Dominant intent

A key issue which arises for consideration in indirect taxation is whether a particular supply is that of goods or of services, so that either the sales tax or the service tax is applicable and not both.

The Supreme Court, in its decision in the BSNL case, has held that the dominant intent of the parties would be the basis for this determination. In a recent decision in Idea Mobile Communications Vs CCEX (2006-TIOL-857), the tribunal has held that since on supply of SIM cards by cellular service providers to customers sales taxes had been paid, it was a sale of goods and has accordingly held that no service tax would apply.

The tribunal did not ascertain the dominant intent of the parties. However, in a subsequent decision, albeit an interim one in the form of a stay order, the tribunal in Bharati Hexacom Vs CCEX (2006-TIOL-1283) has held that the dominant intent in such a situation was not the sale of SIM cards but was the provision of cellular services.

It has consequently arrived at a prima facie view that service tax would be applicable on such supplies of SIM cards and the fact that the service provider had paid sales tax on the supplies was not relevant.

In Transit

Theres some respite for employees of Indian companies who are sent on deputation abroad to a foreign affiliate, parent or an office of the Indian company. They do not have to pay tax in India, for the period that they become a resident of the foreign country, even if the salary is received here.

As residents of a foreign country these employees, in any case, have to pay tax there on the income that they earn. They will not be taxed once again in India on the same income when the two countries have a double taxation avoidance pact. This is the essence of a verdict by the Authority for Advance Ruling, which will ensure that an employee is not taxed twice on the same income.

Of course, the AARs ruling is for a specific taxpayern this case the two employees of British Gas India. The verdict also has a persuasive value in the case of other tax payers. British Gas India had sought a ruling on the tax liability of two of its employees who were sent on deputation to a group company in the UK and had become non-residents in India.
 
The AAR was of the view that the salary paid here by British Gas India to these employees was taxable here under the provisions of the domestic law. At the same time, however, the authority went by the provisions of the double taxation avoidance treaty (DTAA) between India and the UK because these two employees had become residents of the UK.

The Indo-UK tax treaty has a provision on dependent personal services. Going by this provision, the AAR held that the salary paid in India to the employees deputed outside India will not be taxable here as the same was taxed in the UK.

Functional separation

Mumbai branch of Germany-based Dresdner Bank AG has denied its taxability on the interest receivable from its overseas branch head office on the ground that the branch and the foreign company are single entity and no profit can accrue between them.

Mumbai Tribunal noted that intra-organisation transactions can be ignored only when the entire profits are computed. In a scenario like a branch PE of a foreign entity, profits computation has to be similar to functionally separate entity. Thus it held that such interests are to be taxed in India.

The tribunal referred to the decision of ITAT, Kolkata bench, in the case of ABN Amro Bank, wherein the interest payable by branch to its overseas HO was disallowed based on the single entity concept. Interestingly, the tribunal noted that their decision can result in an incongruity and gave an option to taxpayer to have a larger bench decision, which was not opted.