Permanent Establishments: Planning becomes even more critical

In a judgement delivered on 30th August, 2011, the High Court at Delhi has explained the law relating to Dependant Agency Permanent Establishments (DAPE). Amongst other issues, the High Court has considered points like reporting relationships between Indian subsidiary and foreign parent in coming to its conclusions regarding DAPE. Foreign Companies looking at setting up subsidiaries in India now need to be extra-careful in planning the way the Indian operations are to be conducted. You don’t want to set up a Permanent Establishment without planning and incur additional tax hassles.

Added disclaimer below on December 27, 2011

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

Reopening of income tax assessments – for the past 16 years!

From newspaper reports, it seems that a proposal is going to be placed that would allow the tax department to reopen cases for sixteen years instead of the present limit of six years. Reopening of assessments has been the subject of much litigation.  Except in cases where assessment has not been done, the law requires an Assessing Officer to have reason to believe that income has escaped assessment in order to reopen past assessments. Assessees have often challenged reopening of past assessments on the ground that the Assessing Officer merely had reason to suspect escapement of income and not a reason to believe the same. Courts have held that a mere suspicion not based upon information (even prima facie information) does not warrant reopening and have struck down reopening in such cases.

The power given to an Assessing Officer to reopen must not be unfettered. If that were so, then there is no control over proper and justifiable use of the power. It is for this reason that the law has built in controls that seek to ensure that reopening happens only in deserving cases. Six years may be considered quite reasonable for this purpose. A proposal to allow the tax department to reopen cases for sixteen years raises the following questions: 1) What is sacrosanct about sixteen? Why not fifteen or twenty six? 2) What about the cost of data retention for sixteen years? 3) Will stricter provisions be brought about to ensure that the taxpayer is not caused undue harassment?

 

It is a sad fact that Assessing Officers are often responsible for gross misuse of official power. In our view, if power is to be given to an Officer to reopen cases for the last sixteen years, the burden of proof that ought to be placed on the Officer should also be high. Maybe the information that would be required should be more than just prima facie information. Perhaps there could be a Committee set up in each Commissionerate that would examine each such case on merit before sanctioning such reopening. Maybe the Committee should give a reasoned order for reopening which should be provided to the taxpayer.

In any event, we shall follow this report and update you as and when things develop.

 

Added disclaimer below on December 27, 2011

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

TDS on payments for software license still confusing

The confusion over this issue continues. While  payments for software licenses attract TDS u/s 194J, payment of such license fees to foreign companies would attract withholding taxes u/s 195 in accordance with the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the recipient. A DTAA does not specifically cover such payments under the definition of “royalty”.

The tax department has always tried to argue that payment to foreign companies for software license would be payment for “copyright” and consequently covered under the definition of “Royalty” in DTAA (s) entered into by India. However, courts have always distinguished between payment for “copyright” and payments for the “copyrighted article” on the grounds that when paying for software license, what is being paid for is not the copyright itself but only the right to use a copyrighted article.

Two recent and contrasting judgements must be mentioned:

The decision of the Mumbai Bench of the ITAT in TII Team Telecom International Pvt. Ltd. which follows earlier judgments that hold that payment for software license amounts to payment for a copyrighted article and not the copyright itself and therefore not covered under the definition of “Royalty” and that of Bangalore Bench of the ITAT in ING Vysya Bank Ltd which sets out a contrary view.

Added disclaimer below on December 27, 2011

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.