International Tax

·            The assessee was engaged in providing services and facilities in connection with exploration and production of mineral oils and received revenue against the work executed with different companies.

·            The assessee filed return of income under section 44BB(1) on the premise that it was engaged in providing of services and facilities in connection with, or supplying plant and machinery which were used, or to be used, in the prospecting for, or extraction or production of, mineral oils.

·            The Assessing Officer did not accept the stand of the assessee company and applying the provisions of section 115A/44DA computed the incomes of the assessee under section 28.

·            The assessee also offered interest received on IT refund for taxation at the rate of 15% as per article 12 of DTAA, between India & UK.The AO did not accept the assessee's stand and applied tax rate of 40% as per normal provisions of the Act.

·            It was contended by the assessee that the interest on income tax refund is covered under Article No. 12 of the DTAA, according to which the interest on refund is taxable @ 15%.

·            The Hon’ble Tribunal, however, concluded that the interest on income tax refund, in assessee’s case, is taxable @ 40% and will not fall under the Article No. 12 of the DTAA of the India-Uk treaty.

For further reading, refer the attachment.

·         The assessee was a non-resident Malasian company engaged in the project management services in relation to infrastructure and construction work in India.

·         During the year under consideration the assessee had reported international transactions. As regards international transaction in respect of sub-contract payment and materials issued for work execution the assessee had benchmarked the same by selecting TNMM as the most appropriate method. Assessee selected four comparables.

·         The TPO rejected the comparables selected by the assessee and carried out a fresh search and selected ten comparables with mean net margin of 8.37 per cent and proposed adjustment.

·         On appeal to the Tribunal, the assessee has submitted that the company, Progressive Constructions Ltd, was having 61 per cent related party transactions and therefore the same could not be considered as a comparable for determining the ALP. He pleaded that the said company be excluded from the set of comparables.

·         The Hon’ble Tribunal while deciding the issue held that 0 per cent RPT is not practically possible, and therefore, in the due course adjudication process, the Tribunal has taken a consistent view that in the normal course 15 per cent is the tolerance range of RPT which can be relaxed maximum to 25 per cent.

·         Therefore, this issue was set aside to the record of the Assessing Officer / TPO to verify the RPT of the comparables and then apply a suitable filter of RPT not exceeding the maximum tolerance range of 25 per cent.

For further reading, refer the attachment.

The Union Cabinet on Wednesday, August 24, 2016 has approved the new India-Cyprus Double Taxation Avoidance Agreement (DTAA) that provides for source state taxation of capital gains arising from the alienation of shares.

The provisions of the existing DTAA exempted Cypriot residents from Capital Gains Tax in India from sale of shares held in Indian Companies thus resulting in base erosion in India. With the new DTAA, the source state shall also have the power to tax capital gains on sale of shares. The new DTAA shall also pave the way for withdrawal of the Notification No. 86/2013 dated 1^st November 2013 wherein payment of any income to an entity in Cyprus was subject to a minimum withholding tax of 30 per cent. Further, it is expected that the said notification shall be withdrawn retrospectively and any taxes paid under the said notification shall be eligible for refund.

The key highlights of the new DTAA are as under:

Ø  Capital Gains arising from sale of shares of an Indian Company shall be taxable in India with effect from 1^st April 2017;

Ø  Tax at 50 per cent of the applicable rate shall be applicable on sale of shares effected between the period 1^st April 2017 to 31^st March 2019;

Ø  Grandfathering of all investments made prior to 1^st April 2017 i.e. no tax shall be levied on the sale of shares bought on or before 31^st March 2017;

Ø  Cyprus’s status of ‘notified jurisdiction’ rescinded retrospectively from 1^st November 2017;

Ø  The new DTAA to reinitiate bilateral ties between India and Cyprus.

On 10 May 2016, India and Mauritius signed a Protocol to amend the India-Mauritius Double Taxation Avoidance Agreement (DTAA) of 1982. The Central Board of Direct Taxes (CBDT), the apex administrative body of direct taxes in India, had issued a Press Release dated 10 May 2016 on the Protocol amending the DTAA between India and Mauritius.

The Ministry of Finance (Department of Revenue) vide Notification No. 68/2016/F. No. 500/3/2012-FTD-II dated 10^th August 2016 have notified the protocol bring the same into effect. Further, the effective entry date has been kept as 19^th July 2016, i.e., the protocol will come into effect from 19^th July 2016.

The key features of the protocol are highlighted as under:

Ø  Service PE: The protocol introduces the concept of Service PE, wherein the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) for a period or periods aggregating more than 90 days within any 12 month period shall constitute as a permanent establishment in the state in which the services are rendered. [Effective date 1^st April 2017];

Ø  Interest: The protocol caps the maximum withholding rate to 7.5 per cent of the gross amount of interest in the source state. Additionally, the protocol also provides for exemption of interest derived and beneficially owned by any bank resident of the other Contracting State carrying on bona fide banking business, only if the interest arising for debt-claims existing on or before 31^st March 2017. [Effective date 1^st April 2017];

Ø  Fee for technical service: A new Article 12A has been inserted in the existing DTAA to provide for chargeability of Fee for technical service. The protocol; provides for a maximum withholding under the DTAA, by the source state, at 10 per cent of the gross amount of the fee for technical service [Effective date 1^st April 2017];

Ø  Capital Gains: The protocol provides for source state taxation rights towards income arising from the alienation of shares. The present DTAA does not levy tax on sale of shares of an Indian company held by a Mauritian entity. As a result of the protocol, any gain derived by a Mauritian entity form sale of shares in an Indian Company shall be taxable in India. Further, the protocol also provides for a reduced rate of tax at the rate of 50 per cent of the existing rates for capital gains resulting from alienation of shares between the period 1st April 2017 to 31st March 2019 [Effective date 1st April 2017];

The benefits of the aforementioned article shall not be available to a shell/conduit company. For the purpose of this protocol, a shell/conduit company shall mean a company whose expenditure on operations in its resident state is less than MUR 1,500,000 or INR 2,700,000 in the immediately preceding 12 months in which the gains arise [Effective date 1st April 2017];

Ø  Other Income: The protocol also provides for incomes not dealt in the foregoing articles of the DTAA, shall be taxable in the source state (New Para (3) under Article 22) [Effective date 1st April 2017];

Ø  Exchange of information: The protocol provides for exchange of information, wherever required, between the Government of India and Government of Mauritius [Article 26] [Effective from the date of entry of the protocol]; 

Ø  Assistance in Collection of Taxes: The protocol provides for assistance in collection of taxes on revenue claims raised by the authorities of one contracting state with the relevant authorities of the other contracting states [Article 26A] [Effective from the date of entry of the protocol].

India and Mauritius have entered into a limited revision in the tax treaty (“DTAA”) vide entering a protocol dated May 10, 2016. As a result India shall now be eligible to tax interest payable to banks residents in Mauritius and capital gains arising out of sale of shares held in Indian Companies by person resident in Mauritius, acquired on or after April 1, 2017.

Income from foreign countries receivable by persons residing in India is at times subject to tax in the said foreign country as well. Chapter IX of the Income Tax Act, 1961 provides for relief where any tax is deducted/paid on such foreign income. In a bid to bring certainty and clarity, the Central Board of Direct Taxes (CBDT) has come out with draft rules on how to obtain the said relief.

The key points put forward in the rule are as follows.

1.      Credit to be allowed in the year in which income is taxed in India

The Indian revenue authority have proposed to allow the credit for any foreign taxes paid by the assessee in the year in which the said income is taxed in India. Accordingly, irrespective of the fact that when is the tax deducted or paid, credit for such tax will be allowed only in the year in which it is included in the tax return or assessed by the tax officer.

2.      Tax credit can be adjusted against tax, surcharge and cess

CBDT has clarified that the tax credit can be adjusted against the income tax payable and also against surcharge and cess on such income tax. The credit can also be used against payment of Minimum alternate tax (under Section 115JB) or Alternate Minimum Tax (under Section 115JC) in a similar manner.  However, it has been clarified that foreign tax credit cannot be adjusted against interest, fee or penalty and such payments would have to be made in cash.

3.      The credit shall not be available against disputed amounts

The proposed rules have defined foreign tax as the amount paid under the provisions of double taxation avoidance agreements (DTAA) or the amount paid as per the local laws of the foreign country where such DTAAs do not exists. Further, the rate for conversion of tax shall be telegraphic transfer buying rate on the date of payment/deduction of such tax. However, any tax paid which is in dispute in any manner shall not be allowed as credit.

4.      Tax credit to be lower of tax payable in India and the foreign tax paid

The proposed rules clarify that the tax credit shall be computed separately for each source of income. Further, the tax credit available to the assessee shall be lower of the tax payable on each income as per the provisions of Income Tax Act and the foreign tax paid on such income.

5.      Documents to claim the Foreign Tax Credit

The rules propose that the assessee will need to furnish the following documents to claim the relief of such credit.

-        Certificate from the tax authority of the foreign country specifying the nature of income and amount of tax paid by assessee. However, in case of tax deduction at source, certificate from deductor shall also be sufficient.

-        Acknowledgement of payment of taxes (popularly known as challan in India)

-        Declaration that the tax credit claimed is not in dispute.

While the above rules are definitely a step in the right direction, some of the proposed rules may need a relook. Obtaining a certificate from the tax authority of a foreign country may become too onerous a responsibility for the assessee. Some countries allow for deferred payment of taxes and accordingly, the rules need to specify eligibility of such taxes. Further, clarity is also needed where taxes deposited in dispute become final. We hope that these issues are looked into before the final rules are notified. 

Indian government had launched the e-tourist visa scheme earlier this year covering 113 countries with nine airports designated for providing e-tourist visa service. The home ministry is planning to extend e-tourist visa scheme to 37 more nations taking the number of beneficiary countries to 150 in the upcoming budget 2016-17. E visa assistance is expected to include Albania, Austria, Bulgaria, Czech Republic, Denmark, Slovakia, South Africa, Switzerland, Trinidad & Tobago and Zimbabwe etc. 

The assessing officer (‘AO’) erred in concluding the business of the assessee’s liaison office (‘LO’) engaged in providing auxiliary services to its head office in Japan, as creating a fixed place permanent establishment (‘PE’) of the Japanese company in India. Accordingly the AO held that, the profits of the company shall be taxable in India to the tune of such profits attributable to PE.

The assessee preferred an appeal with the dispute resolution panel (‘DRP’) on the impugned order of the AO. However, the DRP disallowed the assessee’s appeal citing that the nature of powers accorded in the power of attorney (‘POA’) are open ended and thus allows the LO to carry out core activities in India on behalf of the head office.

On appeal with the tribunal, the AR submitted that the activities of the LO are only preparatory/auxiliary in nature and the LO is not authorised to discuss the terms of the contract or to bind the head office or to initiate contracts. Further, it was submitted that the purchase orders were directly raised by the Indian customers on the head office and the quotation and invoices, which were signed/executed directly by the head office, were sent to the Indian customers without any involvement of the LO in India.

The tribunal, on the perusal of the power of attorney, held that the clauses of the POA substantiate that the power granted to the LO are specific and that the AO’s conclusion that the POA granted unfettered powers to its LO is incorrect. Further the tribunal emphasised that no doubt the AO can investigate, call for evidences and come to a conclusion where any income earning activity has been carried out by the LO so as to construe it as fixed P.E. but, it is beyond the jurisdiction of the AO to adjudicate and conclude that the assessee has filed false declarations before the RBI. Since, RBI has not found any violations of conditions laid down by it while permitting the assessee to establish a LO; in such circumstances no adverse inference can be drawn.

The tribunal, based on the documents submitted by the assessee to the AO and DR, held that since revenue was unable to bring on records any material to demonstrate that the LO is carrying core business activities and that such activities warrant that the activities of the LO be held as a PE in India, granted the appeal in favour of the assessee.

The Hon’ble High Court of New Delhi held that any amendment made in the domestic Income Tax Law does not impact on the definition of the similar term in the double tax avoidance agreement (‘DTAA’). The high court while considering whether by a unilateral amendment in the Income Tax Act, impact an interpretation of the same term in the DTAA and whether by merely terming an amendment as ‘clarificatory’ and making it retrospective infact renders it retrospectively valid in law, held that any changes made in the definitions of a term in the domestic law does not override the definition of that term in the DTAA. The court held that the finalization of a DTAA is an effort of long negotiations between the governments of two contracting states and any change in the definition contained therein shall require approval of the governments of both the contracting states. The court cited the ruling by the hon’ble Supreme Court in the case of Union of India v.Azadi Bachao Andolan [263 ITR 706 (SC)] “it takes little imagination to comprehend the extent and length of negotiations that take place when two nations decide to regulate the reach and application of their legitimate taxing powers”.

Further, the court also stated that the Vienna Convention of the Laws of Treaties, 1969 provides that the amendment to the treaty must be bought about by agreement between the parties and unilateral amendments to treaties are therefore categorically prohibited.

Also in the case of Commissioner of Income Tax v VR. S.RM. Firms Ors [1994] 208 ITR 400 (Mad), the Madras High Court has held that “tax treaties are…… considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries”.

Though DTAAs does not abstain on reference to the domestic laws, however, the treaties create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. In case of the former the inference has to be drawn on to the meaning of the term as defined in the DTAA. However, in case of the later the reference needs to be drawn from the interpretation of that term in the domestic laws of the contracting state.

Where there does exist a definition of a term within the DTAA, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the DTAA and the ultimate taxability of the income under the agreement. That is to say that the domestic law remains static for the purposes of the DTAA.

The court therefore concluded that the amendments made by the Finance Act 2012 does not affect Article 12 of the DTAA and that the determinative interpretation given to the word ‘royalty’ in Asia Satellite [2011] 332 ITR 340 (Del) will continue to hold the field for the purpose of assessment years preceding the Finance Act 2012 and in all the cases where a DTAA exists. 

The Indian Income tax department (“ITD”) has started verification of details submitted in Forms 15CA and 15CB with the actual transactions. According to the ITD, the following facts shall be examined in case where any variation is identified:

a.    Whether there is any variation between the data furnished and the actual payment and the reasons thereof;

b.    Reason for characterization of each transaction; and

c.    Rates of taxation

Background

Section 195 of the Income Tax Act, 1961 requires that every assessee making a payment to a non-resident is required to deduct applicable tax while making such payments to the non-resident. The section also requires that information in the prescribed format should be submitted with the ITD for such payments.

Accordingly, it was prescribed in Rule 37BB, that certificate in Form 15CB should be obtained from the Chartered Accountant on the taxability such transactions and the particulars of the payment should be submitted on the ITD portal in Form 15CA. Both Form 15CA and 15CB are then required to be submitted to the bank while making the payment.

The ITD has now started calling for verification of the forms submitted with actual transactions.

Documentation

In light of the above, it is imperative that the following supporting documents shall be maintained in case of every 15CA and 15CB filled.

It is advisable to maintain all the necessary documents along with the copy of the form filed in a sequential and indexed manner to ensure regular compliance and avoid unnecessary complications at the time of inquiry.