International Tax Updates & Important Rulings Pune ICAI...

International Tax Updates &

Important Rulings

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Pune ICAI –

Direct Tax Refresher Course April 27th 2013

Ameya Kunte

[email protected]

Important Rulings

INTERNATIONAL TAX – CHANGE IN

APPROACH

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Moral Tax – A reality?

• Tax Avoidance vs Tax Planning – paradigm shift in debate

• Govt and Public looking at tax differently post economic downturn

• Increasing exchange of information

• G20 Nations and OECD’s thrust against tax evasion • G20 Nations and OECD’s thrust against tax evasion

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Existing Agreements:

84 Double Taxation Avoidance Agreements (DTAAs)

10 Tax Information Exchange Agreements (TIEAs)

International Tax Treaty Updates

DTAAs entered into / came into force in

2011/2012/2013:

DTAAs amended / revised in

2011/2012/2013:

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• Bhutan

• Colombia

• Estonia

• Ethiopia

• Finland

• Georgia

• Lithuania

• Malaysia

• Uruguay

• Taiwan

• Tanzania

• United Mexican

States

• Mozambique

• Australia

• Indonesia

• Japan

• Malta

• Nepal

• Netherlands

• Norway

• Poland

• Singapore

• Swiss

Confederation

• UK

• Uzbekistan


LoB Clause / Anti-Abuse

provision introduced:

• Swiss Confederation

• UK

• Norway

• Nepal

Information exchange Clause

introduced / updated

• Australia

• Indonesia

• Nepal

• Netherlands

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• Nepal

• Indonesia

• Netherlands

• Norway

• Singapore

• Swiss Confederation

Information Exchange:

• India signs Multilateral Convention on Mutual Administrative Assistance in Tax Matters

– Supports India's call for standardizing automatic info exchange and sharing of banking info.

• CBDT releases 88-page Information Exchange Manual,


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• CBDT releases 88-page Information Exchange Manual, outlining communication formats, protocols, guidelines for different types of EOI requests – Jan 2013

• CBDT Chairman urges Officers to revert on clarifications sought by foreign tax authorities and outbound requests in timely manner – March 2013

RULINGS ON INTERNATIONAL TAX

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Mumbai ITAT ruling in C.U. Inspections (I) Pvt. Ltd.

[TS-132-ITAT-2013(Mum)]

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Reimbursements – watch out for TDSC.U. Inspections (I) Pvt. Ltd.

P.S.O Beheer. B.V

(Netherlands)

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C.U. Inspections

India Pvt. Ltd.

100%

Subsidiary

Reimbursement of Training Expenses

without deducting tax

Reimbursements – watch out for TDS

Mumbai ITAT - C.U. Inspections (I) Pvt. Ltd [TS-132-ITAT-

2013(Mum)]

• Third party payment via related concern not"reimbursement"; TDS applicable.

– Payment to third party through related entity "reimbursement"– Payment to third party through related entity "reimbursement"

• TDS provisions apply on payment for training services (iftaxable) from external trainers

– Holding co arranged training for subsidiary’s employees

• Payment to be considered as reimbursement only when itultimately stops with related party, not otherwise.

• Routing of payments as reimbursements impermissible tothwart flow of law.

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Kolkata ITAT - Right Florists Pvt Ltd

[TS-137-ITAT-2013(Kol)]

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Google/Yahoo – no PE/ no TaxRight Florists Pvt Ltd

Right Florists

Pvt. Ltd.

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Overture

Cervices Inc USA

(Yahoo USA)

Google/Yahoo – no PE/ no Tax

Kolkata ITAT - Right Florists Pvt Ltd [TS-137-ITAT-2013(Kol)]

• No TDS attracted on payment to Yahoo, Google for onlineadvertisement on search engines.

• Search engine having its presence through website cannotcreate fixed place (basic rule) PEcreate fixed place (basic rule) PE

– Exception where web servers located in relevant jurisdiction.

• Concurs with report of High Powered Committee on e-commerce transactions,

• Relies on OECD Model Commentary.

• Conventional PE tests fail in virtual world;

– Govt should take policy decision on suitable remedial measures toprotect revenue base

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• India's reservations on "website PE" in OECD Commentarynot relevant in judicial analysis.

• Reservations relevant only for interpreting treaties enteredinto after expression of such observations.

• Advertisement revenue not in the nature of 'royalty',

Google/Yahoo – no PE/ no Tax

• Advertisement revenue not in the nature of 'royalty',

– Concurs with coordinate bench rulings in Pinstorm [TS-536-ITAT-2012(Mum)] and Yahoo [TS-290-ITAT-2011(Mum)].

• Absent human intervention, payment also not taxable as “feesfor technical services” under Act as well as DTAA.

• Google Ireland and Yahoo USA did not create “businessconnection” in India

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Bombay HC - Siemens Aktiengesellschaft

[TS-795-HC-2012(BOM)]

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“Cash” System for foreign co – Yes !

Bombay HC - Siemens Aktiengesellschaft [TS-795-HC-2012(BOM)]

• Under India-Germany DTAA, royalty and FTS incomereceived by foreign company taxable in the year of actualreceipt and not otherwise.

• Rejects Revenue's contention that credit entry in Indian payer• Rejects Revenue's contention that credit entry in Indian payercompany's books amounts to receipt by the non-resident.

• Upholds ITAT ruling of applying "receipt" basis for taxationof royalty and FTS income.

• ARTICLE 12 - Royalties and fees for technical services –

1. Royalties and fees for technical services arising in a Contracting State and

paid to a resident of the other Contracting State may be taxed in that other

State.

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Bangalore ITAT - M/s Bosch Ltd.

[TS-904-ITAT-2012(Bang)]

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Paid for Repairs of

Machinery

TDS Gross-up absent PAN?

M/s Bosch Ltd.

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Bosch Ltd.German

Suppliers

Rendered Technical

Services,

Later on Held as FTS

TDS Gross-up absent PAN?

M/s Bosch Ltd. [TS-904-ITAT-2012(Bang)]

• Higher rate of 20% u/s 206AA not applicable for taxgrossing-up u/s 195A, if TDS is borne by the Indian payer.

• Applies literal reading of Sec 195A which provides "rates inforce" for grossing up.

• Higher TDS rate u/s 206AA applicable only where non-• Higher TDS rate u/s 206AA applicable only where non-resident recipient has income chargeable to tax in India anddoes not furnish Permanent Account Number (PAN) u/s 195.

• Repair services which provide technical assistance forpreventive maintenance taxable in India as FTS.

• Description by Chartered Accountant as FTS in Form 15CBalone cannot determine whether payments are FTS.

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Delhi Tribunal - Qualcomm Incorporated

[TS-35-ITAT-2013(DEL)]

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NR – NR Patent Licensing Qualcomm Incorporated

Qualcom

Incorporated,

USA

Original

Equipment

Manufacturers

(OEMs)

Wireless

Carriers

(Worldwide)

Outside India

In India

License of

CDMA

Patents

Sale of

CDMA

Products

Royalty

Ultimate

Subsidiary

Sale of CDMA

Products

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Qualcom India

Pvt. Ltd.

Indian Wireless

Carriers – Tata

Teleservices and

Reliance

Communications

Subsidiary Products

End User –

Customers of Indian

Wireless Carriers

Sale of CDMA

Products

NR – NR Patent Licensing

Delhi Tribunal - Qualcomm Incorporated [TS-35-ITAT-2013(DEL)]

• Royalty received by Qualcomm USA from foreign OEMs onsale of CDMA technology-enabled handsets & equipment toReliance & Tata group in India not taxable.

• Source of royalty is place where patent is exploited or where• Source of royalty is place where patent is exploited or wheremanufacturing activity takes place.

• Royalty income not taxable u/s 9(1)(vi)(c).

• What is important is not whether right to property is used“in” or “for the purpose of ” business, but to determinewhether such business is “carried on by such person in India”.

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Delhi Tribunal - Qualcomm Incorporated [TS-35-ITAT-2013(DEL)]

• Revenue failed to show OEMs have used Qualcomm’s patentsfor a business carried on in India or for making or earningincome from a source in India.

• OEMs manufactured products outside India and sold them to

NR – NR Patent Licensing

• OEMs manufactured products outside India and sold them toservice providers not only in India but in other countries.

• Mere passing of title in imported goods, in India, at the portof destination cannot lead to a conclusion that the OEM’scarry on business in India.

– It is business with India and not business in India.

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AP HC - Sanofi Pasteur Holding SA

[TS-57-HC-2013(AP)]

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Merieux

Alliance (MA),

France

Sanofi Pasteur

Holdings,

France

Sale of Shares

in ShanH

Sale of Shares in

ShanH

Landmark ruling – Offshore Share Sale

Sanofi Pasteur Holding SA

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Group Industrial

Marcel Dassault,

France

ShanH, France

Shantha Biotechnics Ltd, India

in ShanH ShanH

Within India

Outside India


AP HC - Sanofi Pasteur Holding SA [TS-57-HC-2013(AP)]

• Sale of shares of ShanH not transfer of Indian entity's(Shantha Biotechnics Ltd - SBL) shares or underlying assets.

• ShanH serves a legitimate commercial purpose i.e. FDI byway of participation in SBL.

• Prima facie analyses (on treaty interpretation and separatecorporate existence) by Bombay HC in Aditya Birla (relied onby Revenue) must yield to binding precedents of AzadiBachao and Vodafone.

• Creation of wholly owned subsidiaries or joint ventureseither for domestic or overseas investment is a wellestablished business / commercial organizational protocol.

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• Observations of Chinnappa Reddy do not constitute operativeMcDowell ratio.

• AAR ruling inconsistent with "hierarchial discipline" toquestion correctness of Azadi conclusion.


question correctness of Azadi conclusion.

• Tax treaty provisions "non-derogable", "treaty shopping" anexpression of "sovereign policy" choice.

• Developing countries need foreign investment, treaty shopping an additional factor to attract foreign investment.

• Rejects Revenue's purposive construction / "see through approach" of Article 14(5) of Indo-France DTAA.

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• AAR has no inherent power to 'review' its own decision.

• Relies on Srinivasa Setty, holds value of controlling rights asincapable of determination & computation and consequentlycharging provision would not apply


charging provision would not apply

• However rejects Assessee's contention that no TDS would beliable to be deducted even if scheme were to be held a taxavoidance one.

• Obligated to deduct tax at source if capital gain accruing totransaction is chargeable to tax under Income tax Act.

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Hyderabad ITAT - Vanenburg Facilities B.V.

[TS-120-ITAT-2013(HYD)]

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Share transfer of property companies

Vanenburg Facilities B.V.

Vanenburg

Facilities B.V.,

Netherlands

Ascendas

Property Fund

(India) Pte

Limited,

Singapore

Sold 100 % Holdings in VITP for Rs. 225 Cr.

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Vanenburg IT

Park Pvt. Ltd.

100% Equity

Singapore

Outside India

Within India

Approved Infra Project

and eligible for Sec

10(23G) exemption

Hyderabad ITAT - Vanenburg Facilities B.V.[TS-120-ITAT-2013(HYD)]

• Sale of 100% shares of an Indian company by a Netherlandscompany to a Singapore company not taxable under IT Act orIndia-Netherlands DTAA.

• Eligible for exemption u/s 10(23G) for sale of approved


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• Eligible for exemption u/s 10(23G) for sale of approvedinfrastructure undertaking

• Revenue's argument that shares constitute “immovableproperty” u/s 269UA(d) rejected.

• Definition u/s 269UA(d) is contextual to Sec 2(47) andcannot be imported into the DTAA.

Hyderabad ITAT - Vanenburg Facilities B.V.[TS-120-ITAT-2013(HYD)]

• Shares in the Indian company not "immovable property" so asto be taxed under Article 13(1).

• Taxability in India under Article 13(4) on basis of majorvalue of shares being derived from immovable property also


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value of shares being derived from immovable property alsorejected as property used for business purposes

More rulings …

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Loss Double Dip – foreign branch

Bombay HC - Patni Computer Systems Ltd [TS-79-HC-2013(BOM)]

• Bombay HC upholds ITAT ruling allowing set-off of lossesincurred by Swedish Branch in computing Patni Computers'profits taxable in India.

• ITAT allowed similar benefit under India-Japan DTAA &nothing brought on record to show difference in language ofIndia-Sweden DTAA vis-a-vis Japan treaty.

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Nokia Network

Oy, Finland

Indian

Telecom

Operators

Sold GSM

Equipments

Supply Agrmt

Software payments – no tax

Nokia Networks Oy & Ors. Outside India

Within India

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Nokia’s Liaison

Office in India Nokia India P.

Ltd.

Delhi HC - Nokia Networks Oy & Ors. [TS-700-HC-2012(DEL)]

• Delhi HC confirms ITAT Special Bench ruling holdingcomputer software embedded in equipment as not taxableunder DTAA.

• Retrospective amendment to Sec 9 relevant only for IT Actpurposes, not where tax treaty applies.

Software payments – no tax

purposes, not where tax treaty applies.

• Domestic law amendment cannot affect bilateral treaties.

• Delhi HC sets aside ITAT SB order in so far as adverse toNokia on PE existence/attribution vis-a-vis Indian subsidiary

• Accepts Nokia's contention that Tribunal committed factualerrors on PE issue, remands matter back to ITAT for freshconsideration.

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Bombay HC - Ishikawjima Harima Heavy Inds. Co Ltd.[TS-810-HC-2012(BOM)]

• Offshore supply of equipments and offshore services cannotbe taxed irrespective of retro amendment to Sec 9, as India-Japan DTAA applicable;

• SC ruling in IHI followed

Offshore supply and services

• SC ruling in IHI followed

• In Para 76 of the order of SC, it was said that:

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• 76. The provisions of section 9(1)(vii) of the Act are plain and

capable of being given a meaning. There, therefore, may not be any

reason not to give full effect thereto. However, even in relation to

such income, the provisions of Article 7 of the DTAA would be

applicable, as services rendered outside India would have nothing to

Offshore supply and services

applicable, as services rendered outside India would have nothing to

do with permanent establishment in India. Thus, if any services

have been rendered by the head office of Appellant outside India,

only because they were connected with permanent establishment.

Even in relation thereto, principle of apportionment shall apply.

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BUDGET 2013 – INTERNATIONAL

TAX CHANGES

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Tax residency certificate

• Submission of TRC ‘necessary but not sufficient’ to claim DTAA benefit – proposed amendment to Sec 90 and 90A w.e.f. April 2012

• Submission of TRC mandatory as per Finance Act, 2012

– TRC format notified in Rule 21AB– TRC format notified in Rule 21AB

• ‘Necessary-sufficient’ clause merely mentioned in the Memorandum to Finance Bill 2012

TRC – Fin Min clarification

• Finance Ministry’s clarification reiterating validity of Circular 789 on India-Mauritius DTAA

– TRC to be accepted as evidence on residence

– IT Department not to go beyond TRC and question taxpayers on residencetaxpayers on residence

– Govt to provide suitable clarification, if required

• Will SC ruling in Azadi be overruled?

Tax on Royalty/FTS

• Tax rate under domestic law on royalty and FTS raised to 25%

– Existing rate u/s 115A - 10%

– Rate increase effective from FY 2013-14

• Rationale for amendment• Rationale for amendment

– Distribution of profits by subsidiary

– Tax rate on royalty lower under Act than most DTAAs

– Anomaly must be corrected !

• Favourable DTAA rates continue to apply

Tax on royalty/FTS

Treaty Royalty FTS

UK 15% * 15%

USA 15% * 15%

Germany 10% 10%

Singapore 10% 10%Singapore 10% 10%

Japan 10% 10%

Switzerland 10% 10%

Australia 15% 15%

* 10% for equipment royalty

Higher tax gross up absent TRC /

Treaty relief to Indian payer

Dividend from Foreign sub

• Lower tax rate of 15% on dividend from foreign subsidiary extended for FY 2013-14

– Encourage repatriation of funds from overseas companies

– Sec 115BBD provides 26% equity holding in ‘subsidiary’

• Removal of cascading effect of dividend income received from • Removal of cascading effect of dividend income received from foreign subsidiary

– Effective from 1st June 2013

Other changes

• Increase in surcharge on Foreign companies to 5%

• GAAR deferred by 2 years ; Effective from FY 2015-16

• Treaty override to apply when GAAR is invoked

Thank You

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