Saturday, January 31, 2009

Proof of travel not required for claiming LTA: SC


IN THE SUPREME COURT OF INDIA

Civil Appeal No. 993 OF 2005 With Civil Appeal No. 992 OF 2005

COMMISSIONER OF INCOME TAX Vs M/s LARSEN & TOUBRO LTD

A short question which arises for determination in these Civil Appeal(s) is - whether the assessee(s) was under statutory obligation under Income Tax Act, 1961, and/or the Rules to collect evidence to show that its employee(s) had actually utilized the amount(s) paid towards Leave Travel Concession(s)/Conveyance Allowance?


It may be noted that the beneficiary of exemption under Section 10(5) is an individual employee. There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the Declaration to be submitted by an employee(s). For the above reasons there is no merit in the Civil Appeals and the same are dismissed with no order as to costs.

Here goes my opinion on this...

Though Sec-192 doesn't cast any "OBLIGATION" on the employer, but as a DDO (Disbursement Officer), he has the authority to collect en examine the supporting evidence.

The same rule applies for HRA, Medical Reimbursement & 80C investments as well...If you refer to the Circular on "TDS on Salaries" no where it is mentioned about collecting proofs. But as a DO, it is the employer's responsibility to ensure that the deductions he is giving to employees from his income are based on genuine proofs and not mere declarations from employees.

Though the final obligation lies on the employees, employer need to ensure that he has proper basis for the providing exemptions/deductions under various sections viz., Sec-10, 80C etc.

Just a snippet, why complicate our salary structure, can't we have everything as LTC and just a mere declaration that I have incurred my entire salary on LTC !!! What say??

Thursday, January 29, 2009

Family Settlements and tax planning

Tax Planning

Tax planning as a concept had at a point of time suffered degradation and for a while seemed to be a euphemism for tax evasion. This was the fall¬out of some observations in McDowell’s case, [154 ITR 148 (SC)] especially in the separate opinion of Justice Chinnappa Reddy. But the libel did not stay too long. Sabyasachi Mukherjee, Justice of the Supreme Court salvaged its respectability by observing tax avoidance by genuine transactions is not evil. It is any subterfuge or simulation of a transaction or rather a hoax of a make-believe transaction which is despicable and cannot be countenanced. In Playworld Electronics, he observed [184 ITR 308 (SC)] : “It is true that tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is also true that, in order to create an atmosphere of tax compliance, taxes must be reasonably collected and when collected, should be utilised for proper expenditure and not wasted. (See the observations in CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC), it is not necessary, in the facts of this case, to notice the change in the trend of judicial approach in English (Sherdeley vs. Sherdeley (1987) 2 All ER 54 (HL). While it is true, as observed by Chinnappa Reddy J., in McDowell and Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) that it would be too much to expect the Legislature to intervene and take care of every device and scheme to avoid taxation and it is up to the court sometimes to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the device for what they really are and to refuse to give judicial benediction, it is necessary to remember, as observed by Lord Reid in Greenberg vs. IRC (1971) 47 TC 240 (HL), that one must find out the true nature of the transaction, it is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law”.




So tax planning is now rehabilitated as a normative phenomenon. It stands on its ethical plane without diminution in respectability.

Now I turn to address to the subjects assigned me.

Will in tax planning

This special favour unwittingly done by the legislature caused a proliferation of discretionary trusts under section 164 for the advantage of softer tax treatment. There had been a spate of discretionary trusts for tax avoiding advantage. This taxation of discretionary trust as an ordinary association of person came as a relaxation under the new Act because under the repealed Act of 1922, the tax rate for discretionary trust was the maximum slab rate of tax applicable to the association of persons. The error of relaxing the old provision through want of circumspection dawned on the legislature after at least a decade.
Though borrowed from English jurisprudence, the idea of the will was not wholly unknown to ancient Indian society. The idea of the will i.e. the distribution of the estate of the deceased person according to his wish and desire expressed in his Will was quite appreciated in ancient Indian society. But its actual use was scarce. Its existence in the present form can be traced back at least a century and its development was accelerated by British influence. So it can be said that, in effect though not in form, testamentary instruments have for long come into operation after the death of the maker of the instrument before the Raj days. In fact, in Bengal in the 18th Century, the testaments got recognition as part of the law of inheritance which the Courts recognised. Anyway, the history of Will as a subject does not belong here.

By now Will as a means of disposition of property by a person which takes effect after his death is widely used as part of the law of inheritance. As such, it becomes quite popular for the purpose of disposition of property in general and particularly, for its use in arrangement of property and more particularly, for it advantages in taxation and tax planning through testamentary disposition.

Its general popularity is for the reason that the owner of properties in old age, while commanding influence over and respect of younger generation and their attention, apart from bond of love, for the magnetic power of wealth, can retain the property during lifetime and at the same time leave his estate as the legacy according to his wish and desire for the near and dear ones.

The efficacy of Will for tax saving, however, has somewhat lessened after the abolition of Gift tax. From tax point of view, during the regime of Gift tax as an added tax, the old people would prefer Will to making in his life time gift to avoid gift tax which was a substantial levy, almost prohibitive of making gifts. But that cause for use of Will as a tax-saving device is no more after the legislature had done away with the gift tax.

But that does not mean that Wills have lost their use from the tax point of view. It assumed a new dimension and special importance after the amendment to the law relating to taxation of private trusts in 1970.

It requires a short introduction of the law relating to taxation of private Trusts. The private trusts for the purpose of Income-tax Act fall under two classes – specific trusts and discretionary trusts. The specific trusts are trusts where the beneficiary is known and definite and if the beneficiaries are more than one, each beneficiary’s share is known, definite and specified. For such trust, the taxation scheme is that the value of the benefit from the trust availing to a beneficiary shall be a component of his total income and he shall be taxed according to the total income that comprises his share of benefit from the trust.

Discretionary Trust in contrast is one where the beneficiary is not known and determinate or when known, in the case of multiple known beneficiaries, the share of each beneficiary amongst multiple beneficiaries is not determinate and depends on the discretion of the trustee. Thus, the discretionary trust is one where the trust income is not specific for any known person or in other event the shares of beneficiaries are not known and determinate. So for income tax the test of discretionary trust lies in the manner of conferment of the benefit on the beneficiary than in the amount of discretion permitted to be exercised by the trustees. Indefiniteness or uncertainty of the beneficiary or his share in the trust income is the hallmark of a discretionary trust under the Income tax law.

The Income-tax Act when re-enacted in 1961 repealing the old act of 1922, ordained that such a discretionary trust should be taxed in the manner an ordinary association of persons is taxed at the progressive rates prescribed by the Finance Act. This had the effect of giving a premium for discretionary trust because the rates for taxation as an association of persons would be less for the trust income than in the case of a specific trust where the trust income goes to swell the other income of a beneficiary of a specific trust.

Another interesting controversy has arisen with regard to testamentary discretionary trust. The controversy is with regard to the treatment of the income arising from monies received by a testamentary trust from outsiders. The question is whether in regard to such donations, the punitive rate of maximum tax rate shall apply with regard to the income attributable to such donations.
This special favour unwittingly done by the legislature caused a proliferation of discretionary trusts under section 164 for the advantage of softer tax treatment. There had been a spate of discretionary trusts for tax avoiding advantage. This taxation of discretionary trust as an ordinary association of person came as a relaxation under the new Act because under the repealed Act of 1922, the tax rate for discretionary trust was the maximum slab rate of tax applicable to the association of persons. The error of relaxing the old provision through want of circumspection dawned on the legislature after at least a decade. In 1970, section 164 was amended enjoining that discretionary trust shall be taxed as an association of persons at a flat rate of 65%. It can be said to be a punitive taxation measure to counteract the tax payers’ spur in creating discretionary trusts to bring their corpus as discretionary trust fund for lure of lower taxation.

Here, the Wills come in as a means of averting this punitive taxation of discretionary trusts. The amendment gives a concession for testamentary trust in taking effect from assessment year 1971-72 whereby a trust of discretionary nature is subjected to an ordinary rate applicable to an association of persons both for income tax and wealth tax. The punitive rate of discretionary trust does not operate where it is created by a will. The reason is obvious. Where the transfer is by a will which takes effect only after the death of transferor, no advantage can conceivably be derived from such transfer by the transferor. The efficacy of the Will as a means of tax planning thus survives.

Where the beneficiary of a testamentary trust has income from their own sources, he will not be hit hard if he derives benefit from a discretionary trust created by a will because the trust income allocated to him by the trustee in his discretion shall not be assessed at the maximum marginal rate or any punitive rate. The trust income is not to be included in his individual income but to be assessed separately as that of an association of persons. The income of such a testamentary discretionary trust shall be treated as income of any ordinary association of persons at its usual rate. This benefit results in lower taxation. Even if no beneficiary is ascertained or no income is distributed among the beneficiaries the taxation shall be on the trust income in the status of an ordinary association of persons. As a matter of fact, in recent times, the trend creating discretionary trust under a will has caught on. This position has come to stay for over four decades. But for this relaxation, one important condition is that the trust created by the will must be one. If the testator makes more than one trust, the trusts forfeit the benefit.

A more generous plan of testamentary trust may be conceived. When the will creates a number of trusts, each trust deriving income below the taxable limit, it may virtually give to the beneficiaries total tax holiday for all times to come. The attempt at creating such multiple-trusts, will or testament is no more unprecedented.

Another interesting controversy has arisen with regard to testamentary discretionary trust. The controversy is with regard to the treatment of the income arising from monies received by a testamentary trust from outsiders. The question is whether in regard to such donations, the punitive rate of maximum tax rate shall apply with regard to the income attributable to such donations. The donations to a testamentary trust by themselves is in the nature of trust. With regard to the donations, the trust ceases to be testamentary. It is non-testamentary and the exception admissible for a testamentary trust under the amended provision of section 164 shall not be available. This interpretation is almost irresistible. Therefore, the punitive rate of taxation shall apply with regard to the property so donated to an existing testimony trust.

A few words can be said about the mode of executing a will. It does not require any stamp paper. It can be executed by simply signifying the intention on the document signed by the testator himself with two witnesses. All the persons – the testator and the two witnesses shall sign in presence of each other. Registration is optional. Therefore, the execution of a will virtually costs nothing; though obtaining a probate involves more agony than cost for tardy process of obtaining probate. Anyway, the abolition of gift tax does not take away all the winds from the sails of will as a means of tax planning.

Family Settlement or family arrangement and Tax planning

Family settlement or family arrangement is a transaction effecting distribution of family assets. This has fortuitous effect of division of a family’s assets and income resulting therefrom. But it is a misnomer to describe family settlement or arrangement.

As a means of tax planning because the object of such settlement or arrangement is resolving the actual dispute or the potential threat of a dispute striking or threatening to strike at unity and dignity of the family and bringing it to disrepute through public exposure.

Paradoxically, though the family ties are nowhere as strong as they are in the Indian society, the concept of so resolving a family dispute through internal amicable settlement has travelled from England to India. It followed the flag.

The sanctity of a family and its preservation caused the evolution of it as a manner of realignment of family properties for family peace, the motto being that the society must have self-respecting and self-adjusted families, at peace with itself.

That way, the concept of family settlement had its voyage from England and has had a good harbour in the law of this land. Though upholding the family dignity is not a matter alien to Indian genius, the idea of settlement as a form of legal transaction was not there. So we are indebted to the English jurisprudence. Halsbury defines the settlement in the following words :

A family agreement between members of the same family intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving honour. The agreement may be implied from a long course of dealing. But it is more useful to embody or to effectuate the agreement in a deed to which the term family agreement is applied.

It is an agreement for the division of the family property by way of compromise to avoid family quarrel or litigation.
The arrangement results in dividing family property.

It becomes an agreement among the members of a family to share equitably whatever they obtained.

It is an agreement between co-heirs dividing the property between them to conduce to the family peace.

It quite often emerges as an agreement between the heirs and the person supposed to be entitled under a lost will.

In India this mode of transfer is recognized by the Supreme Court in Sahoo Madhab Das vs. Mukand Ram AIR 1955 SC 481. According to this decision, the dispute need not be a present dispute, even the threat of it to erupt imminently is also considered a good cause for such settlement. What would be the test of existence of a dispute will depend on the circumstances of each individual case. No strait jacket formula is possible. There must be some circumstances indicating some forms of controversy threatening the family unity. Another test may be that whether the settlement really removes the cause of discord and makes the family more secure and happier.

That apprehended conflict can also be a ground for such settlement draws support from the decision of Calcutta High Court AIR 1932 Cal 600, AIR 1932 Cal 664. Even the parties to family settlement need not belong to the same family. The word ‘family’ in this context is quite flexible. The family is not to be taken in its rigid connotation in common parlance. It is enough if the parties are relations. Even collaterals having a remote common ancestor may join in an arrangement and can have relinquished or altered even their interest in expectancy. In this connection, reference may be made to Krishna Baharilal vs. Gulab Chand & Ors. AIR 1971 SC 104. The court, in that case, encountered by the question whether the want of direct family bond amongst the parties to the settlement detracts from the family character of the settlement. The answer is in the negative. Even though the parties were nothing but mere relations and not members of the same family, the dispute between the parties was in respect of certain property which was originally owned by their common ancestors, that was considered sufficient for a family settlement or arrangement. Thus, the family for the purpose of such settlement has a broad sense to embrace parties not belonging to the family.

But the most important aspect for such settlement is that the parties to the family settlement or arrangement must have same antecedent title, claim or interest, even a possible claim in the property. The meaning of antecedent title taken out from the dictionary means existing or occurring before any time or order often with consequential effects. Thus, it refers to some prior right or pre-existing right but it is not to be understood in the sense too pat on the dictionary meaning. In the context of Lord Halsbury’s definition, it means not only existing or prior right but also presumptive right. So a family arrangement cannot be denounced or struck down on the plea that the parties or anyone of the parties did not have pre-existing right at the time of settlement. This view is vindicated by the decision of the Supreme Court in Kale vs. Deputy Director – AIR 1976 SC 807. It says that even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all his claims or title in favour of such party and acknowledges him to be the sole owner, the antecedent title could be said to be there residing in such party.

Antecedent title according to the decision must be assumed in such a situation and the family arrangement was upheld.

The last important view is that the family settlement is not a transfer because here property goes to parties who had antecedent rights. The Supreme Court observed in Sahoo Madodas vs. Mokand Ram (supra) that a compromise or family arrangement is based on the assumption that there is an antecedent title of some sort in the parties and the agreement acknowledges what the title is, each party relinquishing all claims to properties other than his share under the agreement and recognizing right of the others to the portion allotted to them respectively. The court has widened the concept of antecedent title by holding that antecedent title would be assumed in a person who may not have any title but who has been allotted a particular property by the other party to the family arrangement by relinquishing his claim in favour of such a donee. In such a case the party in whose favour the relinquishment is made would be assumed to have an antecedent title.

Thus, the family arrangement being a realignment of title among parties having antecedent rights and interest does not lead to any transfer. It is akin to distribution of properties under a partition of a HUF and needs no conveyance.
Now, the terms of a family arrangement may have tax saving effect because the property is deconcentrated and divided. So is income yield of the property. This would certainly go to minimize taxation if the distribution of income resulting therefrom comes in for taxation at lower slab rate as a result of such diffusion. It is also equally true about Wealth Tax. It also used to save gift tax when gift tax had been in vogue.

But family arrangement or settlement cannot have as its object that of saving tax. It then becomes a fraud. The sole object of family arrangement is preservation of family dignity, unity and peace. So if one targets family settlement or arrangement as the tax saving device, that would certainly cast a cloud on the bona fides of the whole transaction. It would be a subterfuge to hoodwink the revenue.

So in the genuine settlement, tax avoidance comes merely as providential or fortuitous side effect.

[Reproduced with permission from the Paper presented at AIFTP's Two Day National Tax Conference held on 13th and 14th December, 2008 at Kolkata.]

Author: S. Bagchi Advocate

The author deals with the ever – popular topic of tax planning in the context of family arrangements. He warns that while in a genuine settlement, tax avoidance comes merely as a providential or fortuitous side effect, if one targets family settlement as a tax saving device that may cast a cloud on the bona fides of the whole transaction and may be regarded as a subterfuge to hoodwink the revenue

Friday, January 23, 2009

Form 27Q Filing Date Changed--E-TDS Related


Filing date changed from "14 days" from end of quarter to "15 days" from end of quarter to align with the Form 24/26Q E-TDS Filings.
NOTIFICATION NO 11/2009, Dated: January 21, 2009

In exercise of the powers conferred by Section 295 read with sub-section (3) of section 200 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1. (1) These rules may be called the Income-tax (Fourth Amendment) Rules, 2009.
(2) They shall come into force with effect from the 1st day of April, 2009.

2. In the Income-tax Rules, 1962, in rule 37A-

(a) for the words “shall send within fourteen days from the end of the quarter”, the words “shall send on or before the 15th July, the 15th October, the 15th January in respect of the first three quarters of the financial year and on or before the 15th June following the last quarter of the financial year” shall be substituted.

(b) the proviso shall omitted.

F.No.142/01/2008-TPL
(V. Vizay Babu)Under Secy. (TPL-III)

Note:- The principal rules were published vide notification No. S.O. 969(E), dated the 26th March, 1962 and last amended by Income-tax (3rd Amendment) Rules, 2009 vide Notification No. S.O. 197(E) dated the 19th January, 2009.

Tuesday, January 20, 2009

Liability Partnership Act, 2008

Limited Liability Partnership Bill has received the accent of Honourable President of India and has now become a legislation and is to be called as 'Limited Liability Partnership Act, 2008'

Click here to download: http://mca.gov.in/MinistryWebsite/dca/actsbills/pdf/LLP_Act_2008_15jan2009.pdf

Monday, January 19, 2009

Provident Fund on "International Workers"

The government of India had made certain fundamental changes vide a notification dated 1 October 2008 in the Employee Provident Fund Scheme, 1952 and the Employee Pension Scheme, 1995 (collectively referred to as Indian social security schemes). This has significant impact on the expatriates and the employers with whom they work in India .

The Additional Central Provident Fund Commissioner (ACPFC) has issued certain clarifications with respect to these amendments vide his letter dated 7 January 2009 (No. Acturial/7(9)2008/ 75683) to all Regional Provident Fund Commissioners. Also, the ministry of labour has posted certain FAQs on their website (www.epfindia.com) clarifying the position relating to the International Worker (IW)

FAQ on International Workers:

1) Who is an International worker?
An International worker may be an Indian worker or a foreign national.
This means an Indian worker who has divided his/her career between India and another country with whom India has entered into a bilateral Social Security agreement or a foreign national working in India. (Para 2 ff)



2) Who is an ‘excluded employee’ under these provisions?
A ‘detached worker’ posted in an establishment in India but contributing to the social security programme of the source country in terms of the bilateral Social Security agreement signed between that country and India shall be an ‘excluded employee’ under these provisions. (Para 2 f)



3) Who is a ‘detached worker’?
An International worker, being not an Indian employee, contributing to the social security programme of the source country in terms of the bilateral Social Security agreement signed between that country and India and exempt from making any contribution to the Indian system for the period and terms as set out in such an agreement is a ‘detached worker’ for the purpose of compliance under the Indian system. (Para 2 f)



4) What does the term ‘Indian employee’ mean?
An employee, holding or entitled to hold an Indian passport and employed by an establishment covered under the EPF and MP Act, 1952 is an Indian employee under the Special provisions in respect of International workers. [Para 2 ff (a) ]



5) Who all shall become the members of the fund?
a) Every International worker, other than an ‘excluded employee’ – from 1st Nov.2008.
b) Every excluded employee, on ceasing the status, - from the beginning of the month following that in which he/she losses the status. (Para 26)



6) Which category of establishments shall take cognizance of these provisions?
All such establishments covered/coverable under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 that employ ‘International workers’ either in India or abroad shall take cognizance of these provisions. (Para 26)



7) Whether PF rules will apply to an employee if his salary is paid outside India?
Yes, the provisions will apply irrespective of where the salary is paid. (Para 30)



8) Whether PF will be payable only on the part of salary paid in India in case of split payroll?
In case of split payroll the contribution shall be paid on the total salary earned by the employee. (Para 29)



9) ‘Monthly Pay’ for calculating contributions to be paid under the Act?
The monthly pay shall be the pay as specified under Para 29 of the EPF Scheme, 1952, which covers:
• Basic wages (all emoluments paid or payable in cash while on duty or on leave / holiday except Dearness allowance, House rent allowance, overtime allowance, bonus, commission or any other similar allowance payable in respect of employment and any presents made by the employer)
• Dearness allowance (all cash payments by whatever name called paid to an employee on account of a rise in the cost of living)
• Retaining allowance
• Cash value of any food concession



10) What portion of salary on which PF would be payable in case an individual has multiple country responsibilities and spends some part of his time outside India?
Contribution is payable on the total salary payable on account of the employment of the employee employed for wages by establishment covered in India even for responsibility outside India also.[Section 2 (b)]



11) Is there a minimum period of days of stay in India which the employee can work in India without triggering PF compliance?
No, there is no any minimum period of employment in India is required to be eligible for membership. Every eligible International worker has to be enrolled from the first date of his employment in India.



12) What constitutes the Pensionable service?
The service for which contributions are received and/or receivable as also the period of service rendered and considered as eligible under a Social Security Agreement that may cover an International worker. (Para 10 of EPS)



13) How is Pensionable service determined?
While the period of service for which contributions are received under the EPS will decide the quantum of pension admissible, the period of service rendered under a relevant social security agreement shall be taken into account only for the purpose mentioned under such agreement. (Para 10 of EPS)



14) Is there a cap on the salary up to which the contribution has to be made by both the employer as well as an employee?
No, there is no cap on the salary up to which the contribution has to be made by both the employer as well as an employee.



15) Is there a cap on the salary up to which the employer’s share of contribution has to be diverted to EPS?

Yes, the cap on the salary up to which the employer’s share of contribution has to be diverted to EPS remains at Rs.6500. (Para 3 of EPS)



16) What is a social security agreement (SSA)?

A social security agreement is a bi-lateral instrument to protect the interests of the workers in the host country. It being a reciprocal arrangement generally provides for avoidance of no coverage or double coverage and equality of treatment with the host country workers



17) What are the provisions covered in a social security agreement?
Generally a social security agreement covers 3 provisions. They are:

a) Detachment
Applies to employees sent on posting in the host country, provided he/she is complying under the social security system of the home country.

b) Exportability of Pension
Provision for payment of pension benefits to the beneficiary choosing to reside in the territory of the home country directly with out any reduction as also to a beneficiary choosing to reside in the territory of a third country.

c) Provision for totalisation of Benefits
The period of service rendered by an employee in the host country to be counted for the “eligibility” purpose and the payment may be restricted to the length of service, on pro-rata basis.



18) What is the status of the SSAs?
As of today, Social security agreements have been signed with Belgium, France and Germany. But the date of entry into force is yet to be notified. Negotiations are at various stages with The Netherlands, Czech Republic, Hungary, Norway, Switzerland, Sweden, Luxembourg, USA and Australia. Government level talks are on with many other countries where sizable numbers of Indian workers are employed. Although not a formal agreement, there is a reciprocal arrangement between India and Korea to settle the claims of the employees on completion of employment in the host country



19) Should the eligible employees from Belgium, France and Germany contribute under the Special provisions till such time the ‘date of effect’ is notified?
Yes, the International workers from Belgium, France and Germany shall be enrolled as members of EPF till such time the ‘date of effect’ is notified by the Government of India and after such workers obtaining a ‘detachment certificate’ from the appropriate authority in their countries, respectively. Till the ‘date of effect’ is notified no Indian employee posted to these countries and none of the employees from these countries working in India shall be eligible for detachment status.



20) Indian employees working abroad and contributing to Social Security Scheme of that country with whom India has social security agreement. Should they be covered for PF in India or should be treated as excluded employee?
As of today the date of effect of the SSAs is yet to be notified. Therefore, a posted employee, whose name is retained in the pay bill maintained by the employer in India, shall be covered under EPF. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the host country legislations.



21) Could the term "Indian employee" mean any foreign national who is directly employed by an Indian establishment i.e. a person who is in India not under a secondment arrangement or any deputation from a foreign employer but hired directly by the Indian establishment under local terms and service conditions?
The term Indian employee shall mean only such of those employees as explained under Q.No 4. No foreign national can be termed an Indian employee.



22) Whether a Third Country(C) National domiciled in a country (B) with which India (A) has a social security agreement is eligible for benefit under the social security agreement between India and that country?
Normally social security agreements are signed to cover the ‘Nationals’ of the respective countries. Therefore, the above employee may be eligible for the benefit provided that the Third country (C) has signed an enabling agreement with both India (A) as well as the Second country (B).



23) Indian employees working abroad and contributing to Social Security Scheme of that country with whom India DOES NOT have social security agreement. Should they be covered for PF in India or should be treated as excluded employee?
A posted employee, who is drawing wages from the employer in India, shall be covered under EPF. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the host country legislations.



24) Foreign nationals who are employed in India and being paid in foreign currency, whether to be covered or not?

Yes, International workers drawing salary in any currency and in any manner are to be covered. (Section 2 f).



25) Foreigners who are employed directly as an employee by an Indian establishment abroad to be covered or not?

The local employees of an Indian establishment engaged abroad shall be covered by the local legislations

26) Considering that in most countries issuance of work permit to an individual is a trigger for social security compliance, whether the purpose and type of visa i.e. business/ employment will be a determinant for a person to be considered as an International Worker?

The purpose of the visit of an individual is the main determinant for social security compliance. The type of visa may help in determining the purpose of visit. For example – a foreign national coming in to India under an employment visa is working in India.

27) Whether benefit of reciprocity can be extended to an International Worker if his home country provides for exemption from social security to Indian nationals going to work in that country under its domestic law even though there is no social security agreement with India?

In the absence of a formal agreement the benefit of reciprocity is available at the time of withdrawal of the pension claim and not at the time of coverage. (Para 14 of EPS)

28) Where will the survivor benefits be delivered in case of a covered employee holding a passport, being other than an Indian passport, issued by a country with which India is not having a SSA?

In the absence of a SSA, the survivor benefits such as widow/widower pension, children /orphan pension, nominee/parent pension, etc. as the case may be, shall be payable to a bank account of the eligible beneficiary in India. (Para 14 of EPS)

29) What is the criterion for receiving the withdrawal benefit for the services of less than 10 years under EPS, 1995?

In respect of employees hailing from the countries with which India has signed a SSA, the withdrawal benefit shall be paid or accounted for as per the provisions of the SSA. In all other cases, it shall be guided by the principle of reciprocity with reference to the entitlement available to Indian employees in the other country. (Para 14 of EPS)

30) How long an Indian employee retains the status of “International worker”?

An Indian employee attains the status of “International worker” only on account of his employment in a country with which India has signed a SSA. He shall remain in that status till the time he avails the benefits under a social security programme covered under that SSA. (Para 2 f)

31) Under what condition the contributions received in the PF account are payable along with interest?

The full amount standing to the credit of a member’s account is payable if any one of the circumstances mentioned under Para 69 of the EPF Scheme, 1952 is fulfilled


32) Is there a cap on the salary up to which the contribution has to be made to EDLI Scheme by both the employer?

Yes, the cap on the salary up to which contribution has to be made to EDLI Scheme remains unchanged at Rs.6500.

In rendering services to the subsidiary, there is no “permanent establishment” under DTAA

Where services are rendered to subsidiary, there will not be a PE under DTAA.

ACIT vs. Epcos AG (ITAT Pune)

Where the assessee, a German company, rendered services to its Indian subsidiaries in respect (a) product marketing and sales support services and (b) information and technology support services and the AO claimed that as the assessee had a permanent establishment in India to which the said services were “effectively connected”, the business profits had to be computed on a gross basis by applying s. 44D, HELD, rejecting the stand of the Revenue that:

(i) As a tax treaty is an alternative taxation regime in the sense that it allocates taxing rights between two competing tax jurisdictions, it is useful to first check whether the receipt is chargeable to tax under the DTAA before considering its taxability under the Act;

(ii) The concept of PE is a result of compromise between residence rule and source rule of taxation, and it constitutes ‘home’ of a foreign enterprise abroad. In order to constitute a PE, there should be (a) a fixed place of business in the source jurisdiction and (b) the business of the foreign enterprise should be carried on through such a fixed place of business in the source jurisdiction.

(iii) Under Article 5(7), while the existence of a subsidiary or parent company in the source jurisdiction by itself does not constitute a PE; the parent or subsidiary can be a PE of each other if the business of the foreign enterprise is carried out by the PE. This depends on the facts of the each case.

(iv) On facts, the assessee had rendered support services to its subsidiaries and some employees of the latter had worked under the guidance of the assessee, but the work so done by the employees was for the business of the Indian subsidiaries and not for the assessee. There is a distinction between business of the foreign company and that of its Indian subsidiaries. What was done by the employees of the Indian subsidiaries was running the business of the Indian subsidiaries with the guidance of the assessee. The work done by the employees of Indian subsidiaries did not mean that these employees were doing business of the foreign principal unless the work so done by these employees entitled the assessee for rewards of the work so done. The situs and manner of rendering of services, by anyone other than the employees or sub-contractees of the foreign principal, cannot govern whether or not the foreign principal will have a PE in India.

(v) Further, a non-resident having a PE in India, by itself, does not lead to taxability in India; there must be some profit attributable to such a PE which alone could be taxed in India because of the existence of the PE. When the PE carries on an activity which does not serve overall purpose of the foreign enterprise, or which does not contribute to profits of the enterprise, the existence of such a PE is wholly academic and does not have any tax implications in the source jurisdiction.

(vi) For purposes of the exclusion clause in Article 12 (5) to apply and for royalties and fees for technical services to be taxable on gross basis u/ss 44D and 115A, it will have to be demonstrated that the royalties and fees for technical services have a live economic nexus with the PE. The mere fact that there is a PE is not sufficient.

Saturday, January 17, 2009

Deduction u/s 10A/B to be computed "Undertaking" wise

For the purpose of computing deduction under section 10A/10B, one has to consider the profit and gains as derived by an “undertaking” (Unit Wise).


IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'C'
ITA No.590/Bang/08
Asstt. Year : 2003-04

TATA CONSULTANCY SERVICE LTD


1. The assessee has filed an appeal against the order of learned CIT, Bangalore dated 19th February, 2008 passed u/s 263 of the IT Act.

2. The appellant is aggrieved against the invoking of power u/s 263 of the IT Act by the learned CIT. According to the appellant, the order is not erroneous, as the Assessing Officer has accepted one of the possible views. The alternative ground of appeal of the appellant is that the learned CIT has erred in directing the Assessing Officer to recompute the deduction allowable u/s 10A of the Act in respect of STP Unit-1 after setting off of the loss of STP Unit-2.

3. The Assessing Officer passed an assessment order on 29th March, 2006 for the asst. year 2003-04. The assessee was having profit in STP Unit-1 while it was having a loss of Rs.7,12,46,057/- in STP Unit-2. The assessee claimed deduction u/s 10A in respect of Unit-1. No deduction u/s 10A was claimed in respect of Unit-2. The deduction u/s 10A for Unit-1 was claimed on the basis of the profit derived from Unit-1.

4. The Assessing Officer while passing the assessment order, has made a transfer pricing adjustment of Rs.7,15,39,506/- to STP Unit-2. The Assessing Officer reduced the communication charges and foreign exchange incurred for onsite development from the export turnover for computing deduction u/s 10A for Unit-1. Accordingly, the AO determined that a sum of Rs. 45,32,911/- has been claimed as excess in respect of deduction u/s 10A for STP Unit-1. Since the transfer pricing adjustment in respect of STP Unit-1 was more than the loss claimed in STP Unit-2, therefore, the Assessing Officer set off the loss in STP Unit-2 against transfer pricing adjustment.

5. The learned CIT perused the income tax record of the assessee for the asst. year 2003-04 and issued a show-cause notice to the assessee u/s 263 of the IT Act. The learned CIT was of the opinion that the assessment order passed by the AO for the asst. year 2003-04 on 29th March, 2006 was erroneous and prejudicial to the interest of the revenue. According to the learned CIT, the AO has wrongly allowed the deduction u/s 10A before setting off of the loss of STP Unit-2 against the income of the STP Unit-1. According to the learned CIT, the deduction allowed u/s 10A in respect of STP Unit-1 without setting off the loss of STP Unit-2 against the income of STP Unit-1 was not in accordance with law.

6. In response to the show-cause notice issued by the learned CIT, the assessee submitted that as per the provisions of section 10A, deduction will be available to an undertaking in respect of profit and gains derived by the undertaking from export of articles or things or computer software. Attention was also drawn towards CBDT Circular No. 308 dated 29th June, 1981 in which it was made clear that the intention of the Legislature is to keep out the profits of the export in respect of the specified undertaking from the provisions of the Act. The main object of section 10A is not to tax export profits from STP Unit. The income of 10A unit has to be excluded before arriving at the gross total income otherwise the provisions of section 10A would have been shifted to Chapter VIA which deals with deductions from gross total income. It was further argued that section 10A is placed under Chapter III which deals with items which do not form part of total income. The appellant relied on the following decisions of the Bangalore Bench in support of its contention that the deduction u/s 10A is to be computed undertaking-wise and loss of one undertaking cannot be adjusted against the profit of the other undertaking for computing deduction u/s 10A in respect of other undertaking:-

ACIT v Yokogawa India Ltd 2007 13 SOT 470 (Bang.)
ITO v SCT Software Solutions India Pvt. Ltd. - ITA No.1014/Bang/2004.

7. It was further argued before the learned CIT that the order of the AO is not erroneous. There has been no error in applying the facts or law nor there is any deviation from the law. The order of the Assessing Officer is not erroneous so far as it relates to the computation of profits derived by an eligible undertaking u/s 10A. Reliance was placed on the following judgements:-
Russel Properties PR Ltd. Vs Addl. CIT 109 ITR 229 (Cal.)
Kiran Agencies Vs ITO 15 TTJ (Nag) 460
K S Gurumurthy Vs ITO 38 TTJ 448 (Mad.)
Badrudeen & Party v by. CIT 85 Taxman 313 (Mad) 56 TTJ (Jp) 400.

8. The learned CIT has considered the decision of the Bangalore Tribunal in the case of Yokogawa India Ltd. In this case, the assessee company was having three divisions i.e. software service division, project service division and system services division. The assessee earned profit in software service division and suffered loss in other two divisions and claimed exemption u/s 10A of the IT Act in respect of the profits earned. The Tribunal held that since there was no unabsorbed depreciation or unabsorbed business loss in respect of software service division, the profit and gains of such division was exempt u/s 10A of the IT Act and the loss of the other two units, whose income was not exempt could not be set off against the income of the unit covered u/s 10A of the Act. In the case of SCT Software Solutions India Pvt. Ltd., the issue involved was exemption u/s 10A of the IT Act without setting off the loss of non-STP unit. The learned CIT therefore felt that the issue involved in the present case is different from the issue involved in the case of Yokogawa India Ltd. and SCT Software Solutions India Pvt. Ltd. The learned CIT further mentioned that the department has not accepted the decision of the ITAT in the case of SCT Software Solutions India Pvt. Ltd. and appeal has been filed against the decision of the ITAT. The learned CIT was of the opinion that there has been an error in application of law in as much as the Assessing Officer has wrongly allowed the deduction u/s 10A before setting off of the loss of STP Unit-2 against the income of STP Unit-1. The order is also prejudicial to the interest of the revenue because it has resulted in allowance of deduction u/s 10A of an amount higher than what ought to have been allowed as per law. Accordingly, the learned CIT modified the order of the AO dated 29th March, 2006 for the asst. year 2003-04 and directed the AO to allow deduction u/s 10A after setting off the loss from STP Unit-2 against the profit of STP Unit-1.

9. During the course of proceedings before us, the learned AR drew our attention to section 10A(1). As per this section, deduction is allowable in respect of such profit and gains as are derived by an undertaking from the export of articles or things or computer software. It was submitted that the deduction is allowable on the basis of the profit and gains of the undertaking. If an assessee is having more than one undertaking, then the deduction u/s 10A is to be computed for different undertakings. Thereafter, the learned AR drew our attention to section 10A(4). The deduction to be computed for the purposes of section 10A(1) is to bear the same proportion to the profits of the business of the undertaking as the export turnover bears to the total turnover of the business carried on by the undertaking. It was submitted that section 10A(4) has been amended by the Finance Act, 2001 w.e.f. 1/4/2001. Prior to amendment, the deduction was to be computed in the same proportion as the export turnover bears to the total profit of the business. It was therefore argued that the intention of the Legislature is clear that deduction u/s 10A is to be computed on the basis of the profit of the undertaking and not on the basis of the profit of the business of the assessee. The learned AR also relied on the following decisions of the Bangalore Tribunal in support of its contention that deduction is to be allowed in respect of an undertaking without setting off the loss from the other undertakings:-

i) Nous Infosystems Pvt. Ltd. Vs ITO, Bangalore - in ITA No.1042/Bang/07 -The Bangalore Tribunal relied on its earlier decisions in ACIT Vs Yokogawa India Ltd. and in SCT Software Solutions (I) Pvt. Ltd. and held that as the profits of the Non-STP unit cannot be clubbed to the STP profit, therefore, the loss of the Non-STP unit cannot be set off against the profit of the STP unit for the purpose of arriving at the profits of the business eligible for tax benefits under section 10A of the Act.

ii) ACIT Vs Yokogawa India Ltd. in 2007 13 SOT 470 - The assessee company operated three divisions viz. software service division, product service division and system service division, during the previous year, the assessee earned profit in software service division and suffered losses in other two divisions and claimed exemption u/s 10A of the IT Act 1961 in respect of the profit earned.
The Hon'ble Tribunal held that since there was no unabsorbed depreciation or unabsorbed business loss in respect of software service division, the profit and gains of such division were exempt u/s 10A of the Act and the loss of other two units, whose income was not exempt, could not be set off against the income of unit covered u/s 10A of the Act.

iii) ITO Vs SCT Software Solutions India Private Limited in ITA No.1014/Bang/2004 - The assessee was engaged in the business of providing student administration software system for higher education institutions worldwide and provided product development service to the associate enterprise. The assessee claimed deduction u/s 10A of the Act in respect of the income of the STP unit. The assessing officer while passing the order u/s 143(3) reduced the deduction u/s 10A in respect of STP unit to the extent of loss relating to non-STP unit.
The Hon'ble Tribunal after referring to notification No. SO 3231 dated 29.09.1987 held that the profits and gains derived by an eligible industrial undertaking are to be excluded in their entirety and shall not be included in the total income of the tax payer for the eligible period.

iv) I Gate Global Solutions Ltd. Vs ACIT in 112 TTJ 1002 - If the STP unit is independent, then the loss cannot be set off against the profit of the other STP unit for the purpose of working out the tax benefit under section 10A. The tax benefit of the STP units are required to be independently calculated.

10. On the other hand, the learned DR supported the order of the learned CIT. It was submitted that the deduction is to be allowed from the gross total income and such deduction is to be on the basis of the profit included in the gross total income. It is not the case of the assessee that it is not claiming deduction u/s 10A in respect of STP Unit-2. If there are more than one units for which deduction u/s 10A is to be computed, then one has to see the total income included in the computation from the undertaking entitled for deduction u/s 10A.

11. We have heard both the parties. Before proceeding further, it will be useful to reproduce section 10A(1) and 10A(4):-
10A (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things of computer software, as the case may be, shall be allowed from the total income of the assessee".
10A (4) For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking".

12. In Section 10A(1), the word 'an' has been used before the undertaking. Deduction is to be allowed on such profit and gains as are derived from the undertaking. Hence, to apply the provisions of section 10A, one has to consider the profit and gains as derived by an undertaking. It does not refer to profit and gains as are derived by the assessee. The assessee may have more than one undertaking. The word 'undertaking' is defined as any business or any work or the project which one engages in or attempts as an enterprise analogue to business or trade. Undertaking is therefore used in the sense of an enterprise which can be owned or transferred. In the instant case, the revenue has not given a finding that STP Unit-1 and STP Unit-2 are not different undertakings.

13. The jurisdictional High Court in the case of Shankar Construction Company Vs CIT 189 ITR 463 had an occasion to consider the meaning of the industrial undertaking as used in section 32A. While defining the industrial undertaking, the jurisdictional High Court at page 468 has referred to the meaning of the word "undertaking". The same is reproduced as under:-
"'Undertaking' must suffer a contextual and associational shrinkage as explained in D N Banerji Vs P R Mukherjee (1952-53) 4 FJR 443; AIR 1953 SC 58, so also, service, calling and the like. This yields the inference that all organized activity possessing the triple elements above mentioned, although not trade or business, may still be 'industry' provided the nature of the activity, viz. the employer-employee basis, bears resemblance to what is found in trade or business. This takes into the fold of 'industry' undertakings, callings and services, adventures analogous to the carrying on of trade or business. All features, other than the methodology of carrying on the activity, viz. in organizing the cooperation between employer and employee, may be dissimilar. It does not matter, if on the employment terms there is analogy".

It is needless for us to point out that the above ruling is binding on us.
In the matter of Sree Yallamma Coton, Woollen and Silk Mills Co. Ltd. (1970) 40 Comp Cas 466, 485; AIR 1969 Mysore 280, late Justice A Narayana Pai (as he then was), sitting as company judge, had occasion to judicially examine the expression 'undertaking' in the context of 'floating charge'. The learned judge ruled as follows (headnote of AIR 1969 Mys.):
"Undertaking" is not in the real meaning anything which may be described as a tangible piece of property like land, machinery or the equipment; it is in actual effect an activity of man which in commercial or business parlance means an activity engaged in with a view to earn profit. Property, movable or immovable, used in the course of or for the purpose of such business can more accurately be described as the tools of business or undertaking i.e. things or articles which are necessarily to be used to keep the undertaking going or to assist the carrying on of the activities leading to the earning of profits".

14. In the case of P Alikunju, M A Nazeer Cashew Industries Vs CIT 166 ITR 804, the Hon'ble Kerala High Court observed "undertaking" in common parlance means an "enterprise", "venture", "engagement". It can as well mean "the act of one who undertakes or engages in a project or business". Considering the definition of undertaking, it is clear that STP Unit-1 and STP Unit-2 are different undertakings as it has been treated as such by the revenue.

15. While introducing amendment to section 10A(4) by Finance Bill, 2001, it was mentioned in Notes on Clauses as Under:-
"Under the existing provision contained in subsection (4), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the assessee. Sub-clause (b) seeks to clarify that such proportions shall be calculated with reference to the profits and gains of the business of the undertaking and not from any other business carried on by the assessee".

16. The Hon'ble Apex Court in the case of CIT Vs Canara Workshops P. Ltd. 161 ITR 320 had an occasion to consider the allowability of deduction u/s 80E of the IT Act. Deduction u/s 80E was allowable to priority industry. In that case, the assessee was carrying on two priority industries. The Hon'ble Apex Court held as under:-
"Held accordingly, in computing the profits for the purpose of deduction under section 80E of the Income-tax Act, 1961, the loss incurred by the assessee in the manufacture of alloy steels (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority industry). The assessee was entitled to a deduction at 8 per cent, on the entire profits of the automobile parts industry included in the total income without deducting therefrom the losses in the alloy steel manufacture".

17. The Hon'ble jurisdiction High Court in the case of CIT Vs Siddaganga Oil Extractions Pvt. Ltd. 201 ITR 968 had an occasion to consider the allowability of deduction u/s 80HH when there was a loss in one unit and there was profit in another unit. The Hon'ble jurisdictional High Court after referring to the decision of the Hon'ble Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs CIT held that the Tribunal was right in holding that deduction u/s 80HH should be allowed in respect of the solvent plant on its income without setting off the loss incurred in respect of the hydrogenation plant.

18. From the above discussion, it is clear that the deduction u/s 10A is to be computed on the basis of profit and gains derived by an undertaking. In the instant case, STP Unit-2 was having a loss and Therefore, its loss cannot be set off while ascertaining the deduction u/s 10A for STP Unit-1.

19. The Bangalore Bench in the case of I Gate Global Solutions Ltd. Vs ACIT 112 TTJ 1002 vide order dated 27th November, 2007 held as under:-
"Before us, it has not been clarified that Pune unit is an independent unit and is in no way related with the activities carried out at Bangalore or Chennai unit. In absence of the facts, it is not possible to say that Pune unit was an independent undertaking engaged in the business of software development, which was in no way related to the software development done at Bangalore or Chennai unit. In case, the Pune unit is found to be independent, then loss from such unit is to be independently calculated. In case such unit is associated with the activities, which are carried out at Bangalore or Chennai unit, then Pune unit will be considered as part of that undertaking. Hence, the issue of ascertaining as to whether Pune unit was an independent unit or a unit associated with activities of other two units is restored back on the file of the AO. In case it is found that it is part of the other two units and is associated with the activities done in other two units, then it will be considered as part of the same undertaking and loss will be adjusted. However, in case, if it is found, it is an independent unit then it will be treated as independent undertaking and the assessee cannot be forced to have exemption in respect of such independent undertaking. In that case the loss will (not) be adjusted against other income".
From the above, it is clear that the Assessing Officer has taken one of the possible views.

20. The Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. 243 ITR 83 had an occasion to consider the scope of section 263 of the IT Act. The Hon'ble Apex Court held that in order to exercise power u/s 263, it is necessary that the order, which is to be revised, is erroneous as well as prejudicial to the interest of revenue. Both the conditions are to be satisfied. If one of the conditions is absent, then power u/s 263 cannot be exercised. The Hon'ble Apex Court held as under:-
"A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interest of revenue. If one of them is absent-if the order of the Income Tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue-recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interest of revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the revenue. If due to an erroneous order of the Income Tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of revenue. The phrase 'prejudicial to the interest of revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interest of revenue, for example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue unless the view taken by the Income Tax Officer is unsustainable in law".

21. Thus, when the Assessing Officer has taken one of the possible views then the order of Assessing Officer cannot be termed as erroneous and the CIT was having no power to cancel that order u/s 263 of the IT Act. Since we have cancelled the order of the learned CIT u/s 263 of the IT Act, therefore, we are not giving any finding on the alternative submission.

22. In the result, the appeal of the assessee is allowed.

DTAA between India and Serbia_Notified


NOTIFICATION NO: 5/2009, Dated : January 7, 2009

Whereas the annexed Convention between the Government of Republic of India and the Council of Ministers of Serbia and Montenegro for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital was signed at New Delhi on the 8th day of February, 2006;
And whereas the State Union of Serbia and Montenegro was disintegrated into two independent States after Montenegro’s formal declaration of independence on 3rd June, 2006 and Serbia’s formal declaration of independence on 5th June, 2006;


And whereas the National Assembly of the Republic of Serbia has ratified the said Convention as published in the Official Gazette of the Republic of Serbia-International Treaties No.102/07 dated 7th November, 2007 and accordingly reference in the said Convention to ‘Serbia and Montenegro’ shall be read as reference to Serbia;

And whereas the date of entry into force of the said Convention is the 23rd day of September, 2008, being the date of later of the notifications of completion of the procedures as required by the respective laws for entry into force of this Convention, in accordance with paragraph 2 of Article 30 of the said Convention;

And whereas sub-paragraph (2) of paragraph 2 of Article 30 of the said Convention provides that the provisions of the Convention shall have effect in India in respect of the taxes on income derived and taxes on capital owned in each fiscal year beginning on or after the first day of April in the calendar year next following the year in which the Convention enters into force;
Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961) and section 44A of the Wealth-tax Act, 1957 (27 of 1957), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India.


ANNEXURE

CONVENTIONBETWEENTHE GOVERNMENT OF THE REPUBLIC OF INDIAANDTHE COUNCIL OF MINISTERS OF SERBIA ANDMONTENEGROFOR THE AVOIDANCE OF DOUBLE TAXATION WITHRESPECT TO TAXES ON INCOME AND ON CAPITAL
THE GOVERNMENT OF THE REPUBLIC OF INDIAANDTHE COUNCIL OF MINISTERS OF SERBIA AND MONTENEGRO


desiring to conclude a Convention for the avoidance of double taxation with respect to taxes on income and on capital and with a view to promoting economic cooperation between the two countries, have agreed as follows:

Article I:

PERSONAL SCOPE

This Convention shall apply to persons who are residents of one or both of the Contracting States.

Article 2

TAXES COVERED

1. This Convention shall apply to taxes on income and on capital imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied.

2. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on elements of income or of capital, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

3. The existing taxes to which the Convention shall apply are in particular:
in Serbia and Montenegro:


1) the tax on profit;
2) the tax on income;
3) the tax on capital;
4) the tax on revenue from international transport.
(hereinafter referred to as “Serbian and Montenegrin tax”);

in India:
1) the income tax, including any surcharge thereon; and
2) the wealth tax.
(hereinafter referred to as “Indian tax”).


4. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any substantial changes which have been made in their respective taxation laws.

Article 3

GENERAL DEFINITIONS
1. For the purposes of this Convention:
1) the terms “a Contracting State” and “the other Contracting State” mean Serbia and Montenegro or India, as the context requires;


2) the term “Serbia and Montenegro” means the state community Serbia and Montenegro and when used in a geographical sense it means the land territory of Serbia and Montenegro, its internal sea waters and the belt of the territorial sea, the air space thereover, as well as the seabed and subsoil of the part of the continental shelf outside the outer limit of the territorial sea over which Serbia and Montenegro exercises its sovereign rights for the purpose of exploitation and exploitation of their natural resources in accordance with its internal legislation and international law;

3) the term “India” means the territory of India and includes the territorial sea and airspace above it, as well as any other maritime zone in which India has sovereign rights, other rights and jurisdiction, according to the Indian law and in accordance with international law, including the U.N. Convention on the Law of the Sea;

4) the term “political subdivisions”, in the state community Serbia and Montenegro, means Member States;

5) the term “national” means:
- any individual possessing the nationality of a Contracting State;
- any legal person, partnership or association deriving its status as such from the laws in force in a Contracting State.


6) the term “person” includes an individual, a company, a body of persons and, in the case of India, any other entity which is treated as a taxable unit under the taxation laws in force in that country;

7) the term “company” means any body corporate or any entity which is treated as a body corporate for tax purposes;

8) the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

9) the term “international traffic” means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft, is operated solely between places in the other Contracting State;

10) the term “fiscal year” means:
- in the case of Serbia and Montenegro, the year beginning on the first day of January;
- in the case of India, the year beginning on the first day of April.

11) the term “competent authority” means:
- in the case of Serbia and Montenegro, the Ministry for International Economic Relations or its authorized representative;
- in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorized representatives.

2. As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

Article 4

RESIDENT

1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof But this term does not include any person who is liable to tax in that State in respect only of income from sources in that State, or capital situated therein.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
1) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
2) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;

3) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;

4) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. If the State in which its place of effective management is situated cannot be determined, then the competent authorities of the Contracting States shall settle the question by mutual agreement.

Article 5

PERMANENT ESTABLISHMENT

1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:
1) a place of management;
2) a branch;
3) an office;
4) a factory;
5) a workshop;
6) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
7) a sales outlet;
8) a warehouse in relation to a person providing storage facilities for others; and
9) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on.

3. The term “permanent establishment” likewise encompasses a building site, or a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than twelve months;

4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:
1) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise;
2) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery;
3) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
4) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

5) the maintenance of a fixed place of business solely for the purpose of advertising, supply of information, scientific research or similar activities which have a preparatory or auxiliary character, for the enterprise;

6) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs 1) to 5) provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
5. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 7 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first - mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person:
1) has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or
2) has no such authority, but habitually maintains in the first - mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.

6. Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 7 applies.

7. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly of almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.

8. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise) shall not of itself constitute either company a permanent establishment of the other.

Article 6

INCOME FROM IMMOVABLE PROPERTY

1. Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.

2. The term “immovable property” shall have the meaning, which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships, boats and aircraft shall not be regarded as immovable property.

3. The provisions of paragraph I shall apply to income derived from the direct use, letting, or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable-property of an enterprise and to income from immovable property used for the performance of independent personal services.

Article 7

BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with and subject to the limitations of domestic tax laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.

4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article.

5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

7. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.

Article 8

INTERNATIONAL TRAFFIC

1. Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State.

2. For the purposes of this Article, profits from the operation of ships or aircraft in international traffic shall mean the profits derived by an enterprise referred to in paragraph 1, from transportation by sea or air of passengers, goods, mail or livestock.

3. Profits derived by an enterprise referred to in paragraph 1, which is a resident of a Contracting State from the use or rental of containers (including trailers and other equipment for the transport of containers) used for the transport of goods or merchandise by that enterprise in international traffic shall be taxable only in that Contracting State unless the containers are used solely within the other Contracting State.

4. For the purposes of this Article, interest on funds directly connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, if they are incidental to the carrying on of such business, and the provisions of Article 11 shall not apply in relation to such interest.

5. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.

Article 9

ASSOCIATED ENTERPRISES

1. Where
1) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

2) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,
and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

2. Where a Contracting State includes in the profits of an enterprise of that State-and taxes
accordingly-profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.

Article 10

DIVIDENDS

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:
1) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends;
2) 15 per cent of the gross amount of the dividends in all other cases.
The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations.
This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3. The term “dividends” as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of
Article 7 or Article 15, as the case may be, shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

Article 11

INTEREST

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.

3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by:
1) the Government, a political subdivision or a local authority of the other Contracting State; or
2) the Reserve Bank, Central Bank or National Bank of the other Contracting State.

4. The term “interest” as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 15, as the case may be, shall apply.

6. Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

Article 12

ROYALTIES

1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.

3. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.

4. The provisions of paragraphs I and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 15, as the case may be, shall apply.

5. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties Shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

Article 13

FEES FOR TECHNICAL SERVICES

1. Fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the fees for technical services. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.

3. The term “fees for technical services” as used in this Article means payments of any kind received as a consideration for the rendering of any managerial, technical or consultancy services (including the provision of services by technical or other personnel) but does not include payments for services mentioned in Articles 15 and 16.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the fees for technical services are effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or
Article 15, as the case may be, shall apply.

5. Fees for technical services shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the fees for technical services was incurred, and such fees for technical services are borne by such permanent establishment or fixed base, then such fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the fees for technical services, having regard to the services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

Article 14

CAPITAL GAINS

1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in 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 with the whole enterprise) or of such fixed base, may be taxed in that other State.

3. Gains derived by an enterprise of a Contracting State from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in that State.

4. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State.

5. Gains from the alienation of shares other than those mentioned in paragraph 4 of a company which is a resident of a Contracting State may be taxed in that State.

6. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident.

Article 15

INDEPENDENT PERSONAL SERVICES

1. Income derived by an individual who is a resident of a Contracting State from the performance of professional services or other independent activities of an similar character shall be taxable only in that State, except in the following circumstances, when such income may also be taxed in the other Contracting State:
1) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or
2) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other Contracting State may be taxed in that other State.

2. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, surgeons, dentists and accountants.

Article 16

DEPENDENT PERSONAL SERVICES

1. Subject to the provisions of Articles 17, 19, 20, 21 and 22, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
1) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; and
2) the remuneration is paid by, or on behalf of an employer who is not a resident of the other State; and
3) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.

2. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State may be taxed in that State.

Article 17

DIRECTORS’ FEES

Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

Article 18

ENTERTAINERS AND SPORTPERSONS

1. Notwithstanding the provisions of Articles 15 and 16, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from personal activities as such exercised in the other Contracting State, may be taxed in that other State.

2. Where income in respect of personal activities exercised by an entertainer or a sportsperson in his capacity as such accrues not to the entertainer or sportsperson himself but to another person, that income may, notwithstanding the provisions of Articles 7, 15 and 16, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised.

3. Notwithstanding the provisions of paragraphs 1 and 2, income derived by a resident of a Contracting State from his personal activities as an entertainer or as a sportsperson shall be taxable only in that State if the activities are exercised in the other Contracting State within the framework of a cultural or sports exchange programme approved by both Contracting States.

Article 19

PENSIONS

Subject to the provisions of paragraph 2 of Article 20, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.

Article 20

GOVERNMENT SERVICE

1. 1) Salaries, wages and other similar remuneration other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
2) However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:
- is a national of that State; or
- did not become a resident of that State solely for the purpose of rendering the services.

2. 1) Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
2) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.

3. The provisions of Articles 16, 17, 18 and 19 shall apply to salaries, wages and other similar remuneration and to pensions, in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof.
Article 21

STUDENTS

1. Payments which a student or business apprentice who is or was immediately before visiting a Contracting State a resident of the other Contracting State and who is present in the first-mentioned State solely for the purpose of his education or training receives for the purpose of his maintenance, education or training shall not be taxed in that State, provided that such payments arise from sources outside that State.

2. In respect of grants, scholarships and remuneration from employment not covered by paragraph 1, a student or business apprentice referred to in paragraph 1 shall, in addition, be entitled during such education or training to the same exemptions, relief’s or reductions in respect of taxes available to residents of the Contracting State which he is visiting.

3. The benefit of this Article shall extend only for such period of time as may be reasonable or customarily required to complete the education or training undertaken, but in no event shall any individual have the benefits of this Article for more than five years from the date of his first arrival in that other Contracting State.

Article 22

PROFESSORS, TEACHERS AND RESEARCHERS

1. A professor or teacher who visits a Contracting State for the purpose of teaching or carrying out research at a university, college, school or other approved educational institution in that State and who is or was immediately before that visit a resident of the other Contracting State, shall be exempt from taxation in the first-mentioned Contracting State on remuneration for such teaching or research for a period not exceeding two years from the date of his first visit for that purpose, provided that such remuneration arise from sources outside that State.

2. The provisions of paragraph 1 of this Article shall not apply to remuneration from research, if such research is undertaken primarily for the private benefit of a specific person or persons.

Article 23

OTHER INCOME

1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 15, as the case may be, shall apply.

3. Notwithstanding the provisions of paragraph 1, if a resident of a Contracting State derives income from sources within the other Contracting State in the form of lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever, such income may be taxed in that other Contracting State.

Article 24

CAPITAL

1. Capital represented by immovable property referred to in Article 6, owned by a resident of a Contracting State and situated in the other Contracting State, may be taxed in that other State.

2. Capital represented by 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 by 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, may be taxed in that other State.

3. Capital represented by ships and aircraft operated in international traffic, and by movable property pertaining to the operation of such ships and aircraft shall be taxable only in the Contracting State of which the enterprise owning such property is a resident.

4. All other elements of capital of a resident of a Contracting State shall be taxable only in that State.

Article 25

ELIMINATION OF DOUBLE TAXATION

1. Where a resident of a Contracting State derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall allow:
- as a deduction from the tax on the income of that resident, an amount equal to the income tax paid in that other State;
- as a deduction from the tax on the capital of that resident, an amount equal to the capital tax paid in that other State.
Such deduction in either case shall not, however, exceed that part of the income tax or capital tax, as computed before the deduction is given, which is attributable, as the case may be, to the income or the capital which may be taxed in that other State.

2. Where in accordance with any provision of the Convention income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.

3. For the purpose of allowance as a credit in a Contracting State the tax paid in the other Contracting State shall be deemed to include the tax which is otherwise payable in that other State but has been reduced or waived by that State under its legal provisions for tax incentives.

4. For the purposes of this Article, the term “tax paid” shall not include any amount which is payable in respect of any default or omission in relation to taxes to which this Convention applies.

Article 26

NON-DISCRIMINATION

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States.

2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which a company of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar company of the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 3 of Article 7 of this Convention). Further, this provision shall also not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.

3. Except where the provisions of Article 9, paragraph 7 of Article 11, or paragraph 6 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State. Similarly, any debts of an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the firstmentioned State.

4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.

5. The provisions of this Article shall apply to the taxes referred to in Article 2.

Article 27

MUTUAL AGREEMENT PROCEDURE

1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or, if his case comes under paragraph 1 of Article 26, to that of the Contracting State of which he is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention.

2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with this Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States.

3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.

4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. When it seems advisable in order to reach an agreement to have oral exchange of opinions, such exchange may take place through a Commission consisting of representatives of the competent authorities of the Contracting States.

Article 28

EXCHANGE OF INFORMATION

1. The competent authorities of the Contracting States shall exchange such information (including documents or certified copies of the documents) as is necessary for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes covered by the Convention insofar as the taxation thereunder is not contrary to the Convention in particular for the prevention of fraud or evasion of such taxes. The exchange of information is not restricted by Article 1. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the Convention. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

2. In no case shall the provisions of paragraph 1 be construed so as to impose on the competent authority of a Contracting State the obligation:
1) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
2) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
3) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public).

Article 29

MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS
Nothing in this Convention shall affect the fiscal privileges of members of diplomatic missions or consular posts under the general rules of international law or under the provisions of special agreements.

Article 30

ENTRY INTO FORCE

1. The Contracting States shall notify each other in writing, through diplomatic channels, the completion of the procedure required by the respective laws for the entry into force of this Convention.

2. The Convention shall enter into force on the date of the later of the notifications referred to in paragraph 1 of this Article and its provisions shall have effect :
1) in Serbia and Montenegro:
in respect of the taxes on income derived and the taxes on capital owned in each fiscal year beginning on or after the first day of January in the calendar year next following the year in which this Convention enters into force;
2) in India : in respect of the taxes on income derived and the taxes on capital owned in each fiscal year beginning on or after the first day of April in the calendar year next following the year in which this Convention enters into force.

Article 31

TERMINATION

This Convention shall remain in force until terminated by a Contracting State. Either Contracting State may terminate the Convention, through diplomatic channels, by giving notice of termination at least six months before the end of any calendar year after the fifth year from the date of entry into force of the Convention. In such event, the Convention shall cease to have effect:
1) in Serbia and Montenegro: in respect of the taxes on income derived and the taxes on capital owned in each fiscal year beginning on or after the first day of January in the calendar year next following the year in which the notice of termination is given;
2) in India: in respect of the taxes on income derived and the taxes on capital owned each fiscal year beginning on or after the first day of April inthe calendar year next following the year in which the notice of termination is given.

IN WITNESS whereof the undersigned, being duly authorized thereto, have signed this Convention.

DONE in duplicate at New Delhi this 8th day of February 2006 in the English, Hindi and Serbian languages, all three texts being equally authentic. In case of any divergence of interpretation, the English text shall prevail.
FOR THE GOVERNMENTOF THE REPUBLIC OF INDIA
FOR THE COUNCIL OF MINISTERSOF SERBIA AND MONTENEGRO
Shri P. Chidambaram Finance Minister
Prof. Dr. Predrag IvanovicMinister for InternationalEconomic Relations
(Anita Kapur)Joint Secretary, Government of India
F.No.503/1/97-FTD-I
PROTOCOL

At the moment of signing the Convention between the Council of Ministers of Serbia and Montenegro and the Government of the Republic of India for the Avoidance of Double Taxation with respect to taxes on Income and on Capital, the undersigned have agreed that the following provision shall form an integral part of the Convention.
Ad. Articles 6 and 14

With reference to paragraphs 1 of Article 6 and Article 14, it is understood that income from immovable property and capital gains on alienation of immovable property respectively may be taxed in both Contracting States.
IN WITNESS whereof the undersigned, being duly authorized thereto, have signed this Protocol.
DONE in duplicate at New Delhi this 8th day of February 2006 in the, English, Hindi and Serbian languages, all three texts being equally authentic. In case of any divergence of interpretation, the English text shall prevail.
FOR THE GOVERNMENTOF THE REPUBLIC OF INDIA
FOR THE COUNCIL OF MINISTERSOF SERBIA AND MONTENEGRO
Shri P. Chidambaram Finance Minister
Prof. Dr. Predrag IvanovicMinister for InternationalEconomic Relations
(Anita Kapur)Joint Secretary, Government of India

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