India - Cases addressing tax issues concerning services provided by U.S. entity, a 100% export oriented unit, and other items 

Payments for rendering healthcare services not to be treated as “fees for included services” under the India-United States income tax treaty: The Mumbai Bench of Income-tax Appellate Tribunal held that payments received by a non-resident (U.S. entity) for rendering healthcare services are not to be treated as “fees for included services” or “royalty” payments under Article 12 of India-United States income tax treaty. The tribunal explained that the payments were for the purpose of advising, recommending and assisting in relation to healthcare projects; for the conducting of education and training programs; and for the purpose of review and giving feedback on various aspects of a new cardiac hospital and a planned patient care delivery system. Accordingly, the tribunal concluded that the payment was neither to be treated as a “royalty” nor “fees for included services.” Because the entity did not have a permanent establishment in India, the income was also not to be taxed under Article 7 of the tax treaty.

The case is: JDIT v. Harward Medical International USA, ITA No.1558/1559(Mum)/07, dated 15 November 2011

A 100% export oriented unit, already having availed itself of the tax benefits under the former regime, is eligible for tax benefits for the unexpired years (i.e., remaining from the original 10-year period) by virtue of amendment to section 10B of the Income-tax Act from AY 1999-2000: The Karnataka High Court held that a 100% export oriented undertaking is eligible for a tax exemption for the unexpired period of 10 years, under the amended provisions of section 10B of the Income-tax Act, 1961. The High Court held that if a period of 10 consecutive years measured from the date of production has not expired prior to the amendment, the taxpayer would be entitled to the benefit of exemption for the remaining unexpired period.

The case is: DSL Software Ltd.

Deduction for interest paid on borrowed funds that are invested in shares of operating companies for acquiring a controlling stake is disallowed under section 14A of the Income-tax Act: The Delhi High Court held that a deduction relating to the interest paid on borrowed funds invested in shares of operating companies for acquiring and maintaining a controlling interest is disallowed under section 14A of the Income-tax Act, 1961. Section 14A provides that an expenditure incurred by the taxpayer in relation to “income which does not form part of total income” (exempt income) is disallowed.

The case is: Maxopp Investment Ltd.

Income tax deduction for commissions paid to a foreign agent for services rendered outside India, for which there was no withholding of tax, is not disallowed under the Income-tax Act: The Hyderabad Bench of Income-tax Appellate Tribunal held that a deduction for commissions paid to a foreign agent, for which there was no withholding of tax, for services rendered outside India cannot be disallowed under the Income-tax Act, 1961. The tribunal observed that section 195 clearly provides that unless the income is liable to be taxed in India, there is no obligation to withhold tax. Also other basic conditions under section 9 of the Act, with respect to income accruing or arising in India (namely in connection with property in India and concerning control and management vested in India) were not satisfied. Accordingly, the deduction for commissions paid to the non-resident without withholding of tax is not disallowed.

The case is: Divi’s Laboratories Ltd.