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

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

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

TDS under section 195 Section 195 : Scope & Conditions Wide Scope of the section q Conditions for application of Section 195: a) “any person” - Includes a person having no taxable income b) “a non-resident” - Includes NRIs - does not include R but NOR c) “any sum chargeable to tax (other than Salaries)” q 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)) 26/03/2012 Sushil Lakhani 5

TDS under section 195 Section 195 : Scope & Conditions (contd. . ) q CBDT Circular No. 723 dated 19 -09 -1995: § Payment to non-resident shipping company where provisions of Sec. 172 apply – Sec. 194 C or Sec. 195 do not apply § Provisions of Sec. 194 C 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. 44 B? – Orient Goa Pvt. Ltd (2009 -TIOL-HC-MUM-IT) Impact of DTAA & Circular 732 dated 29 -12 -1995 26/03/2012 Sushil Lakhani 6

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 26/03/2012 Sushil Lakhani 7

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(1 A) (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 271 C)(Refer Hindustan Coca Cola (296 ITR 226 (SC)) § Prosecution - (Section 276 B) 26/03/2012 Sushil Lakhani 8

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 Nature of Income Act (Sec. 9) Treaty Business/Profession S. 9(1)(i) A. 5, A. 7 & A. 14 Salary Income S. 9(1)(ii) A. 15 Dividend Income S. 9(1)(iv), S. 115 A A. 10 Interest Income S. 9(1)(v), S. 115 A A. 11 Royalties S. 9(1)(vi), S. 115 A A. 12 FTS S. 9(1)(vii), S. 115 A A. 12 Capital Gains S. 9(1)(i), S. 45 A. 13 ACT/DTAA, Whichever is beneficial prevails 26/03/2012 Sushil Lakhani 9

Taxability of non-resident Shipping/Aircraft Companies Relevant Provisions of the Act Section 44 B Section 172 Section 44 BBA Section 10(15 A) 26/03/2012 Coverage Special provision for computing profits and gains of shipping business in the case of nonresidents Occasional Shipping business of non- residents Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents Exemption of tax for Indian company engaged in business of operation of aircraft Sushil Lakhani 10

Section 44 B q Applicable to non-residents engaged in the business of operation of ships - Deemed Profit Rate - 7. 5% of gross receipts q 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 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 26/03/2012 Sushil Lakhani 11

Section 172 q Applicable to an occasional shipping business – Deemed Profit Rate - 7. 5% of gross receipts q Overrides all other provisions of the Act q Machinery & procedure for levy and recovery of tax in the case of ship, belonging to or chartered by a non-resident q 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 26/03/2012 Sushil Lakhani 12

Sec. 44 B vs. Sec. 172 Section 44 B Applicable to non-residents engaged in regular Shipping operations Overrides sections 28 to 43 A of the Act Normal procedures for assessment and payment of taxes applicable Also covers amount received or receivable in India on account of carriage of passengers etc. shipped at a port outside India 26/03/2012 Section 172 Applicable to non-residents engaged in occasional shipping business Overrides all other provisions of the Act Specific procedure for levy, assessment and collection of tax is provided. Only covers ships belonging to nonresident carrying passengers etc. shipped at a port in India. Sushil Lakhani 13

Section 44 BBA q Applicable to non-residents engaged in the business of operation of aircrafts - Deemed Profit Rate - 5% of gross receipts q Scope: – carriage of passengers, livestock etc. from any place 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 26/03/2012 Sushil Lakhani 14

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 26/03/2012 Sushil Lakhani 15

Article 8 of Tax Treaties – A snapshot Sub – Articles Coverage Article 8(1) Taxability of profits from operation of ships or aircrafts in international traffic Article 8(2) Taxability of profits from operation of boats engaged in inland waterways transport Article 8(3) Where place of effective management of enterprise is aboard a ship or boat Article 8(4) Joint business / Pooling Arrangement extension of scope of Article 8(1) Article 8 B (2) – UN Model Right to tax profits to the Source Country if activities more than casual in nature. 26/03/2012 Sushil Lakhani 16

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 26/03/2012 Sushil Lakhani 17

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. Taxability based on POEM Taxability based on residence Netherlands, Mauritius, Germany , Cyprus (refers to Headquarter as POEM) USA, UK, Singapore, Japan, France, Australia, UAE Definition of International Traffic also does not refer to ‘POEM’ in such treaties 26/03/2012 Sushil Lakhani 18

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. 44 B & 172(8) – Profits though not directly connected but are ‘ancillary’ to operation 26/03/2012 Sushil Lakhani 19

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 26/03/2012 Sushil Lakhani 20

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 Navegasao Norsul (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. 26/03/2012 Sushil Lakhani 21

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 26/03/2012 Sushil Lakhani 22

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. 26/03/2012 Sushil Lakhani 23

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’ 26/03/2012 Sushil Lakhani 24

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

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)) 26/03/2012 Sushil Lakhani 26

Cross Border Transactions – Specific Issues Payments to non-resident NVOCC: Transportation enterprises : through ships owned/leased/chartered by other § 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) 26/03/2012 Sushil Lakhani 27

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 26/03/2012 Sushil Lakhani 28

Cross Border Transactions – Specific Issues § Inland Haulage Charges (IHC) - Inland transportation operated by other enterprise Whether covered u/s 44 AB and/or 172(8)? – Contrary views § IHC covered under sub-section (8) of section 172 (Explanation to 44 B 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. 44 B, 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) 26/03/2012 Sushil Lakhani 29

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 Navegasao Norsul (124 TTJ 124) (Mum) (Refer Slide No. 21, 22 & 23) 26/03/2012 Sushil Lakhani 30

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. Moller Maersk Agency (89 ITD 563) (Mum) in the context of specific wordings “derived from” of India-Denmark Treaty 26/03/2012 Sushil Lakhani 31

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 26/03/2012 Sushil Lakhani 32

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)) 26/03/2012 Sushil Lakhani 33

Cross Border Transactions – Specific Issues Types of Charters Payments § Bareboat Charter (Dry Lease) – – 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. – § Hiring of a ship/aircraft for a stipulated period 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 26/03/2012 Sushil Lakhani 34

Cross Border Transactions – Specific Issues Taxability of Charter payments Whether Dry Lease/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 26/03/2012 Sushil Lakhani 35

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 – – ONGC v. IAC (29 ITD 422) (Del) – § UOI v. Gosalia Shipping (113 ITR 307) (SC) 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 § Caribjet Inc (4 SOT 18) (Mum) – Held no fundamental distinction between dry leasing and wet leasing 26/03/2012 Sushil Lakhani 36

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) 26/03/2012 Sushil Lakhani 37

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 26/03/2012 Sushil Lakhani 38

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

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. 26/03/2012 Sushil Lakhani 40

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)? 26/03/2012 Sushil Lakhani 41

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 26/03/2012 Sushil Lakhani 42

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. 26/03/2012 Sushil Lakhani 43

Outbound Investment 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 26/03/2012 Sushil Lakhani 44

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

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 Indian Parent Hold Co. Operating Co. 26/03/2012 Sushil Lakhani 46

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 Hold. Co 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 26/03/2012 Sushil Lakhani India Parent Holding Co. 1 (Cyprus) Holding Co. 2 Operating Co. O Co. perating Co. 47

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. 26/03/2012 Sushil Lakhani 48

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

Example- I of possible structure For Dividend flow India For Royalty Income on right to issue international B/L Denmark UK USA 26/03/2012 Canada UAE Singapore Sushil Lakhani Germany Switzerland 50

Example- I of possible structure § Two Separate companies be set up-one in Denmark & other in UAE; § The Denmark Company would invest in entities in UK, USA, Canada, Singapore, etc. Dividend income would flow from these entities to the Denmark Holding Company which in term may or may not distribute dividends to the Indian Company. § The UAE entity would have the facility / approval of issuing International Bills of Lading. This UAE Company would license this facility to a Switzerland Company which would in turn sub-license it to the other group entities in UK, USA, Canada, Germany etc. The royalty income earned by the Switzerland Company would be offset by the royalty paid by it to the UAE Company & accordingly the taxable profit of the Switzerland Company would be negligible. 26/03/2012 Sushil Lakhani 51

Rationale Denmark as Holding Co. Jurisdiction: § Corporate Tax rate – 25% § Exemption from Corporate tax on dividend from foreign subsidiary companies on fulfillment of certain conditions § Exemption from Capital Gains tax of shares of foreign subsidiary company. § Reduction / Exemptions from withholding taxes on outgoing dividends in view of certain domestic tax provisions and favourable Tax Treaties. Switzerland for earning royalty and paying it to UAE: § Favourable Tax Treaties with number of countries as regards royalties. Thus, no withholding tax from royalty earned such countries § No withholding tax on royalty from Swiss Co. to UAE Co. under Treaty § UAE Co. to operate under free trade zone and thus would bear no tax. 26/03/2012 Sushil Lakhani 52

Alternate - II India USA Singapore HQ Company Canada Netherlands UK 26/03/2012 Germany Sushil Lakhani Cos. in EU countries 53

Rationale Selecting Singapore as the Holding Company jurisdiction: § Singapore has a territorial system of taxation. Income earned from ‘Source in Singapore’ is taxed. § No Capital Gains tax if company has approved Headquarter (holding) company status § Favourable Treaties with number of countries. Dividends, royalties can be remitted after withholding only 5% to 15%. § Business consideration – considered as developed country for the purpose of undertaking logistics business due to better infrastructure, technological development, labour quality. Interposing Netherlands Company between Singapore and other EU Countries: § Participation exemption to companies of EU § No tax on dividend income received from subsidiary § No withholding tax on dividend declared by Netherlands Co. to Singapore Co. 26/03/2012 Sushil Lakhani 54

Part D: Some specific Service Tax issues 26/03/2012 Sushil Lakhani 55

Goods Transport Agency Who is liable to pay? Rule 2(1)(d)(V) of the Service Tax Rules, 1994, the liability to pay service tax is on the person who pays the freight, if the consignor or consignee are Corporate Consignor Consignee Freight Paid by Service Tax to be paid by A Ltd B & Co (Partnership) B & Co A & Co (Proprietary) B Ltd A & Co A Ltd B (Individual) B B A (Individual) B (Individual) A GTA A Ltd B Ltd A (Individual) A A (Individual) B (Individual) C Limited GTA 26/03/2012 Sushil Lakhani 56

Goods Transport Agency § Liability to pay service tax is on the service recipient. 75% Abatement on the value of services (Notification No. 1/2006 -ST) § The service recipient who pays the service tax under reverse charge mechanism can claim the same as input tax credit. § Payment compulsory by cash/cheque. Payment cannot be made by taking input credit. (Although there are some court decisions stating that payment can be made by input credit, there has been a specific amendment in the definition of output service w. e. f 01. 03. 2008 to exclude GTA from the scope of output service. ) 26/03/2012 Sushil Lakhani 57

Cargo Handling Services § § § Value of taxable service is on gross amount charged to client including amounts charged as Reimbursement but not the amounts incurred as pure agent on behalf of client Individuals undertaking CHS not covered. (CCE v Harbhajan Lal Rampal 2009 (16) STR 628 (Del Trib). However, a proprietary firm held to be covered. (J K Transport v CCE, 2007 (8) STR 617 (Del Trib) CHS provided in the following cases is exempt: - to a GTA (Notification No. 1/2009 -ST dated 05. 01. 2009) - Agricultural produce or goods to be stored in cold storage (Notification No. 1/2002 -ST dated 01. 08. 2002) In case of abandoned cargo, goods are auctioned by the agency to recover costs. NO Service Tax leviable as no service rendered (Circular B/1/202 - TRU dated 01. 08. 2002) CHS within the factory premises not taxable (CCE v. Modi Construction Company (2011) 23 STR 6 (Jhar) 26/03/2012 Sushil Lakhani 58

Storage or Warehousing Services § § Demurrage Charges collected as a part of warehousing charges has been held not to be a charge for service and hence accordingly no service tax can be levied on demurrage (As per the Finance Bill, 2012, all demurrage charges are taxable) Warehousing Services provided in the following cases is exempt: - to a GTA (Notification No. 1/2009 -ST dated 05. 01. 2009) - Agricultural produce or goods stored in cold storage (excluded from definition) In case of composite contract - advisable to show the charges for warehousing, transportation, cargo handling separately to avoid the risk of the entire sum getting taxed. Indian Ships availing storage services abroad which are also consumed abroad are exempted (Notification 22/05) 26/03/2012 Sushil Lakhani 59

Transport & Logistics Category of Service Tax Implication Transport of Goods by Road for transshipment Exempt vide Notification 8/2011 Transport of Goods by Rail for transshipment Exempt vide Notification 8/2011 Transport of Goods by Air for trans‐ shipment Exempt vide Notification 8/2011 Transport of Goods by Water for transshipment Not needed in view of the definition set Other Services (e. g. Port Services) for transshipment Taxable Transport of Goods by Air where airfreight included in customs valuation Exempt vide Notification 9/2011 Transport of Goods by Water (General) Abatement provided to the extent of 25% of the value. Effective Service Tax Rate @ 7. 725% 26/03/2012 Sushil Lakhani 60

Changes Proposed in Finance Bill, 2012 affecting Logistics services 26/03/2012 Sushil Lakhani 61

Changes Proposed in Budget 2012 § Rate of service tax increased from 10. 3% to 12. 36% w. e. f. 01. 04. 2012 § Value of taxable service will include any amount realized as Demurrage charges or by any other name for provision of service beyond the period originally contracted. § New Sec 67 A: - Exchange Rate to be applied foreign payments shall be the rate specified in Explanation to Section 14 of the Customs Act, 1962. § Transportation of goods in a vessel from one port in India to another – Abatement has been increased from 25% to 50% 26/03/2012 Sushil Lakhani 62

Changes Proposed in Budget 2012 § Clause (p) of the Negative List includes Services by way of transportation of goods by an aircraft or a vessel from a place outside India to the first customs station landing in India. § Place of Provision of Service − Transport of Goods – the Destination of Goods. Eg. A consignment of cut flowers is consigned from Chennai to Amsterdam. The place of provision of goods transportation service will be Amsterdam and hence not taxable in India. − Goods Transport Agency – Location of Service Recipient − On Board A Conveyance – Place of Origin 26/03/2012 Sushil Lakhani 63

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