision of SC in the case of UOI v. Azadi Bachoa Andolan (263 ITR 706) upholding the validity of Circular 789 would not apply to the facts of this case. In respect of the sale to TIL, the HC held that the value of shares of Idea Cellular which remained with AT&T Mauritius (after sale of shares to Indian Rayon) was US$ 150 million. TIL had paid for the purchase of shares of AT&T Mauritius to NCWS. Hence, the transaction was a colorable transaction for purchase of shares of Idea Cellular and not AT&T Mauritius, and the proceedings for considering TIL as an agent of NCWS were valid. Aditya Birla Novo Ltd v. DDIT [(2011) 12 taxmann.com 141 (Bom HC)] Capital gains arising on the sale of shares in an Indian Company by a Mauritius Company would not be taxable in India in view of India-Mauritius tax treaty The applicant, a Mauritian tax resident, is a wholly owned subsidiary of Ardex Holdings UK Ltd. It planned to sell its entire 50% equity shareholding held in an Indian Ardex UK 100% Applicant Mauritius 100% Ardex India Sale of Shares of Ardex India Consideration Ardex Germany

company, namely, Ardex Endura India Pvt Ltd (Ardex India) to another non-resident group company at the prevailing fair market value. Applicant sought an advance ruling on whether capital gains arising will be subject to income-tax in India or whether such gains will be exempt under Article 13(4) of the India-Mauritius DTAA. The AAR observed that the existing ownership pattern was not a sudden arrangement, but had been prevailing for more than 10 years. AAR held that the proposed sale cannot be categorized as objectionable treaty shopping and, at worst, can be construed as an attempt to take advantage of the India-Mauritius DTAA. The AAR ruled that capital gains arising were not subject to income-tax in India in accordance with Article 13(4) of the IndiaMauritius DTAA, and the Applicant could receive the entire sale proceeds without any tax withholding in India. In re: Ardex Investments Mauritius Ltd [(2011) 16 Taxmann.com 84 (AAR)] Overseas transfer of shares of a foreign company holding shares in an Indian company was taxable. Merieux Groupe Industrial Sanofi

ShanH France India Shantha Biotech Transfer of Shares by ShanH by Merieux and Groupe Industrial

The applicants, Merieux Alliance (Merieux) and Groupe Industrial Marcel Dassault (Groupe Industrial), transferred their stake in ShanH, a company based in France to another France based company called Sanofi Pasteur Holding (Sanofi) in 2009, and sought a ruling on whether the income arising from the transfer of shares was subject to capital gains in India. Considering the facts of the case, the AAR held that the sale of shares of the French company was taxable in India on account of the following reasons: Though the shares being transferred were that of a French company, the situs of the underlying assets

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and controlling interest cannot be ignored. The essence of the transaction takes within its sweep various rights, including a change in the controlling interest of an Indian company having assets, business and income in India. The transfer of shares of ShanH may have commercial and business efficacy or validity, but that could not prevent from looking at the transaction in the context of the domestic tax laws and/or the DTAA and assess its efficacy from the point of view of taxation. The AAR is entitled to reject the application if the question raised therein relates to a transaction which is prima facie designed for the avoidance of income-tax. The transaction is not one to be taken at its face value by the taxing statute, since the series of steps undertaken show that the intention was to avoid payment of tax on capital gains in India. If the transaction was accepted at face value, control over Indian assets and businesses can pass from hand to hand without incurring any liability to tax in India. In re: Merieux Alliance [(2011) AAR No. 846 & 847 of 2009 (AAR)] Benefit of reduced tax rate of 10% on long term capital gains on listed securities in an off-market trade not available to a non-resident applicant The applicant, a private limited company registered in Scotland, held shares in an Indian listed company called Cairns India Ltd (CIL). Petronas Corporation International Limited (PCIL) acquired 2.29% equity shares in CIL from the applicant. The transaction took place off-market and not through the recognized stock exchange. Hence, the exemption available to long term capital gains in case of transactions carried out through a recognized stock exchange was not available. As per the Indian tax law, in case of sale of securities listed on a recognized stock exchange in India, every taxpayer has an option to apply tax rate of 20% on long term capital gains after considering indexed cost of acquisition/cost of improvement (enhancement of cost of acquisition/improvement to take into account the inflation) or a tax rate of 10% on long term capital gains without considering indexed cost of acquisition/cost of improvement, whichever is more beneficial. Since CIL is a listed company, the applicant availed of the option to be taxed at the concessional rate of 10%.

Accordingly, the applicant made an application for a certificate of withholding of tax by PCIL at the rate of 10% on the long-term capital gains. The said application was not accepted by the revenue authorities who directed PCIL to withhold taxes at 20%. On an application for a ruling on the subject, the AAR observed that as per Indian tax law, the computational mechanism for working out capital gains is different for non-residents. In case of a resident taxpayer, the sale consideration is reduced by indexed cost of acquisition/ cost of improvement of the asset whereas in case of a non-resident taxpayer, the sale consideration and cost of acquisition/cost of improvement of asset is converted into foreign currency as per prescribed rules and the capital gain is reconverted into Indian rupees. The reduced tax rate of 10% on long term capital gains is available in case of sale of securities listed on a recognized stock exchange in India. The capital gains are computed without taking into account the benefit of indexed cost of acquisition/cost of improvement. The scheme of taxation of capital gains arising from sale of listed securities and the legislative intent thereof ruled that the benefit of reduced rate of tax on capital gains arising from listed securities would be available to only a resident taxpayer. Hence, the AAR held that the applicant was not eligible for the benefit of reduced tax rate of 10% on long term capital gains in case of sale of securities listed on a recognized stock exchange in India. In re., Cairn UK Holdings Ltd [(2011) 12 taxmann.com 266 (AAR - New Delhi)]

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Others
Parliament constitutionally permitted to enact laws having extra-territorial operation where connection to India is real or expected to be real, and not illusory or fanciful The taxpayer, in a writ petition to the HC, challenged an order of the revenue authorities, which had decided that the taxpayer was liable to withhold taxes on money paid to a foreign company u/s 9(1)(i) or 9(1)(vii)(b) of the Act. The writ challenged the legality of Section 9(1)(vii)(b) in as much as being in want of legislative competence and violating Article 14 of the constitution. The SC held that the framers of the constitution intended that there must be limits as to the manner in which and the extent to which the organs of the state, including Parliament, may take cognizance of extraterritorial aspects or causes and exert the state powers. It would be unconstitutional for Parliament to enact legislation with respect to extra-territorial aspects or causes that do not have any direct/indirect, tangible/ intangible impact(s) on or effects in or consequences for (a) the territory of India or any part of India; or (b) the interests of, welfare of well-being of, or security of inhabitants of India and Indians. Parliament may exercise its legislative powers with respect to extra-territorial aspects only when these have or are expected to have some impact/effect/ consequences for (a) the territory of India or any part of India; or (b) the interests of welfare of well-being or security of inhabitants of India and its people. SC noted that what was required was that connection to India to be real or expected to be real and not illusory or fanciful. Parliament has the power to legislate for the territory of India and for parts outside its territory if it is with respect to extra-territorial aspects or causes that impact on, or nexus with, India. Such laws would fall within the meaning, purport and ambit of the grant of powers to Parliament to make laws for the whole or any part of the territory of India and the same cannot be invalidated simply on the ground that they may require extra-territorial operation. GVK Industries Ltd v. ITO [2011] 10 taxmann.com 3 (SC) Income earned by a non-resident by providing offshore service vessels on time charter basis is covered under presumptive taxation regime The applicant, a Singapore company, is engaged in the business of providing offshore service vessels to global oil and gas industries. The said vessels assist and provide support in offshore drilling and marine operations. Transocean Offshore International Ventures Ltd. (TOIVL) was providing offshore drilling and support services to ONGC under a contract. For execution of the said contract, TOIVL entered into a uniform time charter vessels agreement with the applicant for obtaining its offshore service vessels for providing required services to ONGC. Under the terms of the time charter agreement, the entire operation, navigation and management of the vessel provided on hire was under the exclusive command and control of the applicant. The vessel was operated and services were rendered as requested by TOIVL but were subject to exclusive rights of the applicant. On the issue whether the income derived by the applicant from providing offshore service vessels on time charter basis ought to be computed under presumptive taxation regime in terms of section 44BB of the Act, the AAR observed that the applicant is engaged in the business of providing offshore oil and gas marine subsea services. It also offers a range of offshore oil service vessels to the global oil and gas industry. The AAR observed that for the purposes of section 44BB of the Act, the vessels provided are covered under the definition of plant. The consideration received for supply of plant, i.e., the vessels on hire when used in the prospecting for or extraction or production of oil and gas is covered under the special provision for computing profits and gains under section 44BB of the Act. The intention to exclude construction, assembly and mining or like project from the purview of FTS under Explanation 2 to section 9(1)(vii) of the Act is to draw a line of distinction between business activities and mere rendering of services.

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The nature of receipts on account of provision of supply of vessels on charter hire basis cannot have the character of FTS within the meaning of Explanation 2 to section 9(1)(vii) of the Act. The services required by TOIVL are rendered by the applicant by leasing the vessels under its control and command cannot be considered to have the character of fees for technical services. Bourbon Offshore Asia Pte. Ltd v. DIT [(2011) 12 taxmann.com 232 (AAR)] Credit for income tax paid under the State laws of USA and Canada is to be provided in addition to Federal taxes under section 91 of the Act This case, inter alia, decided on the question of whether the State income taxes paid by the taxpayer in USA and Canada are eligible for tax credit under Sections 90 or 91 of the Act. The Tribunal, while holding that the payment of overseas State income tax is eligible for foreign tax credit under Section 91 of the Act, observed that: Tax credit provisions under Section 91 are more beneficial to the taxpayer vis--vis the tax credit provisions in related tax treaties as Section 91 does

not discriminate between State and Federal taxes, and in effect provides for both these types of income taxes to be taken into account for the purpose of tax credits against Indian income-tax liability. However, the India-US and India-Canada tax treaties provides for the credit of the Federal income taxes only. While the title of section 91 suggests that it is applicable only in cases where India has not entered into a double taxation avoidance agreement with the respective jurisdiction, but the scheme of section 91, read along with section 90, does not reflect any such limitation. Section 91 is, thus, required to be treated as general in application. The fact that a taxpayer is entitled to make a particular claim, in accordance with a tax treaty provisions, does not disentitle him to make the claim in accordance with the provisions of the Act if it is more beneficial to him. DCIT v. Tata Sons [(2011) 43 SOT 27(Mum Trib.)]

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International Tax Updates - India

Agreement among the Governments of SAARC Member States for avoidance of double taxation A multilateral agreement on avoidance of double taxation and mutual administrative assistance in tax matters was entered into between the South Asian Association for Regional Cooperation (SAARC) nations comprising India, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka. The limited multilateral agreement is not as comprehensive as the existing bilateral DTAAs India has signed. The agreement has come into force effective 1 April 2011. The agreement provides taxation rules for professors, teachers, students who are residents of a member State with respect to income earned in another member State. The agreement also has provisions on exchange of information, assistance in collection of taxes, trainings to tax administrators, sharing of tax policies and such other related issues aimed at tax cooperation amongst member States. SAARC countries have also signed a Protocol which specifies that the multilateral agreement shall apply only in member States where an adequate direct tax structure is in place. Where such a structure is not in place, the agreement shall become effective from the date on which such a member State introduces a proper direct tax structure and notifies the SAARC Secretariat to this effect. The protocol to the agreement also specifies that in the event of a conflict between the provisions of the agreement and any bilateral DTAA, the provisions of the agreement or the DTAA that is signed or amended at a later date shall prevail. No. 3/2011-FTD-II [F.NO.500/96/97-FTD-II, dated 10 January 2011] India-Norway renegotiates DTAA to replace the existing DTAA Both India and Norway have signed a new DTAA, which on coming into force, on notification, will replace the existing DTAA that is 25 years old. The salient features of the renegotiated DTAA are follows: The Article on Residence under the new DTAA allows the place of effective management of an entity to be determined through Mutual Agreement Procedure in case it cannot be determined otherwise. New DTAA also has provision for insurance PE.

The Article on Associated Enterprise provides for resolution of transfer pricing cases under Mutual Agreement Procedure. Dividend and interest would be taxed at 10 per cent in the source country. The provision relating to limited tax sparring method for elimination of double taxation has been removed. The article on exchange of information specifically provides for exchange of banking information and information without domestic interest. The Limitation of Benefit Article has been provided. Press Information Bureau, Government of India [Press release dated 2 February 2011] India signs protocol amending treaty with Singapore to help in effective exchange of information in tax matters India and Singapore have signed a Protocol amending the DTAA for effective exchange of information in tax matters. Both India and Singapore have adopted internationally agreed standard for exchange of information in tax matters, including the principles incorporated in the new paragraphs 4 and 5 of OECD MC Article on Exchange of Information, and it requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. Press Information Bureau, Government of India [Press release dated 24 June February 2011] India signs protocol amending treaty with Australia to help in effective exchange of information in tax matters The Government of India and the Government of Australia have entered into a protocol amending the India-Australia DTAA. The protocol, finalized in February 2011, shall enter into force once notified. The salient features of the protocol are: Further Article 5(3) of the DTAA has been amended to: Provide a threshold limit for establishing Permanent Establishment (PE) arising out of activities in the other State Carry on activities (including operation of equipment) in the other State relating to exploration for or exploitation of natural resources (aggregate of 90 days in any 12 month period)

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Operate substantial equipment for a period or periods aggregating to 183 days in any 12 month period Extend the Scope of Service PE to include all services including those defined under Article 12 dealing with royalties. The period of furnishing services within that State to constitute a Service PE has been extended from the existing 90 days to 183 days in any 12 month period for non-associated enterprise/1 day in respect of associated enterprise. Article 7(1)(b) of the DTAA relating to the condition of profits of the enterprise arising in that State from the sale of goods or merchandise of the same or similar kind as those sold or other business activities of the same or similar nature carried on, through that PE has been omitted. It has been provided that a national of one country shall not be discriminated against the nationals of the other country in the same circumstances in line with international practices. The protocol provides that India and Australia will lend assistance to each other in the collection of revenue claims. The assets or money kept in one country can be recovered by the other country for the purposes of recovery of taxes by following certain conditions and procedure. The Exchange of Information Article is updated to internationally accepted standards for effective exchange of information on tax matters including bank information and also for exchange of information without domestic tax interest. It is further provided that the information received from Australia in respect of a resident of India can be shared with other law enforcement agencies with authorization of the Competent Authority of Australia and vice-versa. Press Information Bureau, Government of India [Press release dated 16 December 2011]

Tax Information Exchange Agreement (TIEA) TIEAs are bilateral agreements under which territories agree to co-operate in tax matters through exchange of information. The purpose of this agreement is to promote international co-operation in tax matters through exchange of information. It was developed by the OECD Global Forum Working Group on Effective Exchange of Information. The Agreement grew out of the work undertaken by the OECD to address harmful tax practices. India has signed its first TIEA with Bermuda in October 2010. Further, India has entered into agreements with Isle of Man, British Virgin Islands, etc.

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Tax Rulings- Outside India

US LLC not a transparent entity- taxpayer is taxable in the UK for income from LLC since he does not have proprietary interest in the profits of the LLC UK Court Mr. Ansons share of profits of the LLC was taxed on him personally in the U.S. on the basis that for U.S. tax purposes, the LLC was a transparent entity. Mr. Anson claimed that he was entitled to double taxation relief in the UK for tax paid on the profits of the LLC in the U.S. In the UK, the HMRC, (UK tax authorities) argued that the LLC was a corporate entity that had paid to Mr. Anson the equivalent of a dividend. Accordingly, Mr. Anson could not claim double tax relief beyond any withholding tax as relief for underlying taxes paid on a companys profits is only available to corporate shareholders in the UK. The Upper Tribunal Tax & Chancery Chamber held that Mr. Anson did not have a proprietary interest in the profits of the LLC and, therefore, the profits on which tax has been paid in the U.S. are profits of the LLC. It was held that in the UK, Mr. Anson would be taxed on something different, that is, the distributions from the LLC. The two sources are different and the double tax treaty test is not satisfied; hence, credit cannot be availed for tax paid on profits by the LLC. HMRC v. Anson [2011] UKUT 318 (TCC) All payments made in terms of a software license agreement constitute royalties for the purposes of treaty Australian Court IBM Corp and IBM World Trade Corp, tax resident of USA, entered into an SLA with IBM Australia (IBMA) in respect of the use, distribution and marketing of IBM software. IBM Corp. IBM World Trade Corp Granted rights in respect of use, distribution and marketing of IBM software

From 1987 to 31 December 2002, IBMA remitted royalty withholding tax to the ATO on full amount of payments under the SLA at the then applicable rate of 10%. For the period from 1 January 2003 to 31 December 2004, IBMA obtained a private ruling from the revenue authorities and remitted royalty withholding tax towards the above-mentioned payments made under the SLA at the rate of 5%. Following the expiry of the private ruling, IBMA continued to withhold taxes from the payments under the SLA on the same basis of the private ruling obtained for the earlier period and applied for refund to the revenue authorities of the excess withholding tax paid for the period prior to the application of the private ruling, on the basis that part of those payments did not constitute royalties. The revenue authorities rejected the claim of the taxpayer and applied royalty withholding tax to the full amount of the payments under the SLA, starting from the date that the private ruling expired. On an appeal, the Court held that based on the language of the SLA and the nature of the rights granted, the full amount of the payment received by the USA Corporation under the SLA constitutes royalty for the purpose of the tax treaty and was, thus, wholly subject to withholding tax. The Court stated that SLA did not look like a distributor license as contended by the taxpayers. Rather, SLA granted all IP rights to IBMA as were necessary for the distribution of the relevant software products. The subject matter of the agreement was towards granting of the IP rights and not for use, distribution and marketing rights. Hence, the Court rejected taxpayers submission that the SLA granted a distinct right to distribute which is separate from the IP-related rights as defined in the article 12(4) of Australia-USA treaty. IBM and IBM World Trade Corporation v. Commissioner of Taxation (NSD 661 of 2009) The activities of a Norwegian subsidiary do not create an agency PE in Norway of its Irish parent sales company Norwegian SC The taxpayer (Dell AS) was established as a commissionaire to market and sell Dell products in the Norwegian market under its own name, but for the risk and account carried by the Irish tax resident principal (Dell Products Ltd).

Payment made for the rights given under the software license agreement

Payment made for the rights given under the software license agreement

IBM, Australia

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The Norwegian tax authorities took the position that Dell AS constituted a PE of Dell Products Ltd under article 5(5) of the Norway-Ireland DTAA in Norway and, hence, a significant proportion of the Norwegiansource distribution profits of the Irish entity should be liable to Norwegian tax rather than just the commission fee received by Dell AS. Dell AS argued that a PE only existed under the Norway-Ireland treaty to the extent Dell AS could legally bind Dell Products Ltd. The Norwegian Supreme Court ruled that to be a PE, Dell AS had to meet the requirements of being dependent and habitually exercise in Norway an authority to conclude contracts in the name of Dell Products Ltd. In the proceedings, the parties agreed that Dell AS and Dell Products were dependent (i.e., related parties), and Dell AS could not legally bind Dell Products Ltd. Thus, the case centered on whether article 5(5) of the treaty could be interpreted to mean that a PE exists, where Dell AS had the functional authority to conclude contracts in the name of Dell Products

Ltd even though it could not legally bind the Irish sales company, i.e., Dell AS in practice committed Dell Products Ltd to the contracts. Unlike the Appeal Court, which adopted a substanceover-form approach in concluding that Dell AS was able to conclude contracts in the name of the Irish sales company, the Supreme Court did not determine whether Dell AS committed Dell Products Ltd to the contracts in practice. The Supreme Court stated that since article 5(5) only applies to situations in which the dependent agent legally binds the principal, it is irrelevant whether Dell AS committed Dell Products Ltd to the contracts and, hence, Dell AS could not be construed to be an agent of Dell Products Ltd. Dell AS [Norway Supreme Court] A series of transactions that involved the transfer of shares of the Appellant and another related company to a new offshore company in the group, and redeeming certain shares of the company through a tax-free reduction of paid-up capital could lead to a re-characterization of the tax free income under the GAAR provision Copthorne Holdings, part of a group of Canadian and non-resident companies, was controlled by Li Ka-Shing and his son Victor Li. The company purchased the Harbour Castle Hilton Hotel in Toronto in 1981, and sold it for a substantial capital gain in 1989. The proceeds of the sale were invested by Copthorne in Copthorne Overseas Investment Ltd (COIL), a wholly owned Barbados company, which carried on an active bondtrading business in Singapore. Another company in the Li Group, VHHC Holdings, held directly (and indirectly through its subsidiary VHSUB Holdings) shares in Husky Energy Inc. By 1991, there was a substantial unrealized capital loss on that investment. In 1992, VHHC Holdings was sold to Copthorne, and VHHC Holdings subsequently sold the majority of its VHSUB shares to Copthorne (inheriting the high adjusted cost base under stop-loss rules). Copthorne sold the VHSUB shares to an unrelated purchaser at their fair market value, and realized the capital loss. This allowed Copthorne to carry the capital loss on the VHSUB shares to shelter the capital gains from the sale of the Harbour Castle Hotel.

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The First Series Amalgamating Copthorne and VHHC Holdings In 1993, the Li Family decided to amalgamate Copthorne, VHHC Holdings and two other corporations which it controlled. This was done to simplify the structure of the group of companies and to allow losses from each of the predecessor corporations businesses to shelter the profits of others. However, a direct vertical amalgamation of VHHC Holdings and its parent company, Copthorne, would result in the cancellation of $67.4 million PUC1 in the shares of VHHC Holdings under section 87(3) of the Income Tax Act. To avoid this, the Li Family decided to engage in a number of transactions to protect the PUC. In July 1993, Copthorne sold its VHHC Holdings common shares to Big City, Copthornes parent company for $1,000. This is referred to as the 1993 Share Sale. This meant that any amalgamation between Copthorne and VHHC Holdings was horizontal not vertical. This share sale is the transaction that the Minister(tax authority) found was an avoidance transaction. On January 1, 1994, Copthorne, VHHC Holdings, and two other corporations amalgamated to form Copthorne II. The PUC from the common shares of VHHC Holdings was added to $1 of PUC from the single common share of Copthorne, resulting in a total PUC of approximately $67.4 million distributed evenly between the 20,001,000 common shares of Copthorne II. All of these shares were owned by Big City. Both the 1993 Share Sale and the subsequent amalgamation are agreed to be part of a first series of transactions. The Second Series Amalgamating VHHC Investments with Copthorne II In 1994, legislative amendments were proposed to the Foreign Accrual Property Income (FAPI) rules of the Act which stood to negatively affect COILs business. In response to these proposed changes, the Li Family decided to dispose of some of COILs assets. A new company, CIIL, was incorporated to purchase the bond-trading business from COIL. A new Barbados company, L.F. Investments, was incorporated to purchase all of the shares of Copthorne II from Big City and VHHC Investments from L.F. Holdings. The two purchased companies were then amalgamated with two other companies to form Copthorne III.

Upon amalgamation, L.F. Investments received Class D shares of Copthorne III with a PUC that was the sum of the PUC in the common shares of Copthorne II (approximately $67.4 million) and the PUC in the common and preferred shares of VHHC Investments (approximately $96.7 million), for a total PUC of $164,138,025. This PUC was held in 164,138,025 Class D preference shares each having a PUC of $1. The Redemption Copthorne III then redeemed 142,035,895 of its Class D preference shares held by L.F. Investments for $142,035,895. As the redemption amount was no more than the total PUC in the shares redeemed by Copthorne III, it was not deemed to be a dividend. Nor did the redemption give rise to a capital gain. Thus, Copthorne did not withhold or remit any tax on behalf of L.F. Investments pursuant to s. 215(1) of the Act. The transactions beginning with the incorporation of CIIL and ending with the redemption are agreed to be part of the second series of transactions. The Revenue authorities applied GAAR to re-characterize the payment as a deemed dividend and subjected it to a 15% non-resident withholding tax plus penalty. The SCC concluded that the object, spirit and purpose of s. 87(3) is to preclude the preservation of PUC, upon amalgamation, where such preservation would allow a shareholder, on a redemption of shares by the amalgamated corporation, to be paid amounts without liability for tax in excess of the investment of tax-paid funds. The taxpayers double counting of PUC was abusive, where the taxpayer structured the transactions so as to artificially preserve the PUC in a way that frustrated the purpose of s. 87(3) governing the treatment of PUC upon vertical amalgamation. In the circumstances, SCC unanimously held that the general anti- avoidance rule applied to the planning engaged in by the group of which Copthorne Holding was a part. Copthorne Holdings Ltd v. Canada, 2011 SCC 63

1 PUC represents capital invested in a class of shares of the corporation by its shareholders. When that class of shares is redeemed by the corporation in whole or in part, the amount paid by the corporation to the shareholders in excess of the PUC attributable to the redeemed shares is deemed to have been paid as a dividend that must be included in the income of the recipient shareholder. However, the PUC portion need not be included in the income of the recipient shareholder because it is viewed as a return of capital to shareholders. As a general rule, when two corporations amalgamate, the PUC of the shares of both amalgamating corporations are aggregated to form the PUC of the shares of the amalgamated corporation. However, where the relationship between the amalgamating corporations is parent and subsidiary a so-called vertical amalgamation the PUC of the shares of both corporations are not aggregated. Rather the PUC of the shares of the subsidiary corporation which are owned by the parent is cancelled.

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International Tax Developments

OECD Introduces Discussion Draft on clarification of the Meaning of Beneficial Owner in the OECD MC The concept of beneficial owner is used in Articles 10, 11 and 12 of the OECD MC which provides for limitation of tax benefits in the state of source in case of payment of income to its Beneficial Owner. Given the risks of double taxation and non-taxation due to misinterpretation of beneficial ownership, the OECD Committee has clarified on the interpretation of Beneficial Ownership as under: The term Beneficial Owner was introduced to address the potential difficulties arising from the use of the words paid to a resident. This term is not to be used in a narrow technical sense; rather it should be understood in particular in relation to the words paid to a resident. The term should be interpreted in this context and not refer to any technical meaning that it could have had under the domestic law of a specific country. The meaning given to the term in the context of the Articles must be distinguished from the different meanings that have been given in different contexts. The domestic law meaning of Beneficial Owner does not automatically become irrelevant; it is applicable to the extent it is consistent with the general guidance included in the OECD Commentary. Further, although the recipient of income is considered to be the Beneficial Owner of the income, the benefit of limitation of tax in paragraph 2 should not be made available in the event of abuse or improper use of the convention. Agent or Nominee or Conduit Company being direct recipient: The relief or exemption in respect of an item of income is granted in the state of source to avoid double taxation where the direct recipient of the income is an agent or nominee, no potential double taxation arises since the recipient is not treated as the owner of the income in the state of residence. The above analogy would apply even to the Conduit companies acting as fiduciary or administrator for or on behalf of the interested parties. Under such circumstances, the recipient of income does not have the full rights to use and enjoy the income received, as they are obliged to pass the payments received to another person (Beneficial owner).

Such an obligation to pass on the payment received may arise from relevant legal documents or may also be found to exist on the basis of facts and circumstances. The use and enjoyment of income (dividends, interest and royalty) must be distinguished from the legal ownership as well as the use and enjoyment of shares, on which dividends are paid (in case of dividend income); the use and enjoyment of the debt-claim with respect to which the interest is paid (in case of interest income); and the use and enjoyment of the rights or property in respect of which the royalties are paid (in case of royalty income). OECD releases public discussion draft on the proposed changes to the commentary on Article 5 Permanent Establishment The OECD has released a public discussion draft on the proposed changes to the commentary on Article 5 Permanent Establishment (PE) of the OECD MC. The OECD has invited comments on the discussion draft before February 10, 2012. The discussion draft discusses the clarification on the application of: the at the disposal of test exceptions to the PE definitions which are of particular relevance in the context of limited risk distribution model and contract manufacturing models, application of PE concept in the context of Joint Ventures (JV) and partnerships, authority to conclude contracts by an agent and confirmation that the PE analysis should be unaffected by any prior business restructurings. UN publishes proposed 2011 Model Tax Convention update The UNs Committee of Experts on International Cooperation in tax matters has successfully completed the revision of the United Nations Model Double Taxation Convention. After 10 years of work, the 2011 update has been published. The important feature of this update is that it tries to bring the last update of UN Model in 2001, in line with current realities and, as much as possible, with 2010 version of the OECD MC that aligns with the priorities of developing countries. The 2011 update of the UN Model has made changes to the following articles:

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Article 5 Permanent establishment Article 11- Interest Article 13 Capital gains Article 19- Government service Article 22 Capital Article 25- Mutual Agreement Procedure Article 26- Exchange of information Article 27- Assistance in collection of tax

is important to maintain a balance between the need for tax administrations to protect their tax revenues from the misuse of tax treaty provisions and the need to provide legal certainty and to protect the legitimate expectations of taxpayers. Accordingly the commentary outlines: Specific legislative anti-abuse rules in domestic laws: Tax authorities could consider certain specific legislative anti-abuse rules as under: Controlled Foreign Corporation (CFC) Rules to prevent certain arrangements involving use of conduit companies Foreign Investment Fund (FIF) Rules to prevent the deferral and avoidance of tax on investment income Thin capitalization rules to restrict the deduction of base-eroding interest payments Dividend stripping rules to prevent the avoidance of domestic dividend withholding taxes Where a different view was taken by two contracting states in the context of applicability of specific legislative domestic anti-abuse rules, the issue may be addressed through a Mutual Agreement Procedure (MAP). General legislative anti-abuse rules in domestic laws Intended to prevent abusive arrangements that are not adequately dealt with through specific rules or judicial doctrines. To the extent the application of such general rules is restricted to the cases of abuse; conflicts between domestic rules with the provisions of treaties should not arise. Thus, even OECD was able to conclude that States do not have to grant the benefits of a double taxation convention where arrangements that constitute an abuse of the provisions of the convention have been entered into. This logically leads to the question what is an abuse of tax treaty? Main purpose for entering into the arrangement is to secure more favorable tax position. Obtaining the more favorable treatment would be contrary to the object and purpose of the relevant provisions. Determining the main objective of an arrangement should be that without the tax advantages whether

The Committee also discussed the future direction of its work with the focus on its 2012 session. It will devote substantial attention to the Practical Manual on Transfer Pricing for Developing Countries as well as the Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing countries. In addition, substantial work is expected to be done in the area of tax treatment of services, as well as on several other Articles of the UN Model. Analytical papers will be prepared on: (1) Classification of hybrid entities; (2) Article 8 treatment of auxiliary/ancillary activities in the Commentary; (3) Value-Added Tax cross-border issues related to Permanent Establishment; (4) Location specific country rents the future of company tax; and (5) Taxation by electronic means. Further, the 2011 update of UN Model convention has revised the commentary for all the articles incorporating changes from the 2010 version of the OECD MC. The significant changes brought in the new draft are as under: Article 1: Persons covered The Commentary has been modified to provide on the improper use of treaties as follows: Provisions of tax treaties are drafted in general terms and taxpayers may be tempted to apply these provisions in a narrow technical way so as to obtain benefits in circumstances where the Contracting States did not intend that these benefits be provided. Such improper uses of tax treaties are a source of concern to all countries but particularly for countries that have limited experience in dealing with sophisticated tax-avoidance strategies. The Committee considered that it would therefore be helpful to examine the various approaches through which those strategies may be dealt with and to provide specific examples of the application of these approaches. In examining this issue, the Committee recognized that for tax treaties to achieve their role, it

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a reasonable taxpayer would have entered into the arrangements. Judicial doctrines that are part of domestic laws Judicial doctrines are the views expressed by Courts on how to interpret the tax legislation. Courts have developed different judicial doctrines that have the effect of preventing domestic law abuses like Purpose of business Substance over form Economic substance Step transaction Abuse of law Where a different view was taken by two contracting states in the context of applicability of specific legislative domestic anti-abuse rules, the issue may be addressed through a mutual agreement procedure. Specific anti abuse rules found in tax treaties Examples of approaches are: Reference to the agent who maintains stock of goods for deliveryConcept of beneficial ownership Rule on alienation of shares of immovable properties Limited force of attraction Clearly, such specific anti-abuse rules provide more certainty to taxpayers

General anti-abuse rules found in tax treaties A competent authority of one state may deny the benefits if granting of such benefits would constitute abuse of convention by giving a notice of application of this provision. E.g., paragraph 2 of Article 25 of the treaty between Israel and Brazil, signed in 2002. General clause may be inserted in the convention that the contracting states are not prevented from denying benefits if it can reasonably be concluded that to do otherwise would result in an abuse of the provisions of the Agreement or of the domestic laws of that State. E.g., paragraph 6 of Article 29 of the Canada - Germany treaty signed in 2001. Countries may also consider including a general antiabuse rule in its treaties in that they are of the view that domestic law and approach to the interpretation of treaties may not adequately address improper use of tax treaties. The interpretation of tax treaty provisions Legal interpretation is used to counteract abuses to the domestic tax laws and, similarly, it is appropriate to interpret tax treaty provisions to counteract tax treaty provisions. Disregard abusive transactions under a proper interpretation of the relevant treaty provisions that takes account of their context, the treatys object and purpose.

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Article 4: Residence The UN Model has brought the following changes in the commentary in line with OECD MC, 2010: Certain companies excluded: It excludes companies and other persons who are not subject to comprehensive liability to tax in a Contracting State because the persons, while being residents of that State under that States tax law, are considered to be residents of another State pursuant to a treaty between these two States. Persons liable to tax- Pension funds, charities and other organizations exempt from tax: Contradicting views by countries are acknowledged: In some countries, persons are considered to be liable to tax even if no tax is payable as these institutions are exempt from tax even on fulfillment of certain conditions only In some states, however, such entities are not considered liable to tax and therefore are not considered as residents for the purpose of the convention Persons liable to tax Partnership firms: In certain States, a partnership is not considered as a resident, and the partners are considered residents as they are labile to tax. In such a case, the partners can enjoy the benefits of the treaty. Dual residency of persons other than individuals POEM Test in line with the OECD MC commentary has been adopted. Article 5 : Permanent Establishment Article 5 (3)(b) has been amended to provide that the period six months has been replaced with 183 days in -12-month period commencing or ending in the fiscal year concerned. The commentary to Article 5 has adopted the changes made in the OECD MC, 2010, as under: The question of whether a satellite in geostationary orbit could constitute a permanent establishment for the satellite operator relates in part to how far the territory of a State extends into space. The location of these satellites cannot be part of the territory of a Contracting State under the applicable rules of international law and, therefore, could not be considered to be a permanent establishment situated therein.

The particular area over which a satellites signals may be received cannot be considered to be at the disposal of the operator of the satellite, so as to make that area a place of business of the satellites operator. Article 11: Interest The Commentary amongst other adoptions provides that certain non-traditional financial arrangements are assimilated to debt relations under domestic tax law although their legal form is not a loan. The definition of interest in paragraph 3 applies to payments made under such arrangements. This is especially relevant for the treatment of certain Islamic financial instruments. Article 12: Royalties The UN Model has adopted the changes made in the OECD MC, 2010; the brief of the changes adopted is as under: The requirement of beneficial ownership introduced for payments made to intermediaries The Source state not to relinquish taxing rights in case royalty income is immediately received from a state with which the source state had concluded a convention State of source not to grant relief or exemption where a resident of a contracting state, otherwise through an agency or nominee relationship, simply acts as the conduit for another person who, in fact, receives the benefit of the income. KnowHow Payment for information concerning industrial, commercial or scientific experience that has not been patented and does not generally fall within other categories of IPR. It generally means undisclosed information of an industrial, commercial or scientific nature arising from previous experience; from its practical application in operations; and from the disclosure of which an economic benefit can be derived. Since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as a result of performing services at the request of the payer.

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Distinction for payments made towards know-how and provision of services The listed criteria are same as Para 11.3 of the OECD MC. In case of contract of services, the supplier undertakes to perform services which may require use of special knowledge, skill, or expertise without the transfer of the same Examples for provision of services have been included Consideration for computer software Definition of software included Characterization of the payments for computer software is provided Acquiring of partial rights in the copyright will represent a royalty Transferee granted limited rights to reproduce/ operate the program Distribution Model Where the programmer or the software house supply ideas and principles underlying the program Electronic downloading of digital products Article 13: Capital Gains Article 13(5) has been added to provide: Gains, other than those to which paragraph 4 applies, derived by a resident of a Contracting State from the alienation of shares of a company which is a resident of the other Contracting State, may be taxed in that other State if the alienator, at any time during the 12 month period preceding such alienation, held directly or indirectly at least __________ per cent (the percentage is to be established through bilateral negotiations) of the capital of that company.

The Commentary indicates that: Countries favoring the taxation of capital gains in the State of the alienator of the shares or Countries favoring taxation of capital gains in the State where the Company whose shares are sold is a resident Substantial ownership of shares (either directly/ indirectly) would result in the transfer of the shares being taxed in the place where the alienator is the resident Each country to determine the taxability of the transaction in connection with the alienation of shares and to determine the level of holdings of the alienator, in particular to determine the interest held indirectly. Article 25 seeks to provide an Alternative Mutual Agreement Procedure to include arbitration provisions. Article 26 and Article 27 Article 26 of exchange of information and Article 27 on assistance in collection of tax are introduced in line with OECD Model.

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Glossary

AAR Act DTAA FTS GAAR HC HO IPR LLC LO OECD OECD MC PE POEM SC Tribunal UN UN Model

Authority for Advance Ruling Income-Tax Act, 1961 Double Taxation Avoidance Agreement Fees for Technical Services General Anti-Avoidance Rule High Court Head Office Intellectual Property Rights Limited Liability Company Liaison Office Organisation for Economic Co-operation and Development OECD Model Convention of Capital and Income Permanent Establishment Place of Effective Management Supreme Court of India Income-Tax Appellate Tribunal United Nations United Nations Model Double Taxation Convention

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