Goa Seminar June 2014
Residential programme in Goa
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Payment to Non-Resident – Case Studies
Case Study – 1 : Facts
• A.Co,a resident of India is engaged in manufacture and
sale of automobile products in India. It has availed
services from B.Co (USA) which it used for developing
the final automobile design in India.
• Expenditure has been accounted on 7th Jan 2014 by A,
but payment has been made on 5th Feb,2014.
• B.Co charges A Co technical service fees calculated on
its Cost($ 100) + mark up ($ 25) = Total $ 125. .
• B.Co has a TRC but does not have PAN in India.
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Case Study – 1 : Queries
Assuming the payment is subject to WHT as per Income Tax Act and also
as per DTAA (Article 12).
1. What is the rate of WHT is applicable on this transaction ?
2. In case A.Co chooses to gross up the WHT, what will the rate of WHT
(Rate as IT Act or DTAA) for grossing up ?
3. What is the date of remittance of WHT to Govt ?
4. What is the applicable exchange rate for WHT purpose?
5. If A does not withhold tax, will it be assesse in default for $125 or $25 ?
6. Do you advise B to apply u/s 197 to tax dept to get a benefit tax
withholding on an amount $ 25 instead of $125 in light of recent
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Case Study – 2 : Facts and query
F.Co, tax resident of Thailand has a PE in USA which is assessed to tax in USA and does not have a PE in India.
Activities of the PE are fully managed and controlled by F.Co.
Such PE (USA) renders strategic consultancy services to its clients I Co located in India.
Nature of services include analysis of performance, developments, strengths and weaknesses of their clients,
improving their profitability and productivity and similar other parameters.
Services are rendered from outside India.
I Co utilizes such services while manufacturing the goods in India and sells in USA market.
I Co. did not withhold the tax on the following ground
• Services are rendered outside India and the service was utilized in earning assessee’s source of income outside
India.
• Such services do not make available any technical knowledge or skills as per India-USA DTAA.
Assessing officer in India held that the payment is subject to withholding tax in India as per Article 12 or alternatively
under Article 22 of DTA
Advise F.Co in defending the case.
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Case Study – 3 : Facts
Entity Structure :
 Jupiter Germany is a Germany based company 100% owned subsidiary in India Jupiter India.
 Pluto USA is a USA based company and has a 100% owned subsidiary in India –Pluto India.
Functions :
IP Ownership : Pluto USA owns the IP rights for the software namely “Callisto”.
Contract R&D : R&D for Callisto is carried out by Pluto India which Pluto USA compensates Pluto India on Cost Plus
basis. Callisto is also sold as an “Add-on” software to various customers in India.
The Transaction :
During the current year, Jupiter Germany has acquired Callisto software from Pluto USA along with the concerned
employees and customers list worldwide for $ 40 mn (India Regions $ 13 mn + Other Regions $ 27mn). Jupiter
Germany computed the Purchase Price Allocation and allotted the following values to various countries.
Assets under transfer :
Country
Jupiter India
Jupiter (Other
entities)
Total
Amount ($ mn)
Region
overseas
India
Global (expect
India)
IP Rights
Towards transfer of
Employees
Towards customer list
Total
8
12
3
5
2
10
13
27
20
8
12
40
Transaction :
• Jupiter Germany intends to sell the following assets (India Region) to Jupiter India. Accordingly, Jupiter Germany
raised invoice on Jupiter India for $ 13 mn as above.
• IP right will enable Jupiter India to develop the software on its own and sell it in Indian territory. Employees and
customers, post this transaction, would belong to Jupiter India.
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Case Study – 3 : Queries
1.
Whether the payment made by Jupiter Germany to Pluto USA is royalties or
capital gains?
2.
Is Jupiter Germany required to withhold Indian taxes from payment made to
Pluto USA?
3.
Whether the payment made by Jupiter India to Jupiter Germany is royalties
or capital gains?
4.
Is Jupiter India required to withhold Indian taxes from payment made to
Jupiter Germany? If so, which DTA would apply?
5.
Is TPO right in determining ALP of transaction between Jupiter India and
Jupiter Germany as nil?
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Case Study – 4 : Facts
‘I Co’ ,a company registered in India, is engaged in development of drug products. It does not
have the capability of initial development of particular drug called Gen X.
However, I Co is capable of advanced development based on the drug samples and the
related product dossiers derived from the initial development. Initial development process
includes two stages (i) Development (ii) Clinical studies.
I Co, outsourced initial development to X Co which is a company registered in Japan. Base IP
is generated while conducting such initial development by X Co.
Outcome of initial development i.e. Base IP is delivered in the form of ‘Cell’ and the related
dossiers are delivered in a CD. Dossiers describe the technical information and the manner in
which such Cell was developed.
X Co sent two of its employees to India to facilitate transfer of Base IP. They stayed in India
for 30 days.
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I Co paid the to X Co the entire consideration of the contract comprising of three milestones
resulting in ultimate transfer of Base IP.
Case Study – 4 : Queries
Analyse the withholding tax implication of the following payments by I Co to X
Co.
a) Milestone I : USD 5 mn towards initial development.
b) Milestone II : USD 8 mn or Actual Clinical Trial Exp + 15% (whichever is
higher) upon successful completion of clinical trial.
c) Milestone III : USD 2 mn on transfer of Base IP.
Will it make any difference if X Co is paid 80% of the milestone as scheduled
above and 2% royalty on sale upon commercialization of product.
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Case Study – 5 : Facts and query
•
F.Co is a company registered in USA.
•
F.Co maintains database in US which contains financial and economic information (like shareholding by
global holders of global equities, takeover defence strategies adopted by various US public
companies, etc.) of a large number of companies worldwide. The information contained in the
database is available in the public domain.
•
F Co collates, stores and displays this information in an organised manner which enables the
customers to retrieve the required information within a short span of time in a focussed manner.
•
The customers are required to download client interface software (similar to an internet browser)
to access and view the database.
•
The customers of F Co are mostly financial intermediaries and investment banks. The databases,
software and tools are hosted on the applicant’s main frames/data libraries maintained at its data
centres in the US.
The terms of the Agreement provide that :
a) F Co grants limited, non-exclusive, non-transferable rights to use its database, software tools, etc.
and receives subscription fees from its customers.
b) All proprietary rights including intellectual property rights in the software, databases and related
documentations remain the property of the applicant.
c) On expiry of subscription period, unless renewed, the customer will cease to use all licensed
material and software and destroy all documentation except such copies as are required to be
maintained.
Advise clients of F Co on applicability of WHT on payment to F Co.
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Case Study – 6 : Facts and query
I Co is a company registered in India and is tax resident of India.
I Co manufactures goods in India but sells the goods though the agents outside India in three countries.
a)
USA Market : US agents sell goods for I Co as well as for other clients. They secure market information,
advise I Co about the customer availability in addition to sale of goods.
Sales commission is remitted to them via TT from India.
b)
Cyprus Market : Cyprus agents sell goods in Cyprus for I Co as well as for other clients. They don’t engage
in any other activities. I Co buys FC DDs from the bank and send them through courier to Cyprus.
c)
Hong kong : Hong kong agents sell goods in Cyprus only for I Co and not for any other clients. They don’t
engage in any other activities. I Co buys FC DDs from the bank and send them through courier to Indian
Post.
Advise I Co on applicability of WHT on payment to these agents.
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