MARCH 09, 2012

Contentious Issues in International Taxation - Will Budget bring in some clarity?

By S Sivakumar, CA

INTERNATIONAL taxation has remained one of the most contentious and litigated areas of direct taxation in recent months, if the decision of the Apex Court in the Vodafone case and that of the Karnataka High Court in the Samsung case, are any indication. The FM could use the forthcoming Budget as an effective tool to help bring the much needed clarity in respect of many issues concerning international taxation. Here is an attempt to discuss some of these issues….

Conflicting High Court decisions on taxation of payments for software imports – what is the Government's view?

This is one area which has seen, perhaps, the largest quantum of conflicting decisions from the Tribunals and the High Courts. In a recent case, viz. CIT v. Samsung Electronics Co. Ltd, the Karnataka High Court had held that, payments for import of shrink wrapped software constitutes royalty income chargeable to tax in India under Section 9(1)(vi) of the Income Tax Act and consequently, the Indian importer was required to deduct tax at source on such payments under Section 195. In a contradictory decision, the Delhi High Court had held in DIT v. Ericsson AB that, profits arising from off-shore supply of equipments and software are not taxable in India under Section 9(1)(vi). Very interestingly, Mumbai ITAT in DDIT v M/s Solid Works Corporation has held that payments for sale of shrink wrapped software did not constitute ‘royalty income' chargeable to tax. The Mumbai ITAT had referred to the contradictory decisions of the Karnataka High Court and the Delhi High Court and had observed that the view that is favourable to the assesse is to be taken. As if the existing confusion is not enough, the Authority for Advance Rulings has been taking the view that such payments are taxable in India, in some recent rulings. Where does this absolute confusion leave the assessee?

It's high time, the Government made its view public. It's an established law that, packaged software is treated as ‘goods' by the State and Central Governments and even by the judiciary, for purposes of levy of indirect taxes. One wonders as to how, a transaction which is treated as ‘goods' for purposes of indirect taxes, could result in tax being levied under the direct taxes. The Government would be doing a big favour to the IT industry by coming out with a statutory provision or a circular, clarifying its position which can clear the confusion, once and for all.

Govt needs to exempt Non-Residents from the provisions of Section 206AA

In terms of the provisions of Section 206AA (1) of the Income tax Act, 1961 (‘ITA') which was introduced with effect from April 1, 2010, any person receiving any sum, income or amount which is liable to tax deduction at source, is required to his Permanent Account Number (‘PAN') to the person responsible to deduct tax at source. In the event that the PAN details have not been furnished, the deductor is liable to deduct tax on the sum, income or amount payable to the deductee, at a rate which is highest of the rate specified in the ITA, the rate or rates that are in force or 20%. Nobody disputes the rationale behind this Section, which is to penalize transactions which are not supported by details of PAN.

While this reasoning is good, vis-à-vis the domestic transactions, this Section has been playing havoc in respect of payments to Non-residents. As we know, the payments to Non-residents could either be taxable in India or they could be exempt, under the provisions of the ITA or under the Double Taxation Avoidance Agreements (‘DTAA'). While, there is no need for deduction of tax at source, under Section 195 of the ITA, in respect of income of the Non-resident which is exempt in India, the said Section imposes an obligation on the payer to deduct tax at source, in respect of the payment to the non-resident which results in income taxable in India. Till this Section 206 AA came into the tax statute, there were no issues for the Indian residents effecting payments to non-residents. All that they were required to see was, whether, their payment to the non-resident would result in taxable income in the hands of the non-resident. With this Section in force now, a new complication has arisen. Payments to Non-residents are also seemingly covered under Section 206AA and the Indian resident payers are now required to deduct tax at source at the maximum rate of 20%, when the PAN details are not furnished by such Non-residents.

This is a very unfortunate development which is already affecting the industry. The fact that, the Form 27Q which needs to be filed by the Indian resident, on a quarterly basis, compulsorily asks for a tax deduction rate of 20% to be effected when PAN details are not available, has further confirmed what seems to be the Departmental view that, payments to Non-residents who have not furnished PAN details would have to suffer TDS @ 20%.

Asking Non-residents to take PANs would be to mean that the provisions of the ITA would get extended to countries outside of India. While this could still be palatable in respect of Non-residents, payments to whom, are taxable in India, it would be grossly unfair to expect Non-residents who get payments for income which are not taxable in India, to get PANs. Many Non-residents get terribly scared when they hear of the PAN related requirements and many small and mid-sized Non-resident service providers have chosen to ignore the orders placed by the Indian importers, due to these provisions. Enough damage, therefore, would already seem to have been done in this area and the Industry would look forward to a statutory amendment to Section 206AA taking it away from the purview of non-residents or a clarification from the CBDT that

Filing of Form 15CB needs to be exempted for smaller transactions

In terms of the language used in Notification No. 30/2009 dated 25-3-2009 issued by the Board, it seems that the requirement of providing the chartered accountant's certificate in Form 15CB is applicable to all payments to non-residents including for import of materials, capital goods and spares. This is clear from the format of the certificate given in the said Notification. The whole purpose of this requirement is to ensure that, the payer/remitter deducts tax at source, in respect of payments effected to Non-residents which are covered by Section 195 of the ITA and when, no tax is deducted, there is a justification for the same, based on a certificate given by a chartered accountant. In actual practice, this requirement has become a big nightmare for importers of materials, etc. who might have multiple imports on a daily basis. The lack of uniformity amongst the banks has added to the confusion, with some banks preferring to play it safe by insisting on 15CB certificates for all forex payments.

It would be good if the FM can come out with an amendment exempting imports of materials, capital goods, etc. from the requirement of providing Form 15CBs and also providing for an exemption from this requirement for imports of a value of up to a limit of say, USD 5,000- or its equivalent so that, the small time exporters are spared from this requirement. Alternately, importers can be asked to submit quarterly certificates, instead of the current dispensation of having to submit the certificate every time a forex payment of effected.

(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)