Recent Developments in International Taxation

Mrugen Trivedi

28 August 2014

Contents

2

I Indirect Transfers

II E-commerce

V FTS – when clause is missing

VII GAAR

VIII BEPS

IX CBDT Circulars and Notifications

VI Supreme Court on AAR application

Permanent EstablishmentIII

Most Favoured Nation Clause IV

Taxability of gains in India asserted on the basis of the following:

Transfer of shares in overseas parent results in ‘indirect’ transfer of shares in Indian subsidiary

There is a transfer of rights and entitlements in India such as ‘management rights’, ‘controlling interest’, ‘economic interest’ etc. situated in India by virtue of transfer of overseas shares

Supreme Court’s verdict in the Vodafone International Holdings v. UOI [2012] 341 ITR 1 [SC] 

Section 9 not a look-through provision - No statutory basis for bringing ‘indirect’ transfers to tax

‘Rights and entitlements’ flow from the transfer of shares and are not separate capital assets

Shares and the rights which emanate from them, flow together and cannot be dissected

3

Taxation of Indirect transfers – Origins of the controversy

Retrospective amendments made by the Finance Act, 2012

Retrospective Amendments clarify:

the situs of shares/interest in certain foreign companies for sec. 9(1)(i)

the definition of “capital asset” under sec. 2(14)

the definition of “transfer” under sec. 2(47)

the meaning of the expression “through” in sec. 9(1)(i)

Past notices etc. validated – Section 119 of the Finance Act, 2012

All notices, levies, demands, assessments etc. in respect of indirect transfers deemed valid notwithstanding any contrary judicial order

Notices etc. cannot be called into question on any ground

Amounts deposited /collected need not be refunded

4

Taxation of Indirect transfers – Origins of the controversy

5

Taxation of Indirect transfers – Origins of the controversy

Situs of shares/interest in certain foreign companies

Prior Legal Position: Situs of shares is where the company is incorporated and where its shares can be transferred

Finance Act, 2012: (w.e.f. 1 April 1962)Share/interest in a foreign company deemed to be situated in India, if the share/interest derives, directly or indirectly, its value substantially from the assets located in India

Definition of ‘capital asset’

Prior Legal Position: “Rights and entitlements” not identifiable or distinct capital assets from shares held

Finance Act, 2012: (w.e.f. 1 April 1962)Capital asset deemed to include any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever

6

Taxation of Indirect transfers – Origins of the controversy

Definition of ‘transfer’

Prior Legal Position:Shares and the rights which emanate from them, flow together and cannot be dissected

Finance Act, 2012: (w.e.f. 1 April 1962)“Transfer” deemed to include disposing of or parting with an asset / interest or creating any interest in any manner, notwithstanding that such transfer of rights has been characterised as being effected /dependent upon /flowing from the transfer of shares of a company registered or incorporated outside India

Meaning of ‘through’

Prior Legal Position:“Through” did not mean “in consequence of”

Finance Act, 2012: (w.e.f. 1 April 1962)The expression “through” deemed to mean “by means of”, “in consequence of” or “by reason of”.

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DEALT WITH BY AP HC IN SANOFI’s CASE

Taxation of Indirect transfers – Areas of the controversy

DEALT WITH BY DELHI HC IN COPAL RESEARCH LTD’s

CASE

8

Taxation of Indirect transfers – DIT v. Copal Research Limited, Mauritius (W.P.(C) 2033/2013)

Facts

CRL sold shares of CRIL to Moody’s Cyprus

CMRL sold shares of E Inc., to M-USA resulted in indirect transfer of EIL (Indian Company)

Individual shareholders of CPL sold its shares in CPL to M-UK

AAR Ruling

Capital gains arising from T-1 and T-2 are not liable to tax in India

CPL

CRL CMRL E Inc.

EIL

UK

Cyprus Mauritius

USAJersey Island

67% 33%

M-UK

M-Cyprus

M-USA

Individual Shareholders

CRIL

India

Banks & Financial

Institutions

T-1

T-3

T-2

T – Transaction

Sale of shares

9

Taxation of Indirect transfers – Copal Research Limited

Delhi High Court ‘s decision

Transaction structured has not been done for the purposes of avoiding tax.No material to indicate that the commercial transaction was not bonafide.Only a fraction of the value of shares of Copal-Jersey was indirectly derived from the value of the shares of CRIL and EIL.‘Substantially’ occurring in Explanation 5 would necessarily have to be read as synonymous to ‘principally’, ‘mainly’ or at least ‘majority’.Explanation 5 do not enlarge the scope of Section 9(1)(i)Transfer of overseas asset, which derives less than 50 per cent of its value from assets situated in India would not be taxable in India

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Shantha Biotech

Sale of shares in ShanH

INDIA

FRANCE

ShanH France

Sanofi Pasteur France

Merieux Alliance, France

GIMD, France

80.37%19.63%

Sale of shares in ShanH

Taxation of Indirect transfers - Sanofi Pasteur [2013] 354 ITR 316 (AP)

Issue involves taxability of gains arising on transfer of shares in ShanH, a French company

AP High Court’s decision:

Commercial Substance in ShanH: Revenue had alleged that ShanH was not an entity with commercial substance and was a

mere nominee of the sellers HC observed that ShanH was a French resident corporate entity with commercial substance,

distinct from MA and GIMD Even post the transaction in issue, the commercial and business purpose of ShanH as an

investment vehicle was intact Lifting of the Corporate Veil of ShanH:

ShanH was not conceived for avoiding capital gains liability under the provisions of the Act The fact that a higher rate of capital gains tax is payable and has been remitted to Revenue

in France, lends further support to the Sanofi’s contention that ShanH was not conceived, pursued and persisted with to serve as an India tax-avoidance device

10

Taxation of Indirect transfers – Sanofi Pasteur

• Liability to tax in India under the Act / India-France Treaty: The controlling interest of ShanH over the affairs, assets and management of SBL being

identical to its shareholding and not a separate asset, it cannot be considered or computed as a distinctive value

The retrospective amendments do not alter the provisions of the tax treaty and given the text of Section 90(2) of the Act, these amendments do not alter the taxability of the transaction

The retrospective amendments in Section 2(47) and Section 9 of the Act are not fortified by a non-obstante clause to override the provisions of the tax treaties

Transaction not taxable in India under Article 14(5) of the India-France tax treaty

11

Taxation of Indirect transfers – Sanofi Pasteur

Recent spate of notices to multinational groups in respect of past transactions involving indirect transfers

Significant uncertainties remain as to applicability and determination of Indian tax liabilities

Determination of India tax liability in respect of past and proposed transactions (including methods of valuation, computation of gains, withholding applicability)

Alternative dispute resolution – BIPA Taxing foreign dividends – Unintended consequence as mentioned in the Shome committee

report

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Taxation of Indirect transfers – Takeaways

E-commerce - Background

Tax issues surrounding the digital economy – key issue across sectors

Direct impact on IT/ITeS companies, including online retail, digital media, social media etc.

Issues also relevant to traditional brick and mortar companies using digital media to expand geographical reach and for targeted advertising

Traditional rules of cross-border taxation generally considered inadequate to address peculiarities of the digital economy

Issues being addressed by OECD as part of the BEPS agenda

Aggressive push for source-based taxation by developing countries (including India)

Source-based taxation largely asserted based on:

Existence of PEs due to accessibility of websites, presence of servers, etc.

Characterization of certain payment streams as royalties / FTS

Increased focus on payers for non-deduction of tax at source under s. 195

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E-Commerce related cases

I Co.Google/Yahoo

SERVER

AD PLACED ON WEBSITE ACCESSED BY POTENTIAL

CUSTOMERS IN INDIA

IRELAND/US INDIA

PAYMENTS FOR ONLINE ADVERTISEMENTS

Increasing number of cases coming up for resolution before the ITAT / Courts

Mumbai ITAT in Yahoo India Pvt. Ltd. [2011] (140 TTJ 195) and Pinstorm Technologies Pvt. Ltd. [2012] (54 SOT 78)

Payment made for online advertising held not to be ‘Royalty’

The word 'use' in clause (iva) of Explanation 2 to s. 9(1)(vi) contemplates that the customer should come face to face with the equipment, operate it or control its functions in some manner

If nothing is done to or with the equipment and if there are no possessory rights in relation thereto, there is only use of the facility / rendition of services

Retrospective amendments to the definition of ‘royalty’ not considered – appeals to Bombay HC pending

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E-Commerce related cases

Issue involved taxability of payments to Yahoo and Google for online advertising Disallowance of payments by the tax authorities on the ground of non-deduction of

tax at source under s. 195 ITAT dismissed the Revenue’s appeal and held that payments to Yahoo and Google

were not taxable in India under the Act or the applicable tax treaties: A website does not constitute a PE unless the servers on which websites are hosted are also

located in the same jurisdiction. As the servers of Google and Yahoo are not located in India, there is no PE in India

Payments to Yahoo and Google are not ‘royalties’ – reliance placed on ITAT’s decisions in Yahoo India Pvt. Ltd. and Pinstorm Technologies

Payments to Yahoo and Google are not ‘FTS’ since no human element is involved

India’s reservations to OECD that websites could constitute PE under certain circumstances held inapplicable

Relevant only for interpreting treaties entered into after expression of such observations No circumstances have been set out by Government on when a website could constitute a PE

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E-Commerce related cases – Rights Florists Pvt. Ltd [2013] 143 ITD 445 (Kol)

Retrospective insertion of Explanation 5?

18

E-Commerce related cases – eBay International AG [2013] 40 taxmann.com 20 (Mum)

Indian Group entities

eBAY International

OPERATING INDIA-SPECIFIC WEBSITE

SWITZERLAND INDIA

Support services for India Specific websitei)Suggest eBay legal requirementsii)Provide market data relating to industryiii)Marketing and promotional servicesiv)Payment processing and collection activitiesv)Local customer support activitiesvi)Furnishing of reports and informationvii)Other administrative and support activities

Revenue sought to tax income from operations of the website on the ground that:

Income from operations of the website was FTS

The Indian group entities providing support services to eBay International AG constitute a dependent agent PE

eBay International has a place of management PE in India

ITAT’s findings on FTS

No managerial services rendered: Websites are analogous to a market place where the buyers and sellers assemble to transact. By providing a platform for doing business, the taxpayer cannot be considered as having rendered any managerial services either to the buyer or to the seller

No technical services rendered: Buyer or seller does not avail any technical service from eBay for entering into the transaction on the website, nor is there a provision of technical personnel

No consultancy services rendered: No consultancy possible between buyers or sellers prior to entering into online transaction

Receipts are not FTS but business income

19

E-Commerce related cases – eBay International AG

ITAT’s findings on existence of DAPE Website not controlled directly or indirectly by Indian group companies Indian group companies have no role in introducing any specific customer to Assessee Transaction on website is finalised through website operated from outside India No DAPE under Article 5(5) of tax treaty as:

Indian group companies are dependent agents but do not constitute DAPE Indian group companies have not negotiated or entered into contract for and on behalf of

Assessee There is no case of habitually maintaining stock of goods for or on behalf of Assessee since

goods are delivered by seller to buyer directly No manufacturing or processing of goods in India for Assessee

ITAT’s findings on existence of Place of Management PE: Indian group companies are not taking any managerial decisions, and are simply rendering

certain marketing services to the taxpayer They have no role in the operation of the websites Hence, no place of management PE can be said to exist

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E-Commerce related cases – eBay International AG

Digital economy related income / payments likely to be subjected to increased scrutiny by the Revenue

Potential transaction likely to attract tax inquiry:

Making payments for placing online ads

Operating online platforms for direct sale to customers in India

Availing of online platforms from third parties for sales to customers in India

Sophisticated tax planning is critical for both e-commerce businesses and their customers

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E-Commerce related cases – Takeaways

Permanent Establishment - Centrica India Offshore Pvt Ltd [2014] 224 Taxman 122 (Del)

Facts

•Centrica Plc., U.K. has overseas subsidiaries located in different countries including a wholly owned Indian subsidiary

•Overseas entities outsource their back office support functions to the Indian company

•To seek support during initial years, the Indian company sought some employees on ‘secondment’ from overseas entities High Court decision

•No purported employment relationship between the taxpayer and the secondees.

•Salaries, retirement benefits and other compensation of seconded employees were ultimately paid by the overseas entity

•Employees were seconded for a limited period of time in order to utilise their technical expertise in Indian company

•The employment relationship between the secondees and the overseas Co was at no point terminated, nor was the taxpayer given any authority to modify that relationship

•Overseas entities constituted Service PE in India

•Business support services ‘make available’ technical knowledge, skills, etc. and therefore taxable as FTS/FIS

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Permanent Establishment – e-Fund Corporation / IT Solutions [2014] 42 taxmann.com 50 (Del HC)

Facts

•e-Fund Corp, USA was ultimate holding Company of e-fund India

•e-Fund India had performed back office operations for electronic payments, ATM services and decision support and risk management

High Court decision

•Subsidiary per se does not form a PE

•No fixed place of business in India – No right to use any premises of e-fund India

•‘Place of Management’ PE has not been invoked by lower authorities

•Article 5(3) does not create a PE but has a negative commutation. Article 5(1) and 5(2) should be examined to analyse PE

•No service PE – Foreign company had sent its employees to provide stewardship services to protect their interest, for ensuring quality and confidentiality

•No agency PE - Transactions between the foreign companies and e-Fund India were at arm‘s length

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Permanent Establishment – Some more recent decisions

• Since the hardware supplied by the taxpayer was installed by an Indian subsidiary and the contracts were pre-negotiated by it, Indian subsidiary constituted fixed place of the business and dependent agent PE of the taxpayer in India under the India-USA tax treaty - Nortel Networks India International Inc. v. DDIT (ITA Nos. 1119,1120 & 1121 of 2010) (Mum)

• Services rendered by a Mauritian company for improving the management performance of an Indian company, through its employees, having some place at its disposal, constitutes fixed place PE in India - Renoir Consulting Ltd. v. DDIT (I.T.A. No. 4323/Mum/2011) (Mum)

• Details of foreign employees on LinkedIn is considered as additional evidence to determine the existence of PE in India - GE Energy Parts Inc. v. ADIT (ITA No. 671/Del/2011) - Delhi High Court has stayed this order

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Issue is providing of services of technical/professional personnel to Indian company being taxable in India

AAR’s ruling: PE exists in India and incomes received by applicants from Indian Company are taxable as business profit under Article 7

Indian company not an independent entity – Entities in the group are interdependent as no optimal efficiency without expertise, brand equity & capabilities developed by group

Indian company dependent on the applicants – It is getting services of appropriate personnel and their job training from other entities Employees under overall control of applicants Other group entities legally liable in case of third party liabilities Employees deputed are contracted by applicants only

Business Connection: Requirements of Expln. 2 of s. 9 are satisfied Essential features of business connection as held earlier by Courts in other cases fulfilled

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Permanent Establishment – Booz & Company (Australia) [2014] 362 ITR 134 (AAR)

Fixed Place PE “OECD’ does not expressly define what constitutes the place to be ‘at the disposal’ of the

taxpayer and instead gives examples wherein it may or may not tantamount to ‘right of disposal

Taxpayers rendering service usually do not require a place to be at their constant disposal. (Rolls Royce Plc v. DIT and Seagate Singapore International Headquarters Pvt. Ltd., in re. to analyse the right of disposal)

Service PE: Morgan Stanley and Co. Inc - Foreign Company is rendering services through its employees

to Indian Co and there exists a Service PE in India Aramex Ruling - Foreign group cannot successfully conduct its business of transporting and

delivering articles from and in India without Indian Co performing its role in India. Therefore, subsidiary Co. must be considered to be PE of the group in India

Booz Group thus has, what in the corporate and taxation parlance is known as, a blurred identity…

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Permanent Establishment – Booz & Company (Australia)

PE assertions on multinational groups in India

Issues also impact Indian group entities / customers on account of withholding tax obligations

Certain steps to mitigate PE exposure:

Structuring of sub-contracting agreements to mitigate PE risks (Fixed place, virtual projection, agency, etc.)

Avoid presence of executives with management / oversight roles over group entities abroad Explore feasibility of overseas entities directly bearing software / communication charges.

Withholding and cash trap exposures can be potentially mitigated Avoid reciprocal arrangements as it could be considered as mirror image leading to PE exposure Indian company should be the economic employer and the employer in substance to mitigate PE

exposure

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Permanent Establishment –Takeaways

MFN Clause – certain nuances

Indian tax treaties with MFN

In most tax treaties, MFN clause applies automatically when subsequent tax treaty limits its rate/scope. However, in Switzerland tax treaty fresh negotiation is required between two countries to give effect of the beneficial provision

Usually, MFN clause applies prospectively except in a few tax treaty like France where MFN clause is silent on the effective date - Whether it may apply retrospectively?

MFN may restrict FTS to FIS – without consequential service PE trigger though subsequent tax treaty clause may have FIS with service PE

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OECD Countries OECD Countries Non OECD Countries

Belgium Spain Kazakhstan

Finland Sweden Philippines

France Switzerland Saudi Arabia

Hungary Netherlands -

UK Israel (from 7 September 2010) -

MFN Clause - Judicial Precedents

Harmonious interpretation

• The ‘make available’ clause in the FTS Article under the India-USA and India-Portuguese tax treaties, is applicable to India-France tax treaty in view of MFN clause in India-France tax treaty – DDIT v. IATA BSP India [2014] 46 taxmann.com 150 (Mum)

• Interest payable to French resident on loan insured by specified French corporation is not taxable in India in view of MFN clause under French tax treaty as compared to Canada, Hungary and Ireland tax treaty - Poonawalla Aviation Private Limited [2011] [AAR No. 953 of 2010] (AAR)

• Interest payable to Swedish resident on loan guaranteed by specified Swedish corporation is not taxable in view of MFN clause under Sweden tax treaty deriving benefit from the Ireland tax treaty - Idea Cellular Limited [2012] 206 Taxman 238 (AAR)

Restrictive interpretation

• AAR denies benefit of MFN clause under India-France tax treaty with respect to ‘make available’ clause. AAR observed that as per the Protocol, the restrictions are on the rates and ‘make available’ clause cannot be read into it - Steria (India) Ltd. [2014] 45 taxmann.com 281 (AAR)

• Managerial services provided to the Indian company are taxable as FTS inspite of MFN clause under the French tax treaty. Since USA tax treaty does not cover managerial services, make available clause is not applicable to such services - Mersen India Private Limited [2012] 20 taxman.com 475 (AAR)

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Yes

If FTS Article is missing under tax treaty

Taxability when FTS article is missing

Whether Taxable under Article 7?

Taxable

Whether PE exist?

Whether taxable under Article 22?

Whether taxable under the Act?

Not taxable

No

Golf in Dubai [2008] 174 Taxman 480 (AAR)Viceroy Hotels Ltd [2011] 11 taxmann.com 216 (Hyd)Bangkok Glass Industry [2013] 215 Taxman 116 (Mad)McKinsey & Co. [ITA 7624/Mum/2010) (Mum)(No FTS clause – No PE – Not taxable)

Whether taxable under the Act?

TVS Electronics[2012] 52 SOT 287 (Chennai)(No FTS clause – Taxability under the Act)

Lanka Hydraulic [2011] 11 taxmann.com 97 (AAR)(Article 22 needs to be examined)

Not Taxable Under Article 7

No

Yes

View 1

View 2

Spice Telecom [2006] 113 TTJ 502 (Bang)IBM India ( ITA 489 /Bang/2013)- (No FTS clause – Not taxable

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Supreme Court’s decision on AAR application

• AAR has rejected various applications on the ground that applicant has already filed tax returns and therefore, the issue is pending before tax authorities (proviso to Section 245R)

• Netapp B. V. v. AAR [2013] 357 ITR 102 (Del)

Once the return of income has been filed under Section 139(1), it is construed as a question pending before the tax authority and therefore, the AAR cannot allow the application for advance ruling

•Hyosung Corporation [2013] 218 Taxman 36 (AAR)

Mere filing of return of income before filing of the application does not necessarily mean that the question raised in the application is already pending before the tax authority. (In this case the notice under Section 143(2) was also issued by tax authorities)

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Supreme Court’s decision on AAR application

• Mitsubishi Corporation Ltd. [2013] 40 Taxmann. com 335 (AAR)

Application filed before the AAR, after filing of return of income but before the issue of notice for assessment, cannot be considered as pending for adjudication before the income-tax authorities and therefore, the application is to be admitted.

• The Supreme Court in the case of Sin Oceanic Shipping ASA v. AAR [2014] 41 taxmann.com 444 (SC):

In the light of AAR ruling in the case of Mitsubishi Corporation Ltd., the Supreme Court set aside the High Court and AAR’s rulings and restored the matter back to the AAR for fresh ruling in accordance with the law.

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GAAR provisions to be effective from 1 April 2015 (FY 2015-16)

Main purposes is to obtain a tax benefit

Not at arm’s-length

Misuse/abuse of tax provisions

Lacks commercial substance

Not for bona-fide purposesOR OR

AND

Impermissible Avoidance Arrangement (IAA)

Consequences

Disregard / combine / re-

characterize whole / part of the

arrangement

Disregard corporate structure

Deny tax treaty benefit

Re-assign place of residence / situs of assets or transaction

Re-allocate income,

expenses, relief, etc.

Re- characterize Equity- Debt, Income, Expenses, relief, etc.

General Anti-Avoidence Rule (GAAR)

OR

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GAAR Rules (notified in September 2013) & Way Forward

GAAR to apply to arrangement obtaining tax benefit on or after 1 April 2015

GAAR not to apply to:

An arrangement where the tax benefit arising to all the parties to the arrangement in the relevant assessment year does not exceed INR 30 million in aggregate

FII who has not taken benefit of tax treaty

NR who has investment by way of offshore derivative instruments or otherwise, directly or indirectly, in a FII

Any income accruing from transfer of investment made before the 30 August 2010

Where a part of an arrangement is declared to be an IAA, the consequences in relation to tax shall be determined with reference to such part only

Onus of proof to apply GAAR provisions is on Assessing Officer

Way Forward

Identify every arrangement that results in tax benefit and evaluate possibility of GAAR on each such transaction

Restructuring / substance building - Migration to a better jurisdiction e.g. Singapore

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Base Erosion and Profit Shifting (BEPS)

OECD Action Plan:

• On 19 July 2013 the OECD released an Action Plan on BEPS which was presented to the meeting of G20 Finance Ministers in Moscow..

• The purpose of the Action Plan is “to prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from activities that generate it.”

• The report indicates that “no or low taxation is not per se a cause for concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it.”

Tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ or to shift profits to other locations are under scrutiny

• Little or no real activity but the taxes are low

• Low interaction / sharing of information

Need to provide an internationally coordinated approach and a consensus-based plan

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Base Erosion and Profit Shifting (BEPS)

BEPS Projects

Digital Economy (1)

Multilateral Instrument (15)

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BEPS - Way forward

BEPS Action Plan Potential impact Way forward

Addressing tax challenges of digital economy

Permanent Establishment exposures

Deeper analysis of Digital operations

Neutralizing Hybrid Mismatch arrangement effects

Impact could be on deductibility of expenses etc

• To consider alterations to current structure if deemed necessary

• Analyze whether the company has excessive debt ? Does the group have Fin Cos in low tax jurisdictions?

Counter harmful tax practices more effectively, taking into account transparency and substance

May require disclosure of legal entity information, need for tax ruling, etc.

Assess potential impact including reputational risk

Prevention of Treaty abuse

Increased need for substance

Analyse if the group has holding company – SPV platforms and the satisfaction of substance test ?

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BEPS - Way forward

BEPS Action Plan Potential impact Way forward

Prevention of the artificial avoidance of PE

Possible PE in overseas jurisdiction

Review of current organization strategy for identifying , compensating PEs

Transfer pricing May require reconsideration of Group TP philosophy, allocation of income etc

• To consider approaches to develop additional substance in key jurisdiction over time to support residual profits retained by them

• If presence of IP in low tax jurisdiction, analyse the employee /revenue ratio, cost sharing agreements, and implications of using centralized R&D facility, etc.

Disclosure of aggressive tax planning arrangements

May require increased disclosure of tax positions / planning

Monitor law developments internationally

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Focus Area

GAAR related implications

Digital Economy

Action 1: Address the tax challenges of the digital economy via a focus on concepts of source residence, characterization and value- driving activities

The High Powered Committee on E-commerce and Taxation has laid down its view under various circumstances in relation to e-commerce. This may be a persuasive value while determining the GAAR implications on taxation of digital economy

Coherence and Substance

Action 2 : Neutralize the effects of hybrid mismatch arrangements via recommendation on changes to domestic laws that facilitate double non- taxation

Action 6 : Prevent treaty abuse via recommendation on design of domestic rules that grant tax treaty benefits in appropriate circumstances

There are no direct provisions in Indian tax laws on hybrid instruments/ entities. Under GAAR, transactions can be disregarded/ re-characterised to determine the substance of the arrangement

As per the GAAR Report (Example 25), if an entity or a transaction does not have any commercial substance but was created only to obtain tax benefit under a treaty, then it would be case of treaty abuse and consequently, GAAR provisions shall be invoked

BEPS Action Plan linked to GAAR

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Focus Area GAAR related implications

Coherence and Substance

Action 7: Prevent the artificial avoidance of PE status, via changes to model tax convection treatment of commissionaires and exemptions

Action 8: Assure that Transfer pricing outcomes are in line with value creation

As per the GAAR Report (Example 17), if there is correct reporting of facts by a foreign entity and under the relevant tax treaty, PE does not exists in India, then GAAR provisions are not invoked

As per GAAR Report (Page 25), if there are specific transfer pricing regulations (SAAR) applicable to international transactions and certain specified domestic transactions, the tainted element is to be examined only in those transactions which are not covered by TP regulations and where the main purpose of the arrangement is to obtain tax benefit

Transparency

Action 13: Re-examine transfer pricing documentation via updated guidance to assists risk assessment – including country by country reporting

Under GAAR, the relevant authority determining the ‘Impermissible Avoidance Agreement’ is bestowed with wide powers of access to documents, enquiry, etc

• No clarity provided in the Report as to the interplay with Domestic GAAR

• Treaty GAAR should be in line with Government’s plan on implementation of Domestic GAAR

BEPS Action Plan linked to GAAR

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Instruction No. 2 /2014 dated 26 February 2014

Directions to field officers in the matter of applicability of s. 195 and s. 201

Referred to cases of GE India Technology Private Limited, Transmission Corporation of AP Limited and another and Chennai Metropolitan Water Supply & Sewerage Board

Propositions arising from this Instructions:

Withholding tax liability of payer is with reference to ‘sum chargeable to tax’ under the Act – Failure to withhold taxes, assessee in default under s. 201

Consequence of default proceedings for non-withholding limited to tax liability based on sum chargeable to tax

Payer to approach AO for determining tax liability, if any

Recent CBDT Circulars/Notifications

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Notification No. 86/2013, dated 1 November 2013S. 94A provides for special measures in respect of transactions with persons location in Notified Jurisdictional Areas (‘NJA’)

Transaction with NJA – All parties deemed to be AE and all transactions deemed to be international transaction

Deduction of expenses subject to compliance with rigorous obligations Taxability of sums received from persons located in NJA if source of the sum

not explained Higher tax withholding

‘Cyprus’ specified as NJA by this Notification

Recent CBDT Circulars/Notifications

42

Notification No. 67 of 2013, dated 2 September 2013

CBDT superseded Rules relating to information required to be furnished on payment made to non-residents (Form 15CA/15CB)

Revised scope and format of reporting of information under Rule 37BB Provides that person responsible for making any payment including any interest, salary or any

other sum chargeable to tax shall furnish details in prescribed forms However, information with respect to payment which is not chargeable to tax has been done away

with Amended rule to come into force from 1 October 2013 Part A of revised Form 15CA is applicable if the amount of remittance does not exceed INR 50K

and aggregate of payments during financial year does not exceed INR 250K Part B of revised Form 15CB applies to payment above these limits, after obtaining CA

Certificate or withholding orders from AO which is to be reportedSummary New notification expands scope of covered payments to include payments like salary, interest on

ECB, income from transfer of foreign currency units held by offshore funds, income from foreign currency bonds/shares of Indian company, income of FII from securities, etc.

Notification reduces compliance and administrative burden on certain categories of payments Notification also provides a specified list of payments which are not required to be reported under

revised Rule 37BB

Recent CBDT Circulars/Notifications

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Notification 57/2013, dated 1 August, 2013

Notified additional details to be furnished by NR along with TRC

Status (individual, company, firm etc.) of the taxpayer Permanent Account Number of the taxpayer if allotted Nationality (in case of an individual) or country or specified territory of

incorporation or registration (in case of others) Taxpayer's tax identification number in the country or specified territory of

residence and in case there is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory of which the taxpayer claims to be a resident

Period for which the residential status, as mentioned in the TRC, is applicable Address of the taxpayer during the period for which the certificate is

applicable

Recent CBDT Circulars/Notifications

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THANK YOU

Mrugen TrivediChartered Accountant

Mob: +91 98925 10305