Recent Developments
in International
Taxation
Mrugen Trivedi
28 August 2014
Contents
I
Indirect Transfers
II
E-commerce
III
Permanent Establishment
IV
Most Favoured Nation Clause
V
FTS – when clause is missing
VI
Supreme Court on AAR application
VII
GAAR
VIII
BEPS
IX
CBDT Circulars and Notifications
1
Taxation of Indirect transfers – Origins of the controversy


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
2
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
3
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
4
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”.
5
Taxation of Indirect transfers – Areas of the controversy
Impact of amended
definition of ‘transfer’
and ‘capital asset’
Methods for
determining value
derived from India
Availability of treaty
benefits
DEALT WITH BY AP HC IN
SANOFI’s CASE
Withholding tax liability
on past transactions
Scope of ‘substantially’
DEALT WITH BY DELHI HC IN
COPAL RESEARCH LTD’s
CASE
6
Taxation of Indirect transfers – DIT v. Copal Research Limited,
Mauritius (W.P.(C) 2033/2013)
Individual
Shareholders
Facts
Banks &
Financial
Institutions

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
UK
T-3
M-UK
33%
67%
CPL
USA
Jersey
Island
M-USA
Cyprus
Mauritius
T-2
M-Cyprus
CRL
CMRL
E Inc.
AAR Ruling

India
T-1
CRIL
EIL
Capital gains arising from T-1
and T-2 are not liable to tax in
India
T – Transaction
Sale of shares
7
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
8
Taxation of Indirect transfers - Sanofi Pasteur [2013] 354 ITR 316 (AP)
Sale of shares in
ShanH
Sale of shares in
ShanH
Sanofi Pasteur
France
GIMD, France
19.63%
ShanH
France
Merieux Alliance,
France
80.37%
FRANCE
INDIA
Shantha Biotech
9
Taxation of Indirect transfers – Sanofi Pasteur

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 – Takeaways

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
12
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
13
E-Commerce related cases
IRELAND/US
INDIA
I Co.
Google/Yahoo
PAYMENTS FOR ONLINE
ADVERTISEMENTS
AD PLACED ON WEBSITE
ACCESSED BY POTENTIAL
CUSTOMERS IN INDIA
SERVER
14
E-Commerce related cases

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
15
E-Commerce related cases – Rights Florists Pvt. Ltd [2013] 143 ITD
445 (Kol)

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
Retrospective insertion of Explanation 5?
16
E-Commerce related cases – eBay International AG [2013] 40
taxmann.com 20 (Mum)
SWITZERLAND
INDIA
eBAY International
Support services for India Specific
website
i) Suggest eBay legal requirements
ii) Provide market data relating to
industry
iii) Marketing and promotional
services
iv) Payment processing and
collection activities
v) Local customer support activities
vi) Furnishing of reports and
information
vii) Other administrative and support
activities
OPERATING INDIA-SPECIFIC
WEBSITE
Indian Group entities
17
E-Commerce related cases – eBay International AG


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
18
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
19
E-Commerce related cases – Takeaways

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
20
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
•
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
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.
Business support services ‘make available’ technical knowledge, skills, etc. and therefore
taxable as FTS/FIS
21
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 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
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
22
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
23
Permanent Establishment – Booz & Company (Australia) [2014] 362
ITR 134 (AAR)

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
24
Permanent Establishment – Booz & Company (Australia)



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…
25
Permanent Establishment –Takeaways

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
26
MFN Clause – certain nuances
 Indian tax treaties with MFN
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)
-
 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
27
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)
28
Taxability when FTS article is missing
If FTS Article is missing under tax treaty
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)
View 1
Whether taxable under
the Act?
Not Taxable
Under Article 7
Whether
Taxable under Article 7?
View 2
Whether
taxable under Article 22?
No
No
Whether PE exist?
Yes
Yes
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)
Spice Telecom [2006] 113 TTJ 502
(Bang)
IBM India ( ITA 489 /Bang/2013)
- (No FTS clause – Not taxable
Not taxable
29
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)
30
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.
31
General Anti-Avoidence Rule (GAAR)
Main purposes is to obtain a tax benefit
AND
Not at
arm’s-length
OR
Misuse/abuse of tax
provisions
OR
Lacks commercial
substance
OR
Not for bona-fide
purposes
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.
GAAR provisions to be effective from 1 April 2015 (FY 2015-16)
32
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
33
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
34
Base Erosion and Profit Shifting (BEPS)
BEPS Projects
Coherence
Substance
Transparency
Hybrid Mismatch
Arrangements (2)
Preventing Tax Treaty
Abuse (6)
Methodologies and Data
Analysis (11)
Interest Deductions (4)
Avoidance of PE Status (7)
Disclosure Rules (12)
TP Aspects of Intangibles
(8)
CFC Rules (3)
TP Documentation (13)
TP/Risk and Capital (9)
Harmful Tax Practices (5)
TP/High Risk Transactions
(10)
Dispute Resolution (14)
Digital Economy (1)
Multilateral Instrument (15)
35
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 ?
36
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
37
BEPS Action Plan linked to GAAR
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
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
Action 6 : Prevent treaty abuse via
recommendation on design of domestic
rules that grant tax treaty benefits
in appropriate circumstances
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
38
BEPS Action Plan linked to GAAR
Focus Area
Coherence and
Substance
Transparency
GAAR related implications
Action 7: Prevent the
artificial avoidance of PE
status, via changes to model
tax convection treatment of
commissionaires and exemptions
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
Action 8: Assure that Transfer
pricing outcomes are in line
with value creation
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
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
39
Recent CBDT Circulars/Notifications
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
40
Recent CBDT Circulars/Notifications
Notification No. 86/2013, dated 1 November 2013
 S. 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
41
Recent CBDT Circulars/Notifications
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 reported
Summary
 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

42
Recent CBDT Circulars/Notifications
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
43
THANK YOU
Mrugen Trivedi
Chartered Accountant
Mob: +91 98925 10305