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Small Business Corporation Liaison Office In India v. Director Of Income-Tax
Factual and Procedural Background
The Small Business Corporation (SBC), a Korean Government undertaking promoting small and medium-sized enterprises, established a liaison office in India at Gurgaon with RBI permission. The RBI restricted the liaison office from engaging in trading activities and mandated that all expenses be met solely from foreign funds through normal banking channels. SBC appointed Mr. Ji Hoon Lee as General Manager of the India office. The issue before the authority was whether the remuneration payable to Mr. Lee by SBC Korea and/or the India liaison office was exempt from Indian income tax under Article 20 of the Double Taxation Avoidance Agreement (DTAA) between India and Korea. The applicant sought an advance ruling on this tax exemption question.
Legal Issues Presented
- Whether remuneration payable to Mr. Ji Hoon Lee by SBC Korea and/or the India Liaison Office is exempt from tax in India under Article 20 of the India-Korea DTAA.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court examined Article 20 of the India-Korea DTAA, which provides tax exemption for remuneration paid by a Contracting State or its subdivisions for services rendered to that State. The court noted that Mr. Ji Hoon Lee was employed by SBC, a government-controlled corporate entity, but not directly by the Government of Korea. SBC was not considered a government department but a separate legal entity with corporate status, despite government control through the Small and Medium Business Administration (SMBA).
The court observed that SBC manages its own funds and pays remuneration out of these funds, which are not conclusively shown to be government funds. The applicant provided an affidavit stating that SBC is a government-controlled non-profit entity and that the SME Fund, partially funded by government contributions, finances SBC's operations including Mr. Lee's salary. However, the affidavit did not clarify whether government funds were exclusively used for personnel expenses.
The court emphasized that for Article 20(1)(a) exemption to apply, remuneration must be paid by the Contracting State. The court held that payments made from government-allocated funds specifically for personnel expenses could satisfy this requirement, as such payments are effectively made by the State. Nevertheless, due to lack of sufficient documentary evidence from the applicant to substantiate that Mr. Lee's salary was paid directly out of government funds, the court was compelled to rule against the applicant.
The court left open the possibility for the assessing authority to reconsider the matter if further evidence is submitted. Additionally, the court rejected the contention that Article 20(4) limits the exemption only to certain government entities, clarifying that other state-run entities like SBC may also qualify under Article 20(1) if conditions are met. The court noted that inclusion of SBC within Article 20(4) is a matter for bilateral agreement between India and Korea.
Holding and Implications
The question of exemption under Article 20(1)(a) of the India-Korea DTAA was answered in the negative against the applicant.
The ruling means that, based on the evidence before the court, remuneration paid to Mr. Ji Hoon Lee by SBC is not exempt from Indian income tax. However, the assessing authority may independently decide the matter if the applicant furnishes additional evidence substantiating payment from government funds. No new legal precedent was established, and the decision directly affects the tax liability of the applicant’s employee without broader implications beyond the case facts.
[By Chairman]
1. The Small Business Corporation (for short SBC) is an undertaking of the Korean Government which assists small enterprises for the purpose of promotion of small and medium size business organizations in various ways, having its office in Seoul. Articles of incorporation of SBC has been filed alongwith the application. SBC has opened liaison office in India at Gurgaon after obtaining the permission from the RBI. RBI in its letter dated 24.1.2007 stipulated among other things that the 1 liaison office should not involve in any trading activities and the entire expenses of the office should be met exclusively out of funds received from abroad through normal banking channels. The purpose of opening liaison office in India is stated to be to assist and facilitate the Korean businesses in India and to act as an interface between them and the Governmental authorities. The applicant states that the SBC is a non- profit entity. For the purpose of looking after the affairs of liaison office Mr. Ji Hoon Lee was appointed as a General Manager at its India office. The exigibility of income-tax on the emoluments received by the said officer incharge of the liaison office is the issue raised in this application. The advance ruling is sought on the following question: Whether remuneration payable to the said Korean national by the Republic of Korea and/or by the India Liaison Office will be exempt from tax in India in terms of Article 20 of the Double Taxation Avoidance Agreement between India and the Republic of Korea?
2. Article 20 of the Double Taxation Avoidance Agreement between India and Republic of Korea (for short DTAA) lays down: Article 20: Government functions:
1. (a) Remuneration, other than a pension, paid by a Contracting State or a political sub-division or a local authority thereof, to an individual in respect of service rendered to that State or sub-division or authority shall be taxable only in that State. (b)However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who 2
(i) is a national of that State: or
(ii) did not become a resident of that State solely for the purpose of rendering the services.
2. (a) Any pension paid by or out of funds created by a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that State or sub-division or authority shall be taxable only in that State. (b) x x x x x x x x
4. The provisions of paragraph (1) of this article shall like-wise apply in respect of remuneration or pensions paid, in the case of Korea, by the Bank of Korea, the Export-Import Bank of Korea and the Korea Trade Promotion Corporation and in the case of India, by the Reserve Bank of India and the EXIM Bank of India, and by organizations recognized by and agreed between the competent authorities of the Contracting States.
3. The applicant submits that by virtue of clause (a) of Article 20 the remuneration paid/received by Mr. Ji Hoon Lee from SBC Korea is not liable to be taxed in India under the Income-tax Act, 1961. On the facts placed before us it is not possible to give a ruling that the benefit of clause (1)(a) of article 20 can be invoked by the applicant. Mr. Ji Hoon Lee be it noted is an employee of SBC but not the employee of the State
i.e. Government of Republic of Korea. He is an employee to the undertaking permitted by the Government which is a legal entity by virtue of its incorporation. SBC does not appear to be the department of the Government. The applicant guardedly states in the application that the liaison office of SBC is similar to a Government department. A 3 Government undertaking with corporate status cannot obviously be equated to the Government. Though Articles of Incorporation contain various provisions which disclose that the Korean Government through its official, namely, Administrator of small and medium business Administration has pervasive control over SBC, it cannot however be treated to be a wing or integral part of the Government of Korea. Though sufficient opportunities were given to the applicant, the applicant could not also produce any material to substantiate that salary is being drawn out of the Government funds. It is seen from the articles of Incorporation that SBC creates and manage its own funds, it has annual budget for gross income and outlays including the fund operation and management plan and the budget plan shall be approved by the Administrator of S.B Administration. All this will lead to the conclusion prima facie that the SBC, which is a State managed Corporation, pays the remuneration to Mr. Ji Hoon Lee employed in its liaison office in India out of its own funds.
4. In an apparent bid to establish that the source of salary payment to Mr. Hoon Lee is the Government funds placed at the disposal of SBC, the applicant has filed an affidavit of the Administrator of SMBA. The contents of the affidavit are as follows: 4
5. SBC is a non-profit Government controlled entity under the direct supervision of SMBA which is a Government department1 of the Republic of Korea. SMBA seems to be a department of the Government. It was established in 1979 under SBE Promotion Act. SBC is entrusted with management of SME Development and Industrial Foundation Fund (SME fund). Then it is averred that SME Fund is one of the 61 funds. The amount of SME fund for the year 2008 is KRW 6239.8 B. The amount of capital contribution from SMBA for the year 2008 is KRW 124.2 B. What is stated next is quoted in the words of the deponent. Government contribution toward the SME Fund is restored to the budget of SMBA and serves as the source of operating and personnel expenses required during the execution of businesses by SBC. In this regard, the source of payroll for the chief representative of SBC India Office, Mr. J.H. Lee (at present) is also the SME Fund which is assigned from government budget.
6. In art. 5 of articles of Incorporation, it is stated that SBC will establish annual plan for the operation and management of small and medium business promotion funds for the next year. The applicant has not stated any details in the application about the source of funds. It appears from the affidavit that the Government through SMBA makes contribution to SME fund every year. It is not known whether the fund managed by SMBA is generated from other sources as well. The contribution by the Government may or may not be exclusive source of funding. That apart, the money deployed in the Fund, from whatever source it comes, would belong
1 Though the expression used is Govt. agency in the context the deponent apparently means Govt. Dept. 5 to the applicant, SBC only, which is a corporate entity. It can be mixed up with other funds received from other sources and utilized by SBC for various purposes. It is a different matter if the Government while sanctioning the contribution makes the allocation specifically for the personnel expenses incurred by SBC. The statement in the affidavit quoted above is not at all clear on this aspect. In order to give an opportunity to the applicant to clarify the said statement and to furnish some evidence to substantiate that the personnel expenses are met out of the allocation made by the Government to the fund for this specific purpose, the case was adjourned. However, the authorized representative of the applicant at the resumed hearing of the case stated that he could not get any further information or documents. The fundamental requirement of Article 20(1)(a) is that the remuneration should be paid by the Contracting State. Even if it is paid out of funds allocated by the Government to the applicant specifically towards personnel expenses, the requirement of Article 20(1) is, in our view, satisfied. It is as good as payment by the State itself. The expression payment by a Contracting State ought not to be given a rigid or literal interpretation so as to cover the payments made directly by Government or a department of the Government. Even if the payment is made out of States funds set apart for that purpose, the requirement of section 20(1)(a) will be attracted and the Indian income-tax cannot be levied in such a case. But, the applicant has omitted to furnish requisite clarification with supporting documents to prove such a fact situation. We have, therefore, 6 no option but to answer the question in negative and against the applicant. We, however, keep the issue open for determination by the assessing authority. If the applicant is able to furnish necessary material before the assessing authority to substantiate what has been observed by us, the assessing authority is free to take an independent decision. Subject to this observation, the ruling is given against the applicant and the question is answered in the negative.
7. Before closing the case, we would like to advert to the stand taken by the Director of Income-tax (International Taxation), Delhi, in his comments and reiterated before us in the course of hearing. It is submitted that article 20(4) extended the benefit of Art. 20(1) only to three entities and therefore the other business undertakings of the Government like the applicant cannot claim the benefit of article 20(1). In our view, this contention, though plausible, cannot be sustained. The specification of certain organizations which are controlled by the respective Governments does not exclude by necessary implication the other State run entities falling within the scope of article 20(1) as interpreted by us. Prima facie, none of the entities specified in article 20(4) would be entitled to invoke Article 20(1) even in the expanded sense in which it has been interpreted by us. Hence, they were specifically brought within the purview of sub-article (4) of Article 20. Lastly, we would like to observe that the applicant may have a reasonable claim for specific inclusion within Article 20(4) because prima facie it stands on the same footing as Korea Trade Promotion 7 Corporation. Whether or not to include any of the other entities of like nature as those specified in article 20(4) is a matter of agreement between the two Contracting States. Sd/- Sd/- Sd/- (A. Sinha) (P.V.Reddi) (Rao Ranvijay Singh) Member Chairman Member F.No.AAR/768/2008 Dated .. This copy is certified to be a true copy of the Ruling and is sent to:
1. The applicant
2. The Director of Income-tax (International Taxation), Delhi.
3. The Jt. Secretary (FT&TR-I & II), CBDT, New Delhi.
4. Guard file. (Batsala Jha Yadav) Addl. Commissioner of Income-tax, AAR 8
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