India Tax Konnect - KPMG

India Tax Konnect

December 2016

Contents

Tax article

2

International tax

5

Corporate tax

7

Transfer pricing

9

Indirect tax

11

Personal tax

14

Editorial

The Prime Minister on 8 November 2016 announced demonetisation of INR500 and INR1000 currency notes, making these notes invalid in a major assault on black money, fake currency and corruption. Further to the step of demonetisation, concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 (the Act) can possibly be used for concealing black money. Accordingly, the Government has introduced the Taxation Laws (Second Amendment) Bill, 2016 (the Bill) in the Parliament to amend the provisions of the Act and the Finance Act to ensure that defaulting taxpayers are subjected to tax at a higher rate and stringent penalty provision.

Further there have been suggestions from experts that instead of allowing people to find illegal ways of converting their black money into black again, the government should give them an opportunity to pay taxes with heavy penalty and allow them to come clean so that not only the government gets additional revenue for undertaking activities

for the welfare of the poor but also the remaining part of the declared income legitimately comes into the economy. Accordingly, a scheme called `Pradhan Mantri Garib Kalyan Yojana 2016' has been introduced in the Bill.

India has signed a revised tax treaty with Cyprus along with its Protocol. The revised tax treaty provides for source-based taxation of capital gains arising from alienation of shares, instead of residence-based taxation provided under the existing tax treaty. However, a grandfathering clause has been provided for investments made prior to 1 April 2017, in respect of which capital gains would continue to be taxed in the country of which the taxpayer is a resident. The revised tax treaty expands the scope of Permanent Establishment (PE) and reduces the tax rate on royalty in the country from which payments are made to 10 per cent from the existing rate of 15 per cent, in line with the tax rate under the Act.

Recently, the Central Board of Direct Taxes (CBDT) has issued a press release stating that India and Switzerland have signed the `Joint Declaration' for the implementation of Automatic Exchange of Information (AEOI). In view of this, it will be possible for India to receive from September 2019 onwards, the financial information of accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis.

The Chennai Tribunal in the case of Carpi Tech SA held that the amount received by the taxpayer pursuant to NHPC project was taxable in India since the taxpayer's subsidiary in India represented by its managing director constitutes a fixed place PE in India. The Tribunal observed that the project executed by the taxpayer was in the nature of repair and supply of material and cannot be strictly categorised as one relating to building site, construction, installation or assembly project as specified under the India-Switzerland tax treaty. Therefore, the time limit prescribed under this tax treaty would not be applicable to the taxpayer's case.

We at KPMG in India would like to keep you informed of the developments on the tax and regulatory front and their implications on the way you do business in India. We would be delighted to receive your suggestions on ways to make this Konnect more relevant.

? 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

2

Tax article

Benefit of restrictive scope of fees for technical services, etc. given under a tax treaty can be applied under another tax treaty with most favoured nation clause.

Background

Double taxation avoidance agreement (tax treaty) is a bilateral agreement between two nations that aims to avoid or eliminate double taxation of the same income in two countries. India has entered into more than 90 tax treaties. Some of the Indian tax treaties include Most Favoured Nation (MFN) clause, which typically provides that if India enters into any tax treaty with a specified third country or has already entered into such a tax treaty, the restrictive rate and/or scope given under the subsequent tax treaty shall apply over the first tax treaty. Thus, a country agrees to extend benefits to residents of the other country, which it promised/agreed with any third country. Generally, such benefits are restricted to Organisation for Economic Co-operation and Development (OECD) countries. However, there are a few tax treaties, which also provide MFN clause with respect to non-OECD countries. Accordingly, the MFN clause appears in Indian tax treaties, which India has entered into with both OECD and non-OECD member countries. Some of the Indian tax treaties with OECD member countries where MFN clause is provided are France, Sweden, the Netherlands, the U.K., Spain, Hungary, Switzerland, Finland, Norway, Belgium, Israel, etc. Some of the Indian tax treaties with non-OECD member countries where MFN clause is provided are the Philippines, Kazakhstan, Saudi Arabia, etc.

As an example, due to the MFN clause under the IndiaNetherlands tax treaty, the restricted scope and lower rate relating to royalties and Fees for Technical Services (FTS) as provided in a subsequent OECD country tax treaty i.e. IndiaSweden tax treaty, shall apply to the India-Netherlands tax treaty.

The MFN clause is usually found in the protocol of the relevant tax treaties. Generally, the benefit relates to lower rate and/or narrowing of the scope of the concerned stream of income. The benefit granted through the MFN clause could be automatic or to be notified by the contracting state. In recent times, the issue of applicability of MFN clause has been a subject matter of dispute before the courts/Tribunal.

The Delhi High Court decision - Steria (India) Ltd. Recently, the Delhi High Court in the case of Steria (India) Ltd.1 (the taxpayer), dealt with the applicability of the MFN clause under the India-France tax treaty in relation to the payments for the managerial services made to a French company.

The taxpayer filed an application before the Authority for Advance Ruling (AAR) seeking a ruling on whether the

payment made for the management services provided by Steria France is taxable in India in the hands of Steria France under the India-France tax treaty. Before the AAR, the taxpayer contended that as per the protocol to the tax treaty, the less restrictive definition of the expression FTS appearing in the India-UK tax treaty, must be read as forming part of the tax treaty as well. The AAR held that the protocol could not be treated as forming part of the tax treaty itself. The restrictions imposed by the protocol were only to limit the taxation at the source for the specific items mentioned therein. The restriction was only on the rates. Further, the `make available' clause provided in the India-UK tax treaty could not be read into the expression FTS occurring in the India-France tax treaty unless there was a notification under Section 90 of the Act issued by the government to incorporate the less restrictive provisions of the India-UK tax treaty into the India-France tax treaty. Aggrieved by the AAR ruling, the taxpayer filed a writ petition before the Delhi High Court.

In relation to the protocol to the India-France tax treaty, the Delhi High Court held that on a perusal of Clause 7 of the protocol of the tax treaty, there is no warrant for the restrictive interpretation of the protocol. The words `a rate lower or a scope more restricted' occurring in the protocol envisages that there could be a benefit on either score i.e. a lower rate or a more restricted scope. The benefit of the protocol could accrue in terms of lower rate or a more restrictive scope under more than one tax treaty, which may be signed after 1 September 1989 between India and a third state that is an OECD member. The purpose of the protocol is to afford a party to the tax treaty the most beneficial provisions that may be available in another tax treaty between India and another OECD country. The AAR has failed to notice that the wording of the protocol makes it self-operational. The tax treaty was itself notified by the government by issuing a notification under Section 90 of the Act. The protocol signed between India and France simultaneously forms an integral part of the tax treaty itself. Once the tax treaty has itself been notified and contains the protocol, there was no need for the protocol itself to be separately notified or for the beneficial provisions in some other tax treaty between India and another OECD country to be separately notified to form part of the tax treaty.

In relation to the availability of benefit of the India-UK tax treaty by virtue of the MFN clause, the Delhi High Court held that the definition of FTS occurring in Article 13(4) of the India-UK tax treaty excludes managerial services. In the present case, Steria France had provided managerial services to the taxpayer in terms of the management

1. Steria (India) Ltd. v. CIT [2016] 72 1 (Del)

? 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

3

services agreement. Once the expression `managerial services' is outside the ambit of FTS, the question of withholding of tax on payment for the managerial services would not arise.

The High Court observed that the Tribunal in the case of ITC Ltd.2 observed that the benefit of a lower rate or restricted scope of FTS under the India-France tax treaty was not dependent on any further action by the respective governments. It was held that the more restricted scope of FTS as provided for in a tax treaty entered into by India with another OECD member country should also apply under the India-France tax treaty with effect from the date on which the IndiaFrance tax treaty or such other tax treaty enters into force.

Based on the above, the High Court held that the payment made by the taxpayer for the managerial services provided by Steria France could not be taxed as FTS under the India-France tax treaty. Accordingly, the said payments are not subject to withholding of tax under Section 195 of the Act.

Other MFN related aspects Generally, the MFN clause deals with a particular source of income covered under the respective MFN clause, for e.g. dividend, royalty, FTS, etc. The issue with respect to availing MFN clause vis-?-vis applicability of restrictive scope of dividend, royalty or FTS given in a beneficial tax treaty, has been a subject matter of litigation.

On one hand the AAR in the case of Mersen India Private Limited3 held that managerial services are taxable as FTS in spite of MFN clause provided under the tax treaty. The AAR held that the `make available' concept is applicable only to technical and consultancy services and not to `managerial services' since the comparative tax treaty does not include managerial services.

However, various Courts/Tribunal have allowed the benefit of the MFN clause under different tax treaties. They have also dealt with an issue whether protocol is an integral part of the tax treaty or not.

The Mumbai Tribunal in the case of IATA BSP India4, held that the restricted scope with respect to FTS under the India-USA and India-Portuguese tax treaties is applicable to the India-France tax treaty, by virtue of MFN clause. Accordingly, the payments made for BSP link services are not making available technical knowledge, skills, etc., and the same are not taxable as FTS under the India-France tax treaty. The Mumbai Tribunal in the case of National Organic Chemical Industries Ltd.5, held that by virtue of the MFN clause in the India-France tax treaty, the lower rate of tax at 15 per cent on royalties and FTS under the India-USA tax treaty will apply.

Similarly, the Karnataka High Court in the case of ISRO Satellite Centre6 also applied a beneficial clause of IndiaUSA tax treaty on the India-France tax treaty. Further, the Pune Tribunal in the case of Sandvik AB7, applied the MFN clause under the India-Sweden tax treaty and availed the benefit of the restrictive FTS related conditions under the India-Portuguese tax treaty.

The AAR in the case of Poonawalla Aviation Private Limited8 dealt with the MFN clause under the India-France tax treaty and applied the beneficial and restrictive interest clause from Canada, Hungary and Ireland tax treaty with India. The MFN clause has not been applied merely to restrict the scope of the definition, but it has been extended to apply for the purpose of exemption clause under the India-France tax treaty. The AAR has also taken a similar approach in the case of Idea Cellular Limited9, where the beneficial exemption clause under India-Ireland tax treaty has been applied by placing reliance on MFN clause under the India-Sweden tax treaty.

The Agra Tribunal in the case of Gupta Overseas10 observed that the scope of FTS under the India-Spain tax treaty includes a rider, wherein the application of MFN clause is set out in its protocol. Under the MFN clause, in case any tax treaty that India enters into with any OECD country, and the taxability of FTS has a more restricted scope of taxation or lesser rate of taxation, the provisions of the said treaty will automatically apply to the India-Spain tax treaty as well. A protocol is an integral part of the tax treaty that it is to be given effect in the same manner as any other substantive part of the tax treaty. Also, the application of more restricted treaty provisions, in a situation where it is so specified by the protocol provision, is automatic.

Summing up The object of the MFN clause, inter alia, is to provide an equal treatment to a tax treaty country as compared with a subsequent beneficial tax treaty signed with a third country. Also, it offers better treatment to the other contracting state if there is a favourable change in policy in the future. Thus, the MFN clause helps to establish equality of competitive opportunities between investors from different foreign countries.

Recently, the issue of applicability of MFN clause has been a subject matter of dispute before the Courts/Tribunal/AAR. The AAR in some of the cases has not allowed the benefit of MFN clause and one such example is the case of Steria (India) Ltd. However, the Delhi High Court while reversing the AAR decision in the case of Steria (India) Ltd. observed that there is no warrant for the restrictive interpretation of the protocol containing MFN clause. The purpose of the protocol is to afford a party to the tax treaty the most beneficial provisions that may be available in another tax treaty between India and another (OECD) country. It has also been observed that there is no need

2. Dy. CIT v. ITC Ltd. [2002] 82 ITD 239 (Kol) 3. Mersen India Private Limited [2013] 353 ITR 628 (AAR) 4. Dy. DIT v. IATA BSP India [2014] 46 150 (Mum) 5. National Organic Chemical Industries Ltd. v. DCIT [2006] 5 SOT 317 (Mum)

6. CIT v. ISRO Satellite Centre [2013] 35 352 (Kar) 7. Sandvik AB v. DDIT [2015] 70 SOT 551 (Pun) 8. Poonawalla Aviation Private Limited [2012] 343 ITR 202 (AAR) 9. Idea Cellular Limited [2012] 343 ITR 381 (AAR) 10.DCIT v. Gupta Overseas [2014] 42 42 (Agra)

? 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

4

for a separate action for giving effect to a self-operational MFN clause.

Similarly, other Courts as well as AAR in some other cases have given full effect to the intention behind the introduction of MFN clause under the tax treaty and granted the benefit of the MFN clause under respective tax treaties.

Klaus Vogel in his commentary on `Double Taxation Conventions', also states that protocols elaborate and complete the text of a tax treaty, sometimes even alter the text. Legally they are a part of the treaty, and their binding force is equal to that of the principal treaty text. Therefore, for applying a tax treaty it is necessary to carefully examine protocol and such additional documents.

In the past, the CBDT has issued notifications in relation to India-Netherlands, India-Belgium and India-France tax treaties, explaining the changes in the respective tax treaties due to activation of the MFN clause. The notification provides interesting glimpses of the working of the MFN clause in these tax treaties. It would be apt if CBDT comes out with a detailed clarification on various aspects of the applicability and effective utilisation of MFN clause to give full effect to the intention behind the introduction of MFN clause under respective tax treaties.

? 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

5

International tax

Decisions

Indian subsidiary represented by its managing director constitutes a fixed place PE in India The taxpayer is a foreign company, resident in Switzerland, specialised in geo composite membrane water proofing and drainage systems for dams, canals, tunnels and other hydraulic structures. The taxpayer has a subsidiary, named M/s. Carpi India Waterproofing Specialists Pvt. Ltd. (CIWSPL) in India represented by Sri. V. Subramanian [Managing Director (MD)]. The taxpayer had rendered services for Tamil Nadu Electricity Board (TNEB) at Kadamparal, and the project was executed between 6 November 2004 and 21 May 2005. During the Assessment Year (AY) 2008-09, the taxpayer received a sum of INR11,95,56,285 from National Hydro Power Corporation Ltd (NHPC) for providing PVC geo membrane water proofing in Tanakpur Power channel (Tanakpur project) and claimed it as exempt from tax on the ground that it did not have continuous presence or business connection or a PE in India.

The Assessing Officer (AO) determined the total income as INR 1,09,84,831 after giving deduction of sales and service tax. The Dispute Resolution Panel (DRP) upheld the AO's order. Against the direction of the DRP and the final assessment order, the taxpayer went on to appeal before the Tribunal.

The Tribunal held that the claim of the taxpayer that no PE existed in view of Article 5.2(j) of the tax treaty was only a subterfuge on the face of such facts as the nature of service rendered by the taxpayer were not in relation to a building site, construction, installation or assembly project. The work was in the nature of repair and supply of material and therefore, the time limit of six months as prescribed in Article 5.2(j) would not be applicable. The Tribunal relying on the decision of the Delhi Tribunal in the case of Fugro Engineers BV11 held that number of days was not significant in a peculiar type of work undertaken and if the contract is not one of assembly, construction or installation, no time limit has been prescribed for incidence of source country taxation of such projects.

All correspondences relating to prospecting of client, participation in bids, correspondence with customers, signing of contract document, execution of the project and closure of the project, etc. were initiated or routed through the business address of CIWSPL. The activities of the taxpayer and CIWSPL are intertwined and CIWSPL participates in the economic activities of the taxpayer. Since the taxpayer and CIWSPL are carrying out identical nature of jobs in India and therefore, the activities of CIWSPL necessarily are to be analysed to determine whether there is a fixed place PE.

The Tribunal observed that the `fixed place test' is a positive one for the taxpayer and there was no requirement to go for

special inclusion for the purpose of determination of PE. What constitutes a place of business for Article 5 of the tax treaty is often a question of fact and law. Place of business usually means premises of the enterprises used for carrying on the business, whether or not exclusively used for the business. To constitute a PE, the business must be located at a single place for a reasonable length of time and the activity need not be permanent, endless or without interruptions. The Tribunal relied on the decision of Sutron Corporation12 and Motorola Inc13 wherein the residence of the country manager was held to be a fixed place of business as the same was used as an office address.

The role played by the MD as an agent of the taxpayer as also CIWSPL who renders similar services cannot be easily discerned or separated. There being a unison of interest to a great extent, while as an independent agent there would be required an objectivity in execution of the tasks of the non-resident taxpayer. In the instant case, the MD was acting exclusively or almost exclusively for and on behalf of the taxpayer during the currency of the project and to that extent, the MD was not acting in furtherance of his ordinary course of business. Accordingly, the amount received by the taxpayer pursuant to NHPC project was taxable in India since the taxpayer's subsidiary in India represented by its managing director constitutes a fixed place PE in India.

Carpi Tech SA v. ADIT [ITA No 1742/Mds/2011] -Taxsutra. com

Management support and other services do not make available technology, knowhow, skills, etc. and therefore not taxable as FTS under India-Finland tax treaty

The taxpayer is a tax resident of Finland and is engaged in the business of providing innovative and environmentally sound solutions for a wide variety of customers in metals and mineral processing industries. The taxpayer filed a nil return for the AY 2010-11 on 28 March 2012. During the year under consideration, the taxpayer earned revenue from management support and other services. These services are provided to its group company Outotec India Pvt Ltd and the revenue earned was INR82,22,381. The AO proposed to bring this amount to tax as FTS. The taxpayer contended before AO that the services provided by it are managerial services, and these services fall outside the definition of FTS under India-Finland tax treaty. The taxpayer also contended that no services have been made available so as to tax the amount as FTS. The AO did not accept the contentions of the taxpayer and held that these services constituted FTS and passed the draft assessment order. Aggrieved by the order of the AO, the taxpayer preferred objections before the DRP. The DRP upheld the order of AO.

11. Fugro Engineers B.V. v. ACIT [2008] 26 SOT 78 (Delhi) 12. Sutron Corporation v. DIT [2004] 268 ITR 156 (AAR) 13. Motorla Inc. v. DCIT [2005] 95 ITD 269 (Del) (SB)

? 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download