(B) Matters referred by ABC Professional Services: The partner of the firm have sought opinion in respect of the matters of their clients for filing reply with the tax authorities relating to the show cause notices issue

CS Professional · Direct Tax Law & Practice · PYQS · December 2020
(B) Matters referred by ABC Professional Services: The partner of the firm have sought opinion in respect of the matters of their clients for filing reply with the tax authorities relating to the show cause notices issued indicating to tax the income in India in each of the following cases under the provisions of Income-tax Act, 1961: (ii) Engineers and Engineers of UK a non-resident foreign company entered into a collaboration agreement on 25.06.2019 with Tony (India) Ltd an Indian Company. The UK Company was issued debentures by Tony (India) Ltd of ₹100 lacs on 1.7.2019 bearing interest @ 12% p.a. in consideration of providing the technical know-how to Tony (India) Ltd by the UK Company. Tony (India) Ltd had also paid the interest on the debentures to Engineers and Engineers which was due for the relevant period ended on 31.3.2020. Provide the expert opinion/advice on the matters referred by ABC Professional Services as compiled under 'B' as to: What treatment shall be given for the purpose of taxation to the debentures of ₹100 lacs issued by Tony (India) Ltd to Engineers and Engineers of UK on 1.7.2019? Whether the interest earned on such debentures to be taxed in India in A.Y. 2020-21 and if so, on what amount the tax shall be charged ? Answer be based only on statutory provisions and by ignoring the provisions of Double Taxation Avoidance Agreement (DTAA) between India and UK.

Answer & Explanation:

The debentures of the value of ₹100 lakh issued by Tony (India) Ltd to Engineers and Engineers of UK in consideration of providing the Technical know-how under the collaboration agreement are in the nature of fees for Technical Services as per Explanation 2 of Section 9 of the Income tax Act, 1961. The value of debentures issued by an Indian company in consideration of providing technical know-how, in the nature of fee for technical services, deemed to accrue or arise in India to Engineers and Engineers of UK, a non-resident foreign company, under section 9(1)(vii) of the Income tax Act, 1961. Hence, it is taxable in India and the non-resident foreign company shall be paying tax on the amount of ₹100 lakhs being the value of debentures. As per section 9(1)(v) of the Income tax Act, 1961, income by way of interest payable by a person who is a resident of India is deemed to accrue or arise in India and shall be subject to tax as per section 9 of the Income tax Act, 1961. Therefore, interest income from debentures of an Indian company is deemed to accrue or arise in India in the hands of Engineers and Engineers of UK by virtue of section 9(1)(v) of the Income tax Act, 1961. Hence, the amount of interest on debentures earned in previous year of ₹9 lakhs is taxable in A.Y. 2020-21.

Topics: International Taxation

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