OECD - TAG's Final Report - Are Current Treaty Rules for Taxing Business Profits E-Commerce Compatible ?

          The  Technical Advisory Group on Monitoring the Application of Existing Treaty Norms for Taxing Business Profits ("TAG")  of the  Organisation for Economic Co-operation and Development ("OECD")  has just released its  Final Report  on  "Are the Current Treaty Rules for Taxing Business Profits Appropriate for E-Commerce ?"

Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes) (Judgment dated December 13, 2005 of European Court of Justice in Case C-446)

          By a long-awaited judgment delivered on Tuesday, December 13, 2005 in Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes), the European Court of Justice has ruled as follows on the 2 questions raised in the case :

Question No 1 :
1) In circumstances where:
– Provisions of a Member State, such as the United Kingdom provisions on group relief, prevent a parent company which is resident for tax purposes in that State from reducing its taxable profits in that State by setting off losses incurred in other Member States by subsidiary companies which are resident for tax purposes in those States, where such set off would be possible if the losses were incurred by subsidiary companies resident in the State of the parent company;

– The Member State of the parent company:

– subjects a company resident within its territory to corporation tax on its total profits, including the profits of branches in other Member States, with arrangements for the availability of double taxation relief for those taxes incurred in another Member State and under which branch losses are taken account of in those taxable profits;

– does not subject the undistributed profits of subsidiaries resident in other Member States to corporation tax;

– subjects the parent company to corporation tax on any distributions to it by way of dividend by the subsidiaries resident in other Member States while not subjecting the parent company to corporation tax on distributions by way of dividend by subsidiary companies resident in the State of the parent;

– grants double taxation relief to the parent company by way of a credit in respect of withholding tax on dividends and foreign taxes paid on the profits in respect of which dividends are paid by subsidiary companies resident in other Member States;

is there a restriction under Article 43 EC, in conjunction with Article 48 EC? If so, is it justified under Community law ?

Court's Ruling :
59 Accordingly, the answer to the first question must be that, as Community law now stands, Articles 43 EC and 48 EC do not preclude provisions of a Member State which generally prevent a resident parent company from deducting from its taxable profits losses incurred in another Member State by a subsidiary established in that Member State although they allow it to deduct losses incurred by a resident subsidiary. However, it is contrary to Articles 43 EC and 48 EC to prevent the resident parent company from doing so where the non-resident subsidiary has exhausted the possibilities available in its State of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and where there are no possibilities for those losses to be taken into account in its State of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.

Question No 2 :
2) (a) What difference, if any, does it make to the answer to Question 1 that, depending on the law of the Member State of the subsidiary, it is or may be possible in certain circumstances to obtain relief for some or all of the losses incurred by the subsidiary against taxable profits in the State of the subsidiary?

(b) If it does make a difference, what significance, if any, is to be attached to the fact that:

– a subsidiary resident in another Member State has now ceased trading and, although there is provision for loss relief subject to certain conditions in that State, there is no evidence that in the circumstances such relief was obtained;

– a subsidiary resident in another Member State has been sold to a third party and, although there is provision under the law of that State for the losses to be used under certain conditions by a third party purchaser, it is uncertain whether they were so used in the circumstances of the case;

– the arrangements under which the Member State of the parent company takes account of the losses of UK resident companies apply regardless of whether the losses are also relieved in another Member State?

(c) Would it make any difference if there were evidence that relief had been obtained for the losses in the Member State in which the subsidiary was resident and, if so, would it matter that the relief was obtained subsequently by an unrelated group of companies to which the subsidiary was sold?

Court's Ruling :
60 In the light of the answer to the first question, there is no need to answer the second question.

Sanjeev Woollen Mills v CIT (SC) - Valuation of Closing Stock at Market Value - Validity of Tax Officer's Invocation of 1st Proviso to Section 145(1)

          In  Sanjeev Woollen Mills v CIT, the question before the Supreme Court of India was whether, in a case in which the taxpayer had valued its closing stock of finished goods at market value, the Assessing Officer had jurisdiction to invoke and apply the first proviso to Section 145(1) of the (Indian) Income-tax Act, 1961 [ i.e., Section 145(1) as it stood prior to its amendment with effect from April 1, 1997 by the Finance Act, 1995 ], on the ground that, in the opinion of the Assessing Officer, the income of the taxpayer could not properly be deduced from such method of valuation.

2.          By a judgment dated November 24, 2005, P P Naolekar, J, speaking for the Court, held as follows :

(i)     The recognized and settled accounting practice is that closing stock "..... has to be valued on the cost basis or at the market value basis if the market value of the stock is less than the cost value.".

(ii)     In the instant case, the taxpayer had not adopted the "established and settled practice" (i.e., the accounting practice aforesaid), inasmuch as the market value of the closing stock had been taken into consideration while arriving at the chargeable income although such market value was greater than the cost thereof.

(iii)     Since there was no transfer of the goods constituting the closing stock, having regard to the fact that such closing stock constituted the opening stock of the succeeding year, the "..... profit earned is only notional.".

(iv)     Income (i.e., the "notional" profit aforesaid) which has not been "derived at by the assessee" cannot be said to be income chargeable to tax.

(v)     Consequently, the "..... rejection of the accounts maintained by the assessee for the valuation of the closing stock by the assessing officer and confirmed by the High Court ....." was in accordance with law.

(vi)     Accordingly, the "..... power exercised by the assessing officer under Section 145 (being) as per the principles enunciated by various authorities and the courts .....", there was no good or sufficient reason to interfere with the order passed by the High Court.

3.          The Court, therefore, dismissed the taxpayer's appeal.

Sedco Forex International Drill, Inc v CIT (SC) - Salary paid outside India for field break in the UK NOT taxable in India

           In an important judgment delivered on November 17, 2005 in Sedco Forex International Drill, Inc v CIT, the Supreme Court has, reversing the judgment of the Uttaranchal Pradesh High Court, held that the salaries paid outside India (i.e., in the United Kingdom) by the Appellant-taxpayer to its employees (who were tax residents of the United Kingdom) in respect of periods of "field break(s)" undertaken outside India (i.e., in the United Kingdom) (which employees had, prior to undergoing such "field break(s)", rendered services in India under a wet lease of oil rigs by the Appellant-taxpayer to the Oil and Natural Gas Commission, India) were not chargeable to Indian income-tax in the hands of the concerned employees under Section 9(1)(ii) of the Income-tax Act, 1961 ("Act"), inasmuch as such salaries were not paid for "service rendered in India".

2.           The Supreme Court held that the first clause in the contracts entered into by the Appellant-taxpayer with the concerned employees relating to the payment of salaries for services to be rendered in India was distinct from the second clause relating to the payment of salaries for the "field break(s)". While the first clause clearly fell within the extended meaning given to the words "earned in India" in Section 9(1)(ii) of the Act, the second clause did not; accordingly, since the phrase "earned in India" is part of the statutory fiction created by Section 9(1)(ii), "(t)here is no question of introducing a further fiction by extending the Explanation" (i.e., the Explanation to that Section as such Explanation stood prior to its amendment with effect from April 1, 2000) "to include whatever has a possible nexus with service in India.". (emphases supplied)

3.           Although the High Court had not referred to the 2000 amendment to the Explanation aforesaid, the Supreme Court proceeded to deal with the question of whether such Explanation was clarificatory in nature and hence applicable with retrospective effect from the date on which the provision [Section 9(1)(ii)] to which it was an Explanation came into force, since that question was raised by the Respondent-Revenue. The Court ruled against the Revenue on this issue by holding that "(w)hen the Explanation seeks to give an artificial meaning (to the phrase) 'earned in India' and bring about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.". (emphasis supplied)

Discussion Paper on Tax Avoidance and Section 103 of the (South African) Income Tax Act, 1962 - South African Revenue Service

The South African Revenue Service ("SARS") has recently posted on its website, a "Discussion Paper on Tax Avoidance and Section 103 of the Income Tax Act, 1962 (Act No 58 of 1962)". The Background to, and the Purpose of, the Discussion Paper are best described in the following extract from the Introduction to the Paper :

"Section 103 of the Income Tax Act, 1962 (Act No. 58 of 1962), contains the Act's General Anti-Avoidance Rule (GAAR). In its current form, the GAAR has proven to be an inconsistent and, at times, ineffective deterrent to the increasingly complex and sophisticated tax "products" that are being marketed by banks, "boutique" structured finance firms, multinational accounting firms and law firms. ..... The pernicious effects of aggressive tax avoidance are manifold. They include not only the obvious short-term revenue loss, but longer term damage to the tax system and economy as well. These other effects include a corrosive effect upon the taxpayer compliance, the uneconomic allocation of resources, upward pressure on marginal tax rates, an unfair redistribution of the tax burden, and a weakening of the ability of Parliament and National Treasury to set and implement economic policy. Both SARS and National Treasury firmly believe that the vast majority of South Africans are honest, hard working and willing to pay their fair share of tax. ..... Unfortunately, those who engage in impermissible tax avoidance pose a problem for everyone else. It is the purpose of this Paper to start a discussion of these issues and of how best to address them on behalf of all South African taxpayers ..... ."

(emphasis supplied)

2. The Discussion Paper is a veritable treasure-trove of resources and materials on Tax Avoidance and has annexed to it, inter alia, the Australian GAAR, the Canadian GAAR, the New Zealand GAAR and the Spanish Anti-Avoidance Rule.

German Remedies Ltd v DyCIT (Bom) - Duty of Authority Granting Sanction under Section 151 of Income-tax Act, 1961

By a judgment dated October 28, 2005 in the case of German Remedies Ltd v DyCIT (in Writ Petitions No 621 of 2005 and 619 of 2005), the Bombay High Court has held that, while granting sanction under Section 151 of the Income-tax Act, 1961 ("Act") for the issue of a Notice under Section 148 of the Act [ for reopening an income-tax assessment under Section 149(1)(b) of the Act ], it was obligatory on the part of the the sanctioning income-tax authority to --

(i) "..... verify whether there was any failure on the part of the assessee to disclose full and true relevant facts in the return of income filed for the assessment of income of that assessment year ....." and

(ii) "..... consider whether or not power to reopen is being invoked within a period of 4 years from the end of the assessment year to which they relate .....".

2. Since, in the above case, the sanctioning income-tax authority had failed to carry out its obligations aforesaid, the High Court held that such failure was "..... sufficient to justify the contention raised by the petitioner that the approval granted suffers from non-application of mind .....". Accordingly, on account of such failure as also for other reasons, the High Court quashed and set aside the Notices issued under Section 148.

Britannia Industries Ltd v CIT (SC) (October 5, 2005) - Guest-House Expenses Disallowable under Section 37(4) - Not Allowable under Sections 30 to 36

In a judgment delivered on October 5, 2005 in the case of Britannia Industries Ltd v CIT, the Supreme Court of India has given a quietus to the following long-standing controversy in Indian Business Taxation, viz. :

Whether expenditure by way of rent and repairs incurred on the maintenance of, or depreciation allowance relating to, guest-houses are allowable under Sections 30 and 32, respectively, inspite of the provisions of Section 37(4) whereunder all expenditure incurred on such maintenance and depreciation allowance in respect of guest-houses and assets therein are specifically made disallowable ?

The Court (speaking through Altamas Kabir, J) has answered the above question in the negative, i.e., against the taxpayer.

The Pension Fund Regulatory and Development Authority Bill, 2005 - Twenty-First Report of Parliamentary Standing Committee on Finance

[ Although off-topic, I am nonetheless making this post, in view of the importance of its contents ]

The 21st Report ( of the Parliamentary Standing Committee on Finance) on The Pension Fund Regulatory and Development Authority Bill, 2005 has recently been posted on the Net. The Full Text of the Bill is to be found in the "APPENDIX" to the Report.

The National Tax Tribunal Bill, 2004 - Eleventh Report of Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice

          The  11th Report  (of the Department Related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice) on  The National Tax Tribunal Bill, 2004  has just been published on the Net.

2.           The Committee has taken note of the strong opposition to the Bill of several witnesses who deposed before the Committee as well as of the members of the Committee. The Committee has not bought the explanation of the Secretary,  Department of Legal Affairs,  Ministry of Law and Justice, Government of India and has proceeded to ".......... place on record reservations regarding the setting up of National Tax Tribunal ..........". Having done so, the Committee states that, ".......... in the event of the Government being very keen to go ahead with this Bill, it should take into consideration the observations/recommendations of the Committe on the clauses of the Bill ..........".

3.           Among the significant recommendations of the Committee on the Bill are the following :

(i)      Clause 6(2)  should be modified so that Chief Commissioners of Income-tax are also entitled to become Members of the National Tax Tribunal. [ This recommendation is founded on the Committee's feeling that these Chief Commissioners ".......... should be given encouragement towards the fag end of their career by giving them an opportunity to become Members ..........". This feeling is, in turn, based on the Committee's having noted that these Chief Commissioners ".......... pass appellate orders while adjudicating upon the assessment orders .........." and ".......... take a lot of risk while conducting search and seize operations against the tax evaders." ]

(ii)      Clause 13(1)  should be modified so as to ensure that ".......... only qualified persons such as Advocates, Company Secretaries, Chartered Accountants, Cost and Works Accountants may be authorised to appear before the National Tax Tribunal.".

Jurisdiction of (Indian) Income-tax Appellate Tribunal to Sit In On — and Pass On — the Validity of Subordinate Legislation or Executive Decisions

Until now,  a controversy has raged as to whether the (Indian) Income-tax Appellate Tribunal is empowered to sit in on — or pass on — the validity of subordinate legislation or executive decisions.

2.          The nearest that the Tribunal has come to holding that it has the power to apply the doctrine of  ultra vires  was in  Amar Dye-Chem Ltd v ITO [1983] 3 SOT 384 (Bom)(SB),  in which a 5-Member Special Bench held that if a statutory provision has been declared to be  ultra vires  by a court of competent jurisdiction (i.e.,  any of the High Courts or the Supreme Court),  the Tribunal has to respect the law so laid down by that court,  with the result that  the statutory provision declared to be  ultra vires  has to be ignored by the Tribunal.  In other words,  the Tribunal stopped short of holding that it had jurisdiction to strike down as being  ultra vires,   any statutory provision.  

3.          However,  the Mumbai Bench of the Tribunal had recently,  in the case of  Reliance Industries Ltd v DDI (International Taxation) [2005] 3 SOT 501 (Mum),  occasion to consider this issue.  In that case,  the Government of India in its Ministry of Finance had,  vide  a communication of July 21,  1997,  conveyed to the taxpayer —
(i)     its approval of a loan agreement under which the taxpayer had agreed to borrow moneys from sources outside India and
(ii)     that,  consequent to such approval,  the interest,  commission and fees payable by the taxpayer on the moneys so borrowed by it was exempt from withholding tax under Section 10(15)(iv)(f) of the Income-tax Act,  1961.  
Subsequently,  vide a letter dated April 12,  1999 addressed by the Deputy Director (ECB) of the  Government of India in its  Ministry of Finance to the taxpayer,  the exemption from withholding tax aforesaid was effectively withdrawn,  in the following terms :
     
“
          ……….

2.     Further,  it has been noted that the ECB funds raised above had not been utilized for the specified end uses which is one of the essential terms of the ECB approval for availing relevant exemptions under section 10(15)(iv)(f) of Income-tax Act,  1961.  You are,  therefore,  not entitled to any tax benefit in terms of the above provision of the Income-tax Act,  1961.
……….
”

The issue before the Tribunal was whether the executive was empowered to impose a condition (viz.,  the condition of “end use”) not laid down in the statute.  In what can only be described as a path-breaking ruling,  the Tribunal held as follows :

          “
     17.     ……….  On careful reading of the above decisions it is implicit that the Tribunal does have the power to deal with the validity of such rules or notification and by applying the doctrine of “reading down” can strike down such rules if held to be in contradiction with the provisions of the statute itself.  The gist of all the above decisions is that the rules are made only for the purpose of carrying out the provisions of the Act which cannot be taken away or whittle down the effect conferred by the statute.  With the result we hereby agree with the contentions of ld. A.R. that the ITAT has both,  the power and duty,  to deal with such rules or notification and decide whether the same are in agreement with the main provisions of the statute.  In view of above discussion,  in the present appeal,  now we have to decide the validity of the withdrawal of exemption as has been done by the subordinate competent authority.  ……….
”

4.          Consequent to its above ruling,  the Tribunal proceeded to hold,  inter alia,  that,  “considering the totality of the facts,  circumstances,  conditions of the scheme,  evidences of utility of the funds and the legal matrix of the case;  the withdrawal of the exemption was unwarranted”.

5.          Of course,  it might be argued that the above ruling is  obiter,  at least insofar as subordinate legislation is concerned,  having regard to the fact that the issue before the Tribunal was whether the Tribunal was empowered to strike down as invalid,  an executive decision which was inconsistent with the statutory enactment under which such decision was purportedly made.  However,  even if such an argument is upheld,  the ruling will nonetheless strengthen the hands of a future Bench for holding that the Tribunal is invested with the jurisdiction to strike down as  ultra vires,  even subordinate legislation.

17th Report of Indian Parliamentary Standing Committee on Finance on Demands for Grants of Ministry of Finance for Financial Year 2005-06

The Seventeenth Report of the Standing Committee on Finance of the Parliament of India, which was tabled in both Houses of Parliament on April 20, 2005, has recently been published on the web. While the Report considers - and comments and makes recommendations on - the Demands for Grants of the Ministry of Finance for the Financial Year 2005-06, its most interesting part for me is "ANNEXURE-III" thereto, in which are set out, in extenso, the following Instructions issued by the Central Board of Direct Taxes ("CBDT"), in respect of the monetary limits and other conditions for the filing of Appeals and References by the Revenue :

(i) Instruction No 1979 dated 27th March, 2000

(ii) Instruction 1985 dated 29th June, 2000

(iii) Instruction No 6/2003 dated 17th July, 2003 and

(iv) Instruction No 5/2004 dated 27th May, 2004

The Full Text of the Report can be accessed  here (PDF).

Emirates Fertilizer Trading Co, WLL, In Re — Advance Ruling of Authority for Advance Rulings (Income-tax), India

[ Advance Ruling dated October 27, 2004 in AAR No 628 of 2004
— [2005] 272 ITR 84 (AAR) ]





          By this Advance Ruling, the Authority has, effectively,
ruled that the terms of a Double Taxation Avoidance Agreement
(“Tax Treaty”) have to be given effect to, even if the result of such an exercise is double non-taxation.



          Facts

2.      Emirates Fertilizer Trading Co, WLL (“Applicant”),
a partnership firm which was a tax resident of Dubai, United Arab Emirates (“UAE”), held shares in two Indian companies, viz., Indo-Gulf Fertilizers Limited and Hindalco Industries Limited. The Applicant was desirous of selling these shares and their disposal would have resulted in capital gains to the Applicant. Article 13 of the Tax Treaty entered into between India and the UAE ran as follows :



“

Article 13



CAPITAL GAINS



1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other State.



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



3. Gains from the alienation of any property other than that mentioned in paragraphs 1 and 2 shall be taxable only in the Contracting State of which the alienator is a resident.

”

(emphasis supplied)

Since the property sought to be disposed of by the Applicant was neither immovable property nor movable property forming part of the business property of any permanent establishment in Indian of the Applicant, the proposed sale fell to be considered under Paragraph 3 of Article 13.



          Issue(s)

3.      The Applicant applied to the Authority for an advance ruling on the following effective question (inasmuch as the other two questions would have been required to be answered only if the said effective question was answered against the Applicant) :

“(1) India has a Double Taxation Avoidance Agreement with the UAE. As per article 13(3) of the Double Taxation Avoidance Agreement between India and the UAE, signed in 1993 gains from alienation of shares in an Indian company held by a resident of the UAE will be taxable only in the UAE. So as our client is a resident of the UAE for which necessary tax residency certificate is enclosed. Hence under this tax treaty the assessee would not be liable to capital gain tax in India.

(2) * * * * * * * * * * * * * *

(3) * * * * * * * * * * * * * *

”

          Revenue’s Submission(s)

4.      The Revenue’s only submission was that, inasmuch as the capital gains were not taxable in the UAE, application of Paragraph 3 of Article 13 of the Tax Treaty would lead to a situation of double
non-taxation. The Revenue, therefore, pleaded that the Applicant ought to be taxed in India under the domestic tax law of India laid down in the Income-tax Act, 1961 (“Act”).





          Determination(s) Culminating in Advance Ruling

5.      The Authority made the following determinations in arriving at its ruling :

(i)      Under the India-UAE Tax Treaty, capital gains arising from alienation of shares in Indian companies to a tax resident of the UAE are taxable in the UAE.

(ii)      However, under the Act, “capital gains arising to a non-resident in India, are taxable in India”.

(iii)      “Having regard to section 90(2) of the Act, the terms of the treaty have overriding effect over the provisions of the Act in the event of there being conflict between the treaty and the Act. (Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and CIT v. P. V. A. L. Kulandagan Chettiar [2004] 267 ITR 654 (SC)).”.

(iv)      Accordingly, in view of the provisions of Paragraph 3 of Article 13 of the India-UAE Tax Treaty, the capital gains are taxable only in the UAE and not in India, “….. and ….. their taxability under the Act in India does not depend upon whether they are as a fact taxable in the UAE.”. (emphasis supplied)

          Advance Ruling

6.      Consequent to its determinations aforesaid, the Authority delivered the following Advance Ruling :

“(I)t is ruled that gains from the alienation of shares in Indian companies held by the applicant, a resident of UAE, will not be taxable in India.”

Pfizer Corporation, In Re - Ruling of Authority for Advance Rulings (Income-tax), India

     An Advance Ruling was handed down on October 4, 2004 by the Authority for Advance Rulings in the case of   Pfizer Corporation, Panama   (in AAR No 620 of 2003), the particulars of which are as follows.

Facts
2. Pfizer Corporation, a company incorporated in — and a tax resident of — Panama, was the owner of technical know-how for the manufacture of nutritional food supplement products which were manufactured and sold in India by Pfizer India, a group company, under the "Protinex" and "Dumex" trademarks (both trademarks having been registerd in India). Pfizer India had been using the technical know-how for the manufacture of the aforesaid products free of any royalty, under an arrangement entered into with Pfizer Panama.

3. In November 2003, the technical know-how (inter alia) was sold by Pfizer Panama to EAC Nutrition Limited, Denmark, for US$ 5 million. (Under a separate agreement entered into between EAC Denmark and Pfizer India, the licence granted to Pfizer India by Pfizer Panama was terminated prematurely in consideration of payment by EAC Denmark to Pfizer India of a sum of US$ 7 million). In terms of the agreement entered into between Pfizer Panama and EAC Denmark, the technical know-how was handed over, in Bangkok, Thailand, by Pfizer India to EAC Denmark, in the form of a dossier. While making payment to Pfizer Panama, of the consideration of US$ 5 million, EAC Denmark had withheld therefrom, tax at the rate of 21%, which amount EAC Denmark had deposited with the Government of India.

Issue(s)
4. Pfizer Panama, feeling aggrieved by the withholding of tax by EAC Denmark, applied to the Authority for a ruling on the following question :
"

Whether the receipt by the applicant, a company incorporated in and the tax resident of Panama, from the transfer of documents containing know-how and technical information, outside India, to EAC Nutrition Ltd. A/S, a corporation incorporated under the laws of Denmark, under th Sale and Purchase of Technology Agreement dated November 30, 2002 would be taxable in India having regard to the provisions of the Income-tax Act, 1961 ?

”

Determinations Culminating in Advance Ruling
5. In arriving at its ruling, the Authority made the following determinations :

(i) Since there is no Double Taxation Avoidance Agreement between India and Panama, the taxability of the transaction has to be considered only under the domestic law of India. Further, since the transfer of a capital asset situated outside India does not attract any tax liability under the domestic law, the questions for consideration are :

(a) What is the nature of the property which is the subject-matter (viz., the technical know-how in the form of a dossier) of the transfer and

(b) if such subject-matter is a capital asset, what was its situs at the time of its transfer.

(ii) The answers to the two questions at (i) above were as follows :

(a) It was undisputed that the technical know-how was -

(I) owned by Pfizer Panama,

(II) used for a very long time in India, almost exclusively and, therefore,

(III) "..... available in India, both in the form of a dossier as well as in intangible form.".
(emphasis supplied).

Accordingly, having regard to the judgments of the Supreme Court in Scientific Engg House (P) Ltd v CIT [1986] 157 ITR 86 (SC) and Associated Cement Cos Ltd v Commissioner of Customs [2001] (42)RLT 937, the technical know-how in the form of a dossier was a capital asset and the transfer of such technical-know-how "was transfer of a capital asset.".

(b) Once Pfizer India entered into the agreement aforesaid wih EAC Denmark, "..... the technical know-how reverted back to the owner and there was extinguishment of right to manufacture for which consideration has been paid to the Indian company. As a result no asset related to technical know-how was located in India either in tangible or intangible form after termination of the licence granted to Indian company. The subsequent agreements between EAC Trading Private Limited, an Indian affiliate of EAC Denmark and Pfizer India to have business support during the initial period of EAC Trading's operations in India do not affect the situs of asset which is subject-matter of transfer.". The situs of the capital asset, viz., the technical know-how in the form of a dossier, was therefore not in India in any form after the termination of the licence granted to Pfizer India.

(iii) Consequently, the receipt (viz., the consideration of US$ 5 million aforesaid) is not chargeable to tax, either under Section 5(2)(ii) or under Section 9(1)(i) of the (Indian) Income-tax Act, 1961.

Advance Ruling
6. Consequent to its determinations aforesaid, the Authority's
Advance Ruling was as follows :

"Having regard to the provisions of the Income-tax Act, receipt by the applicant from the transfer of know-how and technical information in the form of a dossier under the sale and purchase of Technology agreement dated November 30, 2002 would not be chargeable to tax in India."

{ Reported in  [2004] 141 Taxman 642 (AAR - New Delhi)  }

Claiming My Feed on Feedster

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