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Association of Multimodal Transport Operators of India (AMTOI)

Association of Multimodal Transport Operators of India (AMTOI). Income Tax Implications of Cross Border Transactions by Members of AMTOI. By Sushil Lakhani 26 th March, 2012. Overview of the Presentation. Part A: Legal Provisions Part B: Specific Issues Part C: Structuring of Outbound

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Association of Multimodal Transport Operators of India (AMTOI)

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  1. Association of Multimodal Transport Operators of India (AMTOI) Income Tax Implications of Cross Border Transactions by Members of AMTOI By Sushil Lakhani26th March, 2012

  2. Overview of the Presentation • Part A: Legal Provisions • Part B: Specific Issues • Part C: Structuring of Outbound Investment with Case Study • Part C: Some Service Tax Issues Sushil Lakhani 26/03/2012 2

  3. Part A: Legal Provisions Sushil Lakhani 26/03/2012 3

  4. Part A: Overview of Legal Provisions • Sec. 195 – TDS on payments to non - residents • Taxability of Non-residents • Taxability of non-resident Shipping & Aircraft companies • Domestic Tax Law • Double Taxation Treaty Sushil Lakhani 26/03/2012 4

  5. TDS under section 195 • Section 195 : Scope & Conditions • Wide Scope of the section • Conditions for application of Section 195: • “any person” - Includes a person having no taxable income • “a non-resident” - Includes NRIs • - does not include R but NOR • “any sum chargeable to tax (other than Salaries)” • Any sum chargeable to tax means • The moment there is a remittance out of India, it does not trigger Sec 195. The payer is bound to deduct tax only if the sum is chargeable to tax in India read with sec 4, 5 and 9. • Obligation to deduct TDS limited to the income portion • (GE India Technology Centre (234 CTR 153) (SC)) Sushil Lakhani 26/03/2012 5

  6. TDS under section 195 • Section 195 : Scope & Conditions (contd..) • CBDT Circular No. 723 dated 19-09-1995: • Payment to non-resident shipping company where provisions of Sec. 172 apply – Sec. 194C or Sec. 195 do not apply • Provisions of Sec. 194C and Sec. 195 will also not apply if the payment to be made to an agent of non-resident shipping company where Sec. 172 applies • Whether Circular 723 dated 19-9-1995 is applicable only to payments covered by Sec. 172 or also to payments covered by Sec. 44B? • Orient Goa Pvt. Ltd (2009-TIOL-HC-MUM-IT) • Impact of DTAA & Circular 732 dated 29-12-1995 Sushil Lakhani 26/03/2012 6

  7. TDS under section 195 Section 195 : Scope & Conditions (contd..) • Section 195 (2) – Application by Payer • Section 195 (3) – Application by Payee • Section 195(4) – Validity of certificate issued by AO • Section 195(6) – CA Certificate for Remittances Sushil Lakhani 26/03/2012 7

  8. TDS under section 195 • Consequences of non / short deduction of TDS • Disallowance u/s. 40(a)(i) or Section 58(1)(a)(ii) • Interest u/s. 201(1A) (1% p.m. for late deduction, 1.5% p.m. for late payment) • Cannot be levied if recipient has paid full tax (296 ITR 226 (SC) & Finance Bill, 2012) • Penalties - (Section 221; Section 271C)(Refer Hindustan Coca Cola (296 ITR 226 (SC)) • Prosecution - (Section 276 B) Sushil Lakhani 26/03/2012 8

  9. Taxability of Non-residents Chargeability to tax governed by provisions of Act/DTAA Sec. 5: If income is accrued or deemed to be accrued in India If income is received or deemed to be received in India ACT/DTAA, Whichever is beneficial prevails Sushil Lakhani 26/03/2012 9

  10. Taxability of non-resident Shipping/Aircraft Companies Relevant Provisions of the Act Sushil Lakhani 26/03/2012 10

  11. Section 44B • Applicable to non-residents engaged in the business of operation of ships - Deemed Profit Rate - 7.5% of gross receipts • Scope: • carriage of passengers, livestock etc. shipped at any port in India i.e. outbound shipments; and • amount received or deemed to be received in India on account of carriage of passengers, livestock etc. shipped at any port outside India; • Demurrage charges or handling charges or any other amount of similar nature are also included • (“Any other amounts of similar nature” will include reimbursements e.g. container detention charges, Light charges to port authority etc. but may not include charges not similar to demurrage or handling charges (Refer Slide 29) • DTC Contrast – Both outbound & inbound shipments taxable in India Sushil Lakhani 26/03/2012 11

  12. Section 172 • Applicable to an occasional shipping business – Deemed Profit Rate - 7.5% of gross receipts • Overrides all other provisions of the Act • Machinery & procedure for levy and recovery of tax in the case of ship, belonging to or chartered by a non-resident • Scope: • Carriage of passengers, livestock, mail or goods shipped at a port in India i.e. only outbound shipments • amount paid or payable (in or out of India) on account of such carriage to the owner or the charterer • Demurrage charges or handling charges or any other amount of similar nature will also be included • Does not cover carriage of passengers etc. shipped at any port outside India Sushil Lakhani 26/03/2012 12

  13. Sec. 44B vs. Sec. 172 Sushil Lakhani 26/03/2012 13

  14. Section 44BBA • Applicable to non-residents engaged in the business of operation of aircrafts - Deemed Profit Rate - 5% of gross receipts • Scope: • carriage of passengers, livestock etc. from any place in India in India; and • Amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock etc. from any place outside India Sushil Lakhani 26/03/2012 14

  15. Other Relevant provisions • Potential risk of freight forwarders being considered as “agent” of non-resident u/s 163!!! • Freight forwarders can be treated as agent u/s 163 of non-resident NVOCC which does transshipment aboard for them • May be liable to taxes payable in India by non-resident NVOCC • Refer WSA Shipping (143 TTJ 423) for Treaty countries • Refer WSA Shipping (48 SOT 551) for non-treaty countries Sushil Lakhani 26/03/2012 15

  16. Article 8 of Tax Treaties – A snapshot Sushil Lakhani 26/03/2012 16

  17. Article 8 – A snapshot • International traffic – Article 3(1)(e) • the term "international traffic" means any transport by a ship or aircraft operated by an enterprise that has its place of effective management in a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State • Profits “from” the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management (POEM) of the enterprise is situated Sushil Lakhani 26/03/2012 17

  18. Article 8 – Taxation based on residency • Most of the Indian treaties prefer taxation of income from operation of ships and aircrafts on the principle of residency instead of POEM • E.g. - India-US Treaty - Article 8 (1) reads as follows: Profits derived by an enterprise of a Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State. Sushil Lakhani 26/03/2012 18

  19. Article 8 – A snapshot • Profits directly obtained by the enterprise from transportation of passengers or cargo by ships or aircrafts(whether owned, leased or otherwise at the disposal of the enterprise) that it operates in international traffic • Also includes • Profits ‘directly connected’ with operation - Contrast with ‘amounts of similar nature’ in Sec. 44B & 172(8) • Profits though not directly connected but are ‘ancillary’ to operation Sushil Lakhani 26/03/2012 19

  20. Article 8 – Indian Treaties • Why do we need to examine each Treaty separately?? • Some Treaties define the term “Operations of ships or aircrafts in international traffic” • Some Treaties do not define the term “Operations of ships or aircrafts in international traffic” • Indian Tribunals and Courts have interpreted the applicability Article 8, based on the language of the Article in the Treaties Sushil Lakhani 26/03/2012 20

  21. Article 8 – Indian Treaties • Use of words “Operation in international traffic” by the owners or lessees or charterers of ships in the Treaties: • Mumbai ITAT in Federal Express Corporation (130 TTJ 526) have held that Inland Haulage Charges are covered under Article 8 of India-USA Treaty only if connected to transportation as owners / charterers / lessee and not if these are connected with transportation by others. • Mumbai ITAT in Cie De NavegasaoNorsul(124 TTJ 124) have held that link between transportation through feeder vessel and mother vessel operated by the Shipping company needs to be established, otherwise only profits attributable to voyage from mid-station to final destination by mother vessel operated by shipping company, would be covered by Article 8. Sushil Lakhani 26/03/2012 21

  22. Article 8 – Indian Treaties When words “Operation in international traffic” are not defined in the Treaty: • Balaji Shipping (UK) Ltd. (25 SOT 325) (Mum) • India-UK Treaty – Article 9 similar to Article 8 of OECD Model Treaty. OECD commentary specifically includes slot chartering as “operation in international traffic” being directly connected with operations in international traffic. • CMA CGM SA France (27 SOT 367) (Mum) • India-France Treaty – Article 9 similar to Article 8 of OECD Model Treaty. Followed decision of Balaji Shipping (UK) Ltd. • Delmas South Africa (2008-TIOL-547-ITAT-Mum) • India-South Africa Treaty – Followed decision of Balaji Shipping (UK) Ltd Sushil Lakhani 26/03/2012 22

  23. Article 8 – Indian Treaties When words “Operation in international traffic” are not defined in the Treaty: • ANL Container Line Pty. Ltd. (2008-TIOL-625-ITAT-Mum) • India-Australia Treaty - benefit of Article 9 would be available to transportation of the cargo by feeder vessels only if the non-resident shipping company is able to establish the link between the transportation of cargo by feeder vessels with transportation by mother vessels owned, leased or chartered by the non-resident shipping company • Delmas France (27 SOT 441) (Mum) • India-France Treaty - Followed decision of ANL Container Line Pty. Ltd. Sushil Lakhani 26/03/2012 23

  24. Article 8 – A snapshot • Article 8 (4) – Article 8 (1) also applicable to profits from participation in following: • a pool, • joint business or • an international operating agency. • Analysis • Terms pool, a joint business or an international operating agency not been defined in the convention. • Cover all forms of cooperation like sharing of infrastructure, manpower, maintenance facilities etc. • Such profits taxed in the state POEM of each participating enterprise • Activity of NVOCC distinct from ‘pool’ or ‘joint business’ Sushil Lakhani 26/03/2012 24

  25. Part B: Specific Issues Sushil Lakhani 26/03/2012 25

  26. Cross Border Transactions – Specific Issues Whether transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services, provided by a non-resident outside India in respect of export consignments from India under ‘Regional Transportation Services Agreement‘ is “fees for technical services”? • Such services were not managerial or technical or consultancy services and do not fall within ambit of section 9(1)(vii) • Income from India by means of operations carried on outside India will not fall within scope of section 9(1)(i) (UPS SCS (Asia) Ltd. (18 taxmann.com 302 (Mum)) Sushil Lakhani 26/03/2012 26

  27. Cross Border Transactions – Specific Issues Payments to non-resident NVOCC: • Transportation through ships owned/leased/chartered by other enterprises : • Such transportation would be outside scope of Article 8(2) of India-USA Treaty. Thus, not exempt under Article 8. Income will be treated as business profits and would be taxable under Article 7 (Federal Express Corporation (130 TTJ 526) (Mum) • Assessee did not actually transport the cargo, though it entered into Charter Party agreement with its client, but acted as agent and earned commission income. Thus, no exemption under Article 8 of India-Singapore Treaty (Thoresen Chartering Singapore (24 SOT 433) (Mum) & J.M Baxi & Co. (42 SOT 333)(Mum) Sushil Lakhani 26/03/2012 27

  28. Cross Border Transactions – Specific Issues • Payment of Demurrage Charges • Demurrage charges shall be considered as part of freight • Gosalia Shipping (P) Ltd. (113 ITR 307) (SC) • Lima Leitao & Co. Ltd. (70 ITR 518) • Japan Lines Ltd. (139 Taxman 267 (MAD.) • (TDS not applicable in view of CBDT Circular No. 723 (Hasmukh J. Patel (Ahmedabad ITAT) • Demurrage for delay at port outside India is not taxable in India Sushil Lakhani 26/03/2012 28

  29. Cross Border Transactions – Specific Issues • Inland Haulage Charges (IHC) - Inland transportation operated by other enterprise • Whether covered u/s 44AB and/or 172(8)? – Contrary views • IHC covered under sub-section (8) of section 172 (Explanation to 44B is similarly worded to 172(8) (Container Carriers (P.) Limited (163 Taxmann 479) (Del) & Freight Systems (India) (P.) Ltd (6 SOT 473) (Delhi) • IHC not covered under Explanation to Sec. 44B, being not in the nature of demurrage charges or handling charges (Safmarine Container Lines NV (120 ITD 71) (Mum)) • Whether covered under Article 8 of Tax Treaties? – Contrary views • Safmarine Container Lines NV (120 ITD 71) (Mum) • Federal Express Corporation (130 TTJ 526) (Mum) • (Refer Slide No. 21, 22& 23) Sushil Lakhani 26/03/2012 29

  30. Cross Border Transactions – Specific Issues • Payments to non-resident shipping company for the transportation through feeder vessel of other operator • Delmas France (27 SOT 441) (Mum) • Cie De NavegasaoNorsul (124 TTJ 124) (Mum) • (Refer Slide No. 21, 22& 23) Sushil Lakhani 26/03/2012 30

  31. Cross Border Transactions – Specific Issues • Payment to non-resident shipping company for transportation through code-sharing or slot-chartering arrangement with other shipper: • OECD Commentary revised in 2005 to cover slot-chartering in Article 8. • Balaji Shipping (UK) Ltd. (25 SOT 325) (Mum) • CMA CGM SA France (27 SOT 367) (Mum) • ANL Container Line Pty. Ltd. (2008-TIOL-625-ITAT-Mum) • Delmas South Africa (2008-TIOL-547-ITAT-Mum) • (Refer Slide No. 21, 22& 23) • Contrary (incorrect??) view in A.P. MollerMaersk Agency (89 ITD 563) (Mum) in the context of specific wordings “derived from” of India-Denmark Treaty Sushil Lakhani 26/03/2012 31

  32. Cross Border Transactions – Specific Issues Tramp Shipping: • It was considered as “more than casual” in respect of India-Netherlands. More than casual visits include 'regular and frequent' shipping visits, as also 'irregular and isolated’, as long as same are planned and not merely fortuitous. (James Mackintosh & Co. (P.) Ltd. 93 ITD 466 (Mum)) Taxability of shipping income under India- Switzerland Treaty • Article 8 of India-Switzerland Treaty does include shipping income. Article 7 specifically excludes shipping income. • AAR in Gearbulk AG (184 Taxman 383) held that shipping income will also be not included in Article 22 i.e. not covered under any Article of the Treaty. Thus, it will be taxed under the domestic tax law of India Sushil Lakhani 26/03/2012 32

  33. Cross Border Transactions – Specific Issues • Payments for facility to Indian agents to access information like tracking of cargo of a customer, transportation schedule, customer information, documentation system etc. Such facility was only to facilitate Indian agent’s international traffic operations, it was to be regarded as preparatory and auxiliary activity related to transportation and would be covered by provisions of article 9(1) of DTAA (Dampskibsselskabet(130 ITD 59 (Mum)) Sushil Lakhani 26/03/2012 33

  34. Cross Border Transactions – Specific Issues • Types of Charters Payments • Bareboat Charter (Dry Lease) • Hiring of a ship/aircraft for a stipulated period • Possession and control (including the right to appoint the master and crew ) of ship given to the charterer . The Captain and Crew would work under control, supervision and direction of charterer. • Purchase of ship or aircraft on installment i.e. Finance Lease (Bareboat Charter-cum-demise – BBCD) • Time Charter (Wet Lease) • Fully equipped ship/aircraft along with crew is provided - Agreement for a definite period • Voyage Charter (Wet Lease) • Fully equipped ship along with crew is provided - Agreement for a particular voyage Sushil Lakhani 26/03/2012 34

  35. Cross Border Transactions – Specific Issues Taxability of Charter payments Whether Dry Lease/BBC/BBCD covered under Article 12? • Royalty to include use or right to use ship being an equipment (Refer West Asia Maritime Ltd. (111 ITD 155) (Mum)) • CBDT letter dated July 29, 2003 to Ministry of Shipping clarifies: • Ships are industrial equipments. • Payments for bareboat charter in the nature of royalty. • India reservations to OECD updates of 2010– India reserves its right to tax profits from leasing ships or aircrafts on a bare charter basis as Royalty • Bareboat Charter could be covered by Article 8 if ancillary to main activity Sushil Lakhani 26/03/2012 35

  36. Cross Border Transactions – Specific Issues Taxability of Charter payments Whether Wet Lease/Time-Voyage Charter not covered by Article 8? • OECD Commentary & Klaus Vogel on Double Taxation Conventions • ‘Time Charter’ payment not for ‘carriage’ of goods • UOI v. Gosalia Shipping (113 ITR 307) (SC) • ONGC v. IAC (29 ITD 422) (Del) • Contrary view in Indian National Ship Owners Association (Bombay HC - W.P. No. 400 of 2007 – BCAJ August 2007) • Poompuhar Shipping Corporation Ltd. (108 TTJ 970) (Mum) • Considered Time Charter as BBC • CaribjetInc(4 SOT 18) (Mum) • Held no fundamental distinction between dry leasing and wet leasing Sushil Lakhani 26/03/2012 36

  37. Cross Border Transactions – Specific Issues Taxability of Charter payments • Where Indian resident has entered into ‘Bareboat charter’ agreements with Vessel Providing Companies, under which vessels would be delivered to and redelivered by Indian resident outside India and also payments due by applicant to VPC under agreement would be received/paid outside India and the vessel owner has not carried out any operations in India either directly or through the crew. Whether under such facts, income earned by VPC is taxable in India? • (Seabird Exploration FZ, LLC (192 TAXMAN 471 (AAR) Sushil Lakhani 26/03/2012 37

  38. Relevant Proposed Amendments in Finance Bill, 2012 • Deduction for 100% of capital expenditure for setting up and operating Inland Container Depot and Container Freight Station • Setting up and operating a cold chain facility allowed a weighted deduction of 150% of the capital expenditure Sushil Lakhani 26/03/2012 38

  39. Part C: Structuring of Outbound investments Sushil Lakhani 26/03/2012 39

  40. Exchange Control considerations • Direct Investment in a JV/WOS: • Permitted to invest up to 400% of its net worth either directly or through an SPV: • Drawal of foreign exchange from an authorized dealer in India • Through a loan or a guarantee to or on behalf of the JV • Utilization of proceeds of ECBs / FCCBs • Exception for EEFC account holders, and investment out of proceeds of ADR / GDR issue for 400% net worth criteria • Permitted to acquire shares of an overseas company by capitalizing amounts receivable from the overseas company against export of plant / machinery, royalties, commission, etc. Sushil Lakhani 26/03/2012 40

  41. Tax considerations • What should you acquire (assets or shares)? • How should you acquire it (holding company issues)? • How will you pay for it (tax efficient funding)? • How will you use profits (maximizing dividend flows)? • What if things don’t work out (tax efficient exit)? Sushil Lakhani 26/03/2012 41

  42. Tax considerations • Need for an Overseas Holding Company (OHC): • Taxation of foreign dividends in India • Retention of profits in offshore jurisdiction • Deferment of tax • Greater flexibility for inter-company transfer of funds and for setting up operations in other overseas jurisdictions • Future restructuring easy • Better tax regime within European Union Sushil Lakhani 26/03/2012 42

  43. Taxation considerations • Parameters for selection of OHC • Nature of revenue stream expected • No withholding tax in source country • No tax in country of OHC • No withholding tax when payments made by OHC to ultimate parent • Civil law v/s common law • Corporate law provisions like declaration of dividends, buyback, board meetings, etc. • Selection of branch v/s sub • Different types of entity (LLC, LLP,Trusts) • Cost of set up and administration Business consideration for logistics services – Need to have better infrastructure, technological development, labour quality etc. Sushil Lakhani 26/03/2012 43

  44. Outbound Investment Strategy • Strategy: • Most of the outbound acquisitions technique is focused on the following: • Using a favorable foreign holding company to defer Indian tax and circulate cash within the foreign structure in a tax-efficient manner • Repatriation through foreign tax credits and use of hybrid instruments • Leveraging an acquisition through effective use of debt to claim interest deduction in India Caution!!!! GAAR proposals introduced by Finance Bill, 2012 Sushil Lakhani 26/03/2012 44

  45. Typical jurisdictions for locating HoldCo • Netherlands • Switzerland • Singapore • Luxembourg • Mauritius • Cyprus • Denmark • UAE Sushil Lakhani 26/03/2012 45

  46. One-tier Hold Co structure • Benefits • Low/ nil tax in Hold Co on dividends from Operating Cos • Low/ nil WHT on dividends paid by Hold Co • India tax deferral – no tax until repatriated • Possibility of redeploy funds within foreign structure without • India tax cost Sushil Lakhani 26/03/2012 46

  47. Two-tier Hold Co structure • Hold Co 1 located in Cyprus • Hold Co 2 located in Netherlands, Belgium or Luxembourg • Benefits: • Low/ nil tax in Hold Co 2 on dividends from Operating Cos • Nil WHT on dividends paid by HoldCo 2 under EU Directive • Foreign Source dividend exemption in Cyprus and absence of WHT • Tax sparing credit under India/ Cyprus tax treaty can reduce India tax on dividends to almost 5% • India tax deferral – no tax until repatriated • Possibility to redeploy funds within foreign structure Sushil Lakhani 26/03/2012 47

  48. Case Study on Outbound Structuring Facts: • “I Co.” is an India company and is a leading freight forwarding and logistics solution providers and is registered as NVOCC. • With a view to globalize their operations, I Co. plans to setup a holding company outside India which in turn set up companies jointly with their associates in different parts of world. • I Co. prefers that the holding company should be set up in a jurisdiction which permits it to issue International Bills of Lading which could be used by all the group companies by paying a fee / charge to the holding company. Sushil Lakhani 26/03/2012 48

  49. Case Study on Outbound Structuring Query: Suggest a tax efficient jurisdiction for setting up the holding company Sushil Lakhani 26/03/2012 49

  50. Example- I of possible structure For Royalty Income on right to issue international B/L For Dividend flow Sushil Lakhani 26/03/2012 50

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