About the Authors
Daksha Baxi is one of the top rated tax advisers in India, recognised over many years by various worldwide surveys and ranking agencies.
She is a fellow member of the Institute of Chartered Accountants in England & Wales; a fellow member of the Institute of Chartered Accountants of India and honours graduate in Economics.
Having spent a decade and half in the UK, Switzerland and various parts of Europe and the USA advising on cross border investments and navigating bilateral tax treaties, her return to India coincided with the opening up of the Indian economy to welcome foreign investments and liberalise the policies for international transactions.
Enthused by the opportunity to advise a globalizing Indian economy, she found it personally gratifying to help Indian businesses grow. This paved the way for Daksha’s professional mantra: help clients achieve their commercial goals efficiently and in a legally sound manner.
Her extensive stints with various premier and pioneering law firms such as Nishith Desai Associates, Khaitan & Co., Cyril Amarchand Mangaldas, exposed her to each and every aspect and nitty gritty of the world of international taxation. Her experience pans across working with and on the opposite side of some of the top law firms and advisers across major jurisdictions for structuring of multitude of domestic and international mergers and acquisitions, negotiating private equity investment deals, structuring and setting up educational institutions, putting in place complex employee incentive programmes, advising on cross border estate and succession planning, structuring of sector specific as well as sector agnostic venture capital funds, transactions related to Insolvency & Bankruptcy Code, setting up InvITs and REITs, structuring of EPC Contracts, making representations before the revenue authorities and appearing before the AAR to obtain some landmark rulings.
Daksha participated and contributed to various committees for advising and formulating regulations such as the SEBI (Share Based Employee Benefits) Regulations, Alternative Investment Funds Regulations, E-Com-
I-5
merce Taxation, providing taxation inputs to the committee advising SEBI on creating framework for Indian companies to list outside India and for Indian companies to merge with foreign company. She has written a plethora of articles and research papers on a whole gamut of domestic and international tax issues, contributed several chapters to various publications of the IBFD, Kluwer Law, and others and made numerous presentations and participated in panel discussion at international fora such as the International Fiscal Association, Foundation for International Tax, International Bar Association, STEP and others.
After a very engaging and satisfying experience of working with law firms she finally called it a day and decided to pursue her passion to service smaller businesses, help families to resolve their issues with succession and estate planning strategies and teach practical international taxation at various institutes. This book is part of this new passion she pursues.
For her exemplary work over the years, Daksha has been consistently recognised as one of the top, most highly acclaimed and distinguished tax experts in India by:
Tax Expert and Tax Leader in World Tax Experts’ Guide by Euromoney
Chambers & Partners
Legal 500
ITR- Women in Tax Leaders Guide
Who’s Who Legal
India Business Law Journal A-List of Top 100 Practitioners in India.
Adv. Surajkumar Shetty is enrolled with the Bar Council of Maharashtra & Goa and has over 12 years of experience in advising clients on aspects relating to direct taxation.
After having completed law, he has been working with some of the top tier law firms in India in their direct tax teams. During his stint with these firms, Suraj has received tremendous exposure to various intricate issues pertaining to both, domestic and international taxation. He is well-experienced in advising clients on various income-tax aspects relating to M&A transactions, devising appropriate risk mitigation and litigation strategies, restructuring businesses and business transfers, drafting and negotiating agreements from an income-tax standpoint, funds taxation, etc.
ABOUT THE AUTHORS I-6
I-7
ABOUT THE AUTHORS
He has represented domestic and foreign clients before the Indian tax authorities and assisted them in matters before the Income Tax Appellate Tribunal, High Courts and the Supreme Court of India. He has advised clients from industries as diverse as infrastructure, funds, financial services, manufacturing and real estate.
In addition to his practice, Suraj has authored articles that are published by International Tax Review, IBFD, etc. He has also co-authored chapters in books of academic importance that have been published by the Chamber of Tax Consultants, International Taxation Committee and IFA Tax Conference (2013 Compendium). He has also conducted sessions on taxation for tax professionals and law students.
Preface
Indian taxation system, comprising the Income Tax Statute – Incometax Act, 1961, Income-tax Rules, 1962, regulations, circulars, notifications, the bilateral tax treaties, judicial precedents, procedural notifications and so on has developed substantially since independence and more so post the current Income-tax Act, 1961 replaced the erstwhile Income-tax Act, 1922.
Since 1991 when the Indian economy reformed and opened up to take the baby steps to integrate with the globalised world, there have been continuous reforms leading to more and more multinational companies setting up shops in India and collaborating with Indian entrepreneurs. Similarly, the overseas investment regime for Indian entrepreneurs to spread their wings outside India and benefit from the financing and growth opportunities offered around the world has enabled Indian corporations to become conglomerates, almost competing with the global multinational corporations. It cannot be said that we have arrived. But yes, we are on the path to be recognised as an economic force to reckon with. It is impossible to think that any global corporation would not have India as a country in their strategy for growth –whichever way it may be considered.
All these plus huge increase in the digital transactions and being able to do significant business in a jurisdiction through servers and websites located outside the customer jurisdictions and without any physical presence, have contributed to the complexity of taxation laws. The size of Income-tax Act, 1961 with the bare text of the provisions of the statute and extracts of related laws referred therein, has more than doubled in the last 30 plus years. This does not even take into consideration the plethora of tax judgments both on the domestic front and in relation to cross border transactions, both in case of non-residents and residents. Nor does it take into consideration the myriads of rules, notifications, circulars, internal guidance and so on. New areas of businesses such as digital economy transactions, e-commerce, online entertainment industry, all-pervading technological advancement and reach in every
I-9
nook & corner of business have all thrown up huge challenges for the taxpayer to ensure not paying multiple layers of tax and for the tax collector to ensure that their legitimate tax dues are paid. This constant tussle has created a maze of taxation system, which is a huge challenge to navigate through. While large corporations and companies are fairly comfortably placed to get advice from numerous tax and legal consultants, the smaller businesses, being advised by their trusted advisers face significant challenges. In the course of our work on multitude of mergers & acquisitions and other challenging transactions, this is one lacuna we identified despite the presence of excellent books, commentaries and material on international taxation.
It is in this backdrop that when the team at Taxmann, made up of Naveen Wadhwa and Punit Aggarwal – supported by many others – approached me with a proposal to author a ready reckoner of International Taxation, it sounded interesting. My co-author Surajkumar Shetty - a very mature and able tax lawyer who has worked with me for at least 10 years - and I spent some time discussing and debating what would such a book look like? Finally we came up with the outline of this book with the idea that it will serve as a handbook for all cross border transactions that a professional is called upon to advise. We were conscious for it not to be a very detailed commentary on any of the aspects involving cross border transactions. That would probably require us to write several volumes and would make it difficult to be used as a referencer. We have also assumed that a person advising on cross border transactions would be one who is at least well versed with the Income Tax Law and practice. We have therefore not explained the normal concepts of determination of business income, allowable deductions, disallowances, income purely from domestic transactions etc. contained in the domestic law, except to the extent the reference has been necessary for the purposes of explaining the determination of income in cross border situation. Hence, the details of computing minimum alternate tax, computing depreciation, preparing and filing of income tax return and several other aspects pertaining to tax administration have not been dealt with in this book. Our idea is to provide insight into how to advise in relation to any cross border transaction or payment and what to look for.
We have observed in the course of our work over the years that people faced with such transactions find it challenging about determining taxability, what role is played by the provisions of the IT Act and the provisions of the bilateral tax treaties, how to read a bilateral tax treaty
PREFACE I-10
(referred to in this book as Double Taxation Avoidance Agreement or DTAA), whether such treaty applies to the person involved or to the transaction and how to go about evaluating and advising on it. To help reduce this difficulty, we have identified all the issues that we have come across during the course of our own work and tried to present the law and practice for taxation of cross border transactions and payments, in simple and lucid manner. We have attempted to use a sequence that we felt would make it easier for readers to find what they are looking for and apply them. We have used examples at many places to explain the complexities and give guidance. The last chapter, comprehensive case study, is an example where we have tried to apply most of the information and details contained in the book to apply to a practical situation. We hope that the readers find this useful. The case study can be expanded and deepened further as time goes by. We have also referred to relevant up to date judicial precedents to elucidate and support the discussions.
Despite our efforts to be as comprehensive on the subject as possible, we are open to the readers giving their feedback on what else they would like to see included and what other details they would like clarified. To the extent it is possible, we will endeavour those to be addressed in a subsequent edition.
We would like to thank our families for their unflinching support and encouragement to complete this book, the teams at Taxmann and the excellent Practice Module research material available on Taxmann portal for many of the tricky aspects to clarify.
I-11
PREFACE
Glossary of Terms
AAR Authority for Advance Rulings
AD Bank Authorised Dealer Bank
AIF Alternative Investment Fund
ALP Arm’s Length Price
AO Assessing Officer
AOP Association of Persons
APA Advance Pricing Agreement
AY Assessment Year
BC Business Connection under section 9 of the IT Act
BEPS Base Erosion & Profit Shifting
Bn Billion
BOI Body of Individuals
CA Competent Authority under DTAA
CBDT Central Board of Direct Taxes
CEO Chief Executive Officer
CCIT Chief Commissioner of Income Tax
CIT Commissioner of Income Tax
CIT(A) Commissioner of Income Tax (Appeals)
CPC Central Processing Centre
Cr Crore
CRISIL Credit Rating Information Services of India Limited
CRS Common Reporting Standard (used for exchange of information between 2 states)
DAPE Dependent Agent Permanent Establishment
DDT Dividend Distribution Tax
DGIT Director General of Income Tax
DRP Dispute Resolution Panel
I-13
DSC Digital Signature Certificate
DTAA Double Tax Avoidance Agreement / Tax Treaty / Convention
EL Equalisation Levy
EL-2 Equalisation Levy-2
EPC Equipment Procurement & Construction Contract
ESOP Employee Stock Option Plan
EVC Electronic Verification Code
FA Finance Act
FAQs Frequently Asked Questions
FEMA Foreign Exchange Management Act, 1999
FMV Fair Market Value
FPI Foreign Portfolio Investor or erstwhile Foreign Institutional Investor registered under the SEBI FII Regulations as replaced by FPI Regulations
FTC Foreign Tax Credit
FTD Foreign Tax Division
FTS/FIS Fees for Technical Services/Fees for Included Services
FY Financial Year
GAAR General Anti Avoidance Rules
GDR Global Depository Receipt
HC High Court
HUF Hindu Undivided Family
IAA Impermissible Avoidance Arrangement
ICDS Income Computation and Disclosure Standard
IFSC International Financial Service Centre
INR Indian Rupees
InvIT Infrastructure Investment Trust
IP Intellectual Property
IT Act Income-tax Act, 1961
ITAT Income-tax Appellate Tribunal
IT Rules Income-tax Rules, 1962
ITSC Income-tax Settlement Commission
JV Co. Joint Venture Company
Lkh Lakh
LLP Limited Liability Partnership
GLOSSARY OF TERMS I-14
I-15
GLOSSARY OF TERMS
LO Liaison Office
LOB Limitation of Benefits in DTAA
LTCA Long Term Capital Asset
LTCG Long Term Capital Gains
LTCGT Long Term Capital Gains Tax
MAP under DTAA Mutual Agreement Procedure under DTAA
MAP-ALP Most Appropriate Method for determining ALP
MD Managing Director
MFN Most Favoured Nation
MLI Multi-Lateral Instrument of the OECD
Mn Million
MNC Multi-National Corporation
MOU Memorandum of Understanding
NCLT National Company Law Tribunal
NR Non-Resident
NRI Non-resident Indian
NSDL National Securities Depository Limited
OCI Overseas Citizen of India
OECD Organisation for Economic Development and Co-operation
OECD MC OECD Model Convention
OFI Overseas Financial Institution
PAN Permanent Account Number
PCIT Principal Commissioner of Income Tax
PDGIT Principal Director General of Income Tax
PE Permanent Establishment referred to in a DTAA or IT Act, as applicable
PIO Person of Indian Origin
POEM Place of Effective Management
PPT Principal Purpose Test under MLI
PY Previous Year
QFI Qualified Foreign Investor
RBI Reserve Bank of India
REIT Real Estate Investment Trust
RNOR Resident but Not Ordinarily Resident
ROR Resident and ordinarily resident
SBI State Bank of India
SC Supreme Court of India
SCRA Securities Contracts (Regulations) Act, 1956
SEBI Securities & Exchange Board of India
SEP Significant Economic Presence as defined in the IT Act
SEZ Special Economic Zone
STCA Short Term Capital Asset
STCG Short Term Capital Gains
STCGT Short Term Capital Gains Tax
SPV Special Purpose Vehicle
STT Securities Transaction Tax
SW Software
TAN Tax Deduction and Collection Account Number
TCS Tax Collected/Collection at Source
TDS Tax Deducted/Deduction at Source
TIEA Tax Information Exchange Agreement
TP Transfer Pricing under the IT Act
TPR Transfer Pricing Regulations
UAE United Arab Emirates
UAPA Unilateral Advance Pricing Agreement
UK United Kingdom
UN United Nations
UN MC UN Model Convention
US / USA United States of America
UTIITSL UTI Infrastructure Technology & Services Limited
VsV Vivad Se Vishwas Scheme through VsV Act, 2020
WHT Withholding Tax
WOS Wholly Owned Subsidiary
GLOSSARY OF TERMS I-16
PAGE About the Authors I-5 Preface I-9 Glossary of Terms I-13 Contents I-19 Rates for deduction of tax at source under Income-tax Act I-39 CHAPTER 1 : TAX SYSTEM FOR NON-RESIDENTS IN INDIA - OVERVIEW 1 CHAPTER 2 : TAX TREATIES 32 CHAPTER 3 : SETTING UP A BUSINESS IN INDIA 50 CHAPTER 4 : CLASSIFICATION OF INCOME 67 CHAPTER 5 : DETERMINING ELIGIBILITY TO CLAIM BENEFITS OF DTAA 81 CHAPTER 6 : TAXATION OF RENTAL INCOME 102 CHAPTER 7 : TAXATION OF BUSINESS INCOME 116 CHAPTER 8 : TAXATION OF DIVIDEND INCOME 153 CHAPTER 9 : TAXATION OF INTEREST INCOME 177 CHAPTER 10 : TAXATION OF ROYALTY INCOME 190 CHAPTER 11 : TAXATION OF INCOME FROM FEES FOR TECHNICAL SERVICES 219 CHAPTER 12 : TAXATION OF CAPITAL GAINS 245 CHAPTER 13 : TAXATION OF EMPLOYMENT INCOME 281 CHAPTER 14 : TAXATION OF NON-RESIDENT INDIAN 304 CHAPTER 15 : TAXATION OF FOREIGN PORTFOLIO INVESTORS 310 CHAPTER 16 : TAXATION OF AIFs, REITs, InvITs, SECURITISATION TRUST 316 CHAPTER 17 : TRANSACTIONS ATTRACTING TRANSFER PRICING REGULATIONS 329 CHAPTER 18 : BUSINESS REORGANISATIONS 359 CHAPTER 19 : DISCONTINUANCE OF BUSINESS AND DISSOLUTION OF INDIAN COMPANY 378 CHAPTER 20 : FOREIGN TAX CREDIT 385
Chapter-Heads I-17
PAGE CHAPTER 21 : MAKING PAYMENTS TO NRs & OBTAINING LOWER WITHHOLDING TAX CERTIFICATE 395 CHAPTER 22 : ASSESSMENTS, APPEALS AND DISPUTE RESOLUTION 417 CHAPTER 23 : GENERAL ANTI AVOIDANCE RULES 451 CHAPTER 24 : MISCELLANEOUS 470 CHAPTER 25 : CASE STUDY TO DETERMINE TAXABILITY OF NR, UNDER IT ACT & DTAA 503 APPENDIX : LIST OF FORMS REFERRED 537 CHAPTER-HEADS I-18
I-19 Contents PAGE About the Authors I-5 Preface I-9 Glossary of Terms I-13 Chapter-heads I-17 Rates for deduction of tax at source under Income-tax Act I-39 CHAPTER 1 TAX SYSTEM FOR NON-RESIDENTS IN INDIA - OVERVIEW 1.1 To begin with 1 1.2 De nition of ‘Person’ 2 1.3 Two important elements of de nition of ‘Person’ 2 1.4 Residential status of individual - Section 6(1)/(1A) 3 1.4-1 Residence of an Individual 3 1.4-2 Residence, based on physical presence 3 1.4-3 Deemed residence 5 1.4-4 Non-resident 5 1.4-5 Not ordinarily resident 7 1.5/6 Summary of the above rules for determining residential status of individuals in India 7 1.7 Residential status - Hindu Undivided Family (HUF) and other non-company persons - Section 6(2) 9 1.7-1 HUF, AOP 9 1.7-2 Company 9 1.7-3 Every other Person 17
PAGE 1.8 Residence for all sources Income from foreign source 17 1.9 18 1.10 Resident and ordinarily resident in India (ROR) 18 1.11 Scope of total income - Section 5 18 1.11-1 Scope of total income of resident 18 1.11-2 Scope of total income of RNOR (includes person who is ‘Deemed Resident’) 19 1.11-3 Scope of total income of NR 20 1.12 Section 9 - Income deemed to accrue or arise in India 21 1.12-1 This Section lays down the guidelines and rules on how to determine when income falling under various categories is deemed to accrue or arise in India 21 1.12-2 Business and other income of an NR in India 22 1.12-3 Exclusions from BC and activities of NR which do not attract taxation in India under the IT Act 24 1.12-4 Expansion of Source Rule under section 9(1)( i ) of the IT Act for taxing income of NR in India [Refer to separate Chapter on “Taxation of Indirect Transfer of Indian Asset”] 25 1.12-5 Salary income - Section 9(1)(ii) 26 1.12-6 Interest, Royalty and Fees For Technical Services - Section 9(1)(v), (vi) and (vii) 27 1.13 NR, IT Act and DTAA 29 1.14 NR tax rates in India - Foreign companies 30 CHAPTER 2 TAX TREATIES 2.1 Scope of this chapter 32 2.2 Purpose of DTAA and TIEAs 32 2.3 Models of DTAAs 33 2.4 Authority to enter into Bilateral tax agreements 34 2.5 How to read a DTAA for its application 34 2.5-1 Steps to follow to apply DTAA 35 CONTENTS I-20
PAGE 2.5-2 The following chart explains the process of determining taxability of NR under the provisions of applicable DTAA or the IT Act 38 2.6 The following table lists the article number of the DTAA and brie y describes the topic or the income that the said article covers 41 2.7 Examples of MFN clauses 47 2.7-1 The India-Belgium DTAA contains the following language in the Protocol 47 2.7-2 The Protocol in the India-Philippines DTAA 48 2.8 DTAA rates are nal rates, no addition of surcharge or cess to those rates 48 CHAPTER 3 SETTING UP A BUSINESS IN INDIA 3.1 Scope of this chapter 50 3.1-1 Basic compliance requirements under Indian taxation law 50 3.2 Income Tax Registrations 50 3.2-1 PAN 50 3.2-2 TAN 56 3.3 Directors’ IT registration 56 3.4 Valuation requirements - Anti-avoidance measures 57 3.4-1 Share premium for investment in closely held company needs to be justi ed by valuation 57 3.4-2 Minimum acquisition price of asset 58 3.4-3 Determination of FMV of Quoted shares 59 3.4-4 Determination of FMV of Unquoted Equity Shares 59 3.4-5 Determination of FMV of non-equity shares and securities in unlisted companies 60 3.4-6 Table summarising the Valuation Rules and when required 61 3.5 Related party transactions 61 3.5-1 Associated Enterprise 62 3.5-2 Methods for determining Arms’ Length Price (“ALP”) 62 I-21 CONTENTS
PAGE 3.5-3 Most Appropriate Method (“MAP -ALP”) 63 3.5-4 Filings and documentation 64 3.5-5 Obtaining Report in Form 3CEB 65 3.5-6 Summary of Transfer Pricing Provisions 65 CHAPTER 4 CLASSIFICATION OF INCOME 4.1 Scope of this chapter 67 4.2 Salary income 68 4.2-1 Income which is taxed as Salary 68 4.2-2 Salary, when regarded earned in India 69 4.2-3 Components of Salary 69 4.2-4 Valuation of Perquisites 69 4.3 Income from house property 69 4.3-1 Determination of Income from House Property 69 4.3-2 Determination of Annual Value 70 4.3-3 Annual value of Stock in Trade or property not let out in the whole year 70 4.3-4 Determination of Amount of Rent Received 70 4.3-5 Deductions from House Property Income 71 4.3-6 Owner of House Property 71 4.4 Pro ts and gains from business or profession 71 4.5 Capital gains 72 4.6 Royalty/Fees for Technical Services/Interest/Dividend 79 4.7 Income from other sources 80 CHAPTER 5 DETERMINING ELIGIBILITY TO CLAIM BENEFITS OF DTAA 5.1 Scope of this chapter 81 5.2 Factors that determine eligibility to DTAA 82 5.3 Whether surcharge & cess should be added to DTAA rates 94 5.4 Whether Equalisation Levy -2 on E-Commerce Operators (“EL-2”) is part of taxes covered under DTAA? 94 CONTENTS I-22
PAGE 5.5 Consequences of PE, GAAR and Failing Principal Purpose Test under MLI 96 5.5-1 PE 96 5.5-2 GAAR 96 5.5-3 Principal Purpose Test (PPT) under Article 7 of MLI 98 5.6 Judicial determinations on application of DTAA 98 5.6-1 Delhi ITAT - Holds that the DTAA rate applies to DDT in case of Giesecke & Devrient (India) (P.) Ltd. 98 5.6-2 Mumbai ITAT does not permit DTAA rate to apply to DDT in case of Total Oil India (P.) Ltd. 99 CHAPTER 6 TAXATION OF RENTAL INCOME 6.1 Scope of this chapter 102 6.2 Income from house property 102 6.3 Case of NR for Taxability of Income from House Property 102 6.4 Article 6 on income from immovable property in several DTAAs 103 6.4-1 India-Australia DTAA 103 6.4-2 India-US DTAA 104 6.4-3 India-Singapore DTAA 105 6.5 Taxability under the IT Act 105 6.5-1 Computation of Income from House Property 105 6.5-2 Pro ts and gains from business or profession in case of a person in the business of real estate 109 6.6 Taxability under the DTAA 113 6.7 Tax Rate 113 6.8 Case Study 114 CHAPTER 7 TAXATION OF BUSINESS INCOME 7.1 Scope of this chapter 116 7.2 Relevant provisions under the DTAA 117 I-23 CONTENTS
PAGE 7.2-1 Business income taxable if NR has Permanent Establishment in Source State 117 7.3 Implications of PE in India 132 7.3-1 Article 7 of a DTAA lays down the principles of allocation of pro t to a PE 133 7.3-2 Force of Attraction 136 7.3-3 Preventing Arti cial Avoidance of Permanent Establishment Status, Action 7 of the BEPS-2015 Final Report 136 7.3-4 Taxable income and applicable tax rate to PE 137 7.4 ‘Business connection’ under the IT Act 138 7.4-1 Business connection due to an agent of the NR in India 140 7.4-2 ‘Signi cant Economic Presence’ 141 7.4-3 Determination of BC of NR in India 141 7.5 Computing of business income under the IT Act 143 7.5-1 Computation as per normal provisions 144 7.5-2 Provisions of the IT Act for determining income 145 7.5-3 Deduction for Depreciation 149 7.6 Other Relevant Provisions 151 7.6-1 Carry forward & Set-off of Losses 151 7.6-2 Special Provisions are certain businesses 151 7.6-3 Conversion of branch of foreign bank into subsidiary 151 7.6-4 Taxation when POEM of NR in India 151 7.7 Tax rate applicable to NRs 152 CHAPTER 8 TAXATION OF DIVIDEND INCOME 8.1 Scope of this chapter 153 8.2 Meaning of Dividend 154 8.2-1 Under the IT Act 154 8.2-2 Base Erosion and Pro t Shifting Action Plan 6Principal purpose and GAAR 170 CONTENTS I-24
PAGE 8.2-3 Compliance with withholding tax 170 8.2-4 Claiming deduction of expenses against dividends 176 CHAPTER 9 TAXATION OF INTEREST INCOME 9.1 Scope of this chapter 177 9.2 Meaning of Interest 177 9.2-1 Under the IT Act 177 9.2-2 Taxability of interest under the IT Act 178 9.2-3 Taxability of interest under the DTAA 183 9.2-4 Base Erosion and Pro t Shifting Action Plan 6Principal purpose and GAAR 186 9.2-5 Compliance with withholding tax 187 9.3 Claiming bene t of MFN clause in respect of interest 187 9.3-1 CBDT Circular issued on 3 February, 2022 in respect of application of MFN Clause - Circular No. 3/2022 188 CHAPTER 10 TAXATION OF ROYALTY INCOME 10.1 Scope of this chapter 190 10.2 Meaning of Royalty and Taxability under IT Act 191 10.3 Meaning and Taxation of Royalty under DTAA 201 10.4 Controversies in relation to royalty and some Judicial Precedents 207 10.5 Income in relation to shipping and air transport 213 CHAPTER 11 TAXATION OF INCOME FROM FEES FOR TECHNICAL SERVICES 11.1 Scope of this chapter 219 11.2 Fees for technical services under the IT Act, Section 9(1)(vii) 220 11.2-1 Included in the meaning of FTS 220 I-25 CONTENTS
PAGE 11.2-2 Excluded from the meaning of FTS 221 11.2-3 When is it accrued or arisen in India in the hands of resident or NR? 221 11.2-4 When is it not accrued or arisen in India in the hands of NR under the IT Act? 221 11.2-5 Nexus approach for taxability in India 221 11.3 Taxability of fees for technical services under the IT Act 223 11.3-1 Foreign companies with PE, receiving fees for technical services - sections 44D & 44DA 223 11.3-2 Taxation of fees for technical services under section 115A - on Gross basis 223 11.3-3 Withholding tax provisions under the IT Act 224 11.3-4 Consequences of not complying with withholding tax requirement 225 11.4 Fees for technical services under DTAA 225 11.4-1 FTS under the UN MC Article 12A 225 11.4-2 FTS under the OECD MC 227 11.4-3 FTS under India-USA DTAA 227 11.4-4 FTS under India-Germany DTAA 229 11.5 Analysis of the text of FTS article under the MCs, and the DTAAs 231 11.5-1 No Article in OECD for taxation of Fees for technical services 231 11.5-2 Protocol under India-US DTAA 232 11.6 Some useful recent judicial precedents 240 11.6-1 In GE India Technology Centre (P.) Ltd. v. CIT 240 11.6-2 CIT v. Toshoku Ltd. 241 11.6-3 Principal CIT v. Gopakumaran Nair 241 11.6-4 Regen Powertech (P.) Ltd. v. Dy. CIT (IT) 241 11.6-5 Infosys BPO Ltd v. Dy. CIT (IT) 242 11.6-6 IT Of cer (International Taxation) v. Cadila Healthcare Ltd. 242 CONTENTS I-26
CHAPTER 12 TAXATION OF CAPITAL GAINS
PAGE
12.1 Scope of this Chapter 245 12.2 Capital Gains 245 12.3 Expansion of Source Rule under section 9(1)(i) of the IT Act for taxing Income of NR in India - Indirect transfer of Indian Assets 253 12.3-1 Section 9(1)(i) pertaining to taxation of indirect transfer of Indian asset 253 12.3-2 Analysis and Explanation of Taxation of Capital Gains from Indirect Transfer of Indian asset 257 12.3-3 Valuation Rules for computing tax under Explanation 5 of section 9(1)(i) of the IT Act 257 12.4 Tax rates under the IT Act 264 12.4-1 De nitions of short-term and long-term capital asset 264 12.4-2 De nition of short-term and long-term capital Gain 267 12.4-3 Summary of period of holding to qualify as longterm capital gain for different assets 268 12.4-4 Tax on short-term capital gain from speci ed listed securities 268 12.4-5 In case of FPIs or speci ed category-III AIFs 268 12.4-6 Tax rates on long-term capital gain 269 12.5 Taxability under the DTAA 271 12.5-1 India - US DTAA 271 12.5-2 India - France DTAA (MLI synthesized text as available on the Indian income tax department’s website) 271 12.5-3 India-Netherlands DTAA (MLI synthesized text as available on the Indian income tax department’s website) 273 12.5-4 India - Singapore DTAA (MLI synthesized text as available on the Indian income tax department’s website) 274 12.5-5 India - Mauritius DTAA 275 I-27 CONTENTS
PAGE 12.5-6 Multiple Factors Determine Treatment of Capital Gains Under DTAA 277 12.6 Some Judicial Precedents 277 12.6-1 Sano Pasteur Holding SA v. Department of Revenue, Ministry of Finance 277 12.6-2 Director of Income-tax (International Taxation), Hyderabad v. Vanenberg Facilities BV 278 12.6-3 Indostar Capital v. Assistant Commissioner of Income-tax, (International Taxation) 2(2)(1) 278 12.7 Case Study 279 12.7-1 Example of indirect transfer of Indian assets 279 CHAPTER 13 TAXATION OF EMPLOYMENT INCOME 13.1 Scope of this chapter 281 13.2 Provisions of IT Act pertaining to salary and its taxability 282 13.2-1 De nition of ‘income’ 282 13.2-2 De nition of ‘salary’ 283 13.2-3 Deductions available against salary income 285 13.2-4 New Default Tax Regime for individuals, HUFs, AOPs and BOIs 288 13.2-5 Timing of taxation of salary income 289 13.2-6 Accrual of Salary 289 13.2-7 Taxability of individuals coming to India for employment purposes 290 13.3 Taxability of employment income under DTAA 291 13.3-1 India-Australia DTAA 292 13.4 Taxability of ESOP 294 13.4-1 Under the IT Act and the DTAA 294 13.4-2 Taxability of ESOP for globally mobile employees 297 13.5 Tax Equalisation - Meaning and taxability in India 301 13.5-1 What is Tax Equalisation 301 13.5-2 Computation of salary under tax Equalisation 302 13.6 An ordinarily resident Indian earning salary outside India 303 CONTENTS I-28
PAGE CHAPTER 14 TAXATION OF NON-RESIDENT INDIAN 14.1 De nition of NRI 304 14.2 Applicability 304 14.2-1 Section 115E 304 14.2-2 De nitions of some important terms 305 14.2-3 Tax rates 306 14.2-4 Applicability is optional 306 14.3 Exemption 306 14.3-1 Amount of exemption 308 14.3-2 Withdrawal of exemption 308 14.4 Exemption from ling Tax Return 308 14.5 Applicability post becoming Resident of India 308 14.6 Case Study 309 CHAPTER 15 TAXATION OF FOREIGN PORTFOLIO INVESTORS 15.1 Scope of the Chapter 310 15.2 Taxation of FPIs In India 311 15.2-1 Income categories 311 15.2-2 Income of FPI/FII from securities is not business income 314 15.3 Income of FPI/FII other than from securities and set-off or carry forward of losses 314 CHAPTER 16 TAXATION OF AIFs, REITs, InvITs, SECURITISATION TRUST 16.1 Scope of this chapter 316 16.2 AIF 316 16.2-1 De nition of AIFs under the IT Act 316 16.2-2 Taxability of AIFs 317 I-29 CONTENTS
CHAPTER
PAGE 16.3 REITs & InvITs - Business Trusts 320 16.3-1 De nition of ‘business trusts’ (i.e. REITs and InvITs) 320 16.3-2 Taxability of business trusts 321 16.4 Securitisation trusts 325 16.4-1 De nition of ‘Securitisation trusts’ 325 16.4-2 Taxability of Securitisation trusts 326
17 TRANSACTIONS ATTRACTING TRANSFER PRICING REGULATIONS 17.1 Scope of the chapter 329 17.2 Provisions of Chapter X of the IT Act Pertaining to anti avoidance - Transfer Pricing Regulations (“TP Regulations”) 330 17.2-1 Section 92 - Basic Framework of Transfer Pricing 330 17.2-2 Section 92A - Associated Enterprise 332 17.2-3 Section 92B - Meaning of International transaction 335 17.2-4 Section 92BA - Meaning of ‘Speci ed Domestic Transaction’ 338 17.2-5 Section 92C - Determination of ALP 339 17.2-6 Section 92CB - Safe Harbour Rules 342 17.2-7 Section 92CC - Advance Pricing Agreements 350 17.2-8 Rollback Provisions for APA under section 92CC(9A) 352 17.2-9 Section 92CD - Giving Effect to Advance Pricing Agreements 353 17.2-10 Section 92CE - Secondary Adjustment 354 17.2-11 Section 92D - Maintenance of documents where ALP is to be determined 355 17.2-12 Section 92E - Filing of a report by a Chartered Accountant 357 17.2-13 Section 92F - Certain de nitions relevant to transfer pricing regulations 357 CONTENTS I-30
CHAPTER 18
BUSINESS REORGANISATIONS
PAGE
18.1 Scope of this chapter 359 18.2 Share sale 359 18.2-1 Types of share sale 359 18.2-2 Impact of share transfer 360 18.3 Merger (called amalgamation under the IT Act) 361 18.3-1 De nition of amalgamation 361 18.3-2 Conditions for tax neutral mergers 362 18.3-3 Exemptions from Capital Gains Tax to transfer under Amalgamation (Merger) 363 18.3-4 Losses in case of Amalgamation 366 18.3-5 Conditions for set-off and carry forward of losses in case of amalgamation 367 18.3-6 Consequences if conditions are violated 369 18.4 Demerger related Provisions 369 18.4-1 Meaning of demerger analysed 371 18.4-2 Meaning of undertaking 372 18.4-3 Meaning of liabilities 372 18.4-4 Exemption from Capital Gains Tax in case of demergers 372 18.4-5 Demerger of an Indian Company 373 18.4-6 Demerger between two foreign companies 374 18.4-7 Treatment of losses and unabsorbed depreciation in Demerger - Availability of set-off or carry forward 375 18.5 Amortisation of expenses incurred for amalgamation or demerger 375 18.6 Demerger and tax saving - Judicial precedent Vodafone ESSAR judgment 375 18.7 Tax assessment of amalgamating company 376 I-31 CONTENTS
CHAPTER 19
CHAPTER 20 FOREIGN TAX CREDIT
PAGE
DISCONTINUANCE OF BUSINESS AND DISSOLUTION OF INDIAN COMPANY 19.1 Scope of the chapter 378 19.2 Taxation of discontinued business 378 19.2-1 Section 176 - Discontinued business taxed at rates prevalent in the FY of closure of business 378 19.2-2 Section 177 - Discontinuance of business of AOP 379 19.2-3 Section 178 - Company in Liquidation 380 19.2-4 Section 179 - Liability of directors of private company 381 19.3 Tax implication on shareholders of private company in liquidation 382 19.4 Cost of acquisition of the assets received upon liquidation for future 384
20.1 Scope of this chapter 385 20.2 Different methods of providing FTC 385 20.3 India’s DTAAs 385 20.4 Procedure under the IT Act and IT Rules 389 20.4-1 Guidelines for claiming FTC 389 20.4-2 Rule 128 - Credit allowed in the year of recognition of income 391 20.4-3 Credit only allowed for income-tax 392 20.4-4 No credit for disputed tax liability 392 20.4-5 Credit available in Indian Rupees 392 20.4-6 Credit available against MAT and AMT liability 393 20.4-7 Supporting documents to be furnished for claiming FTC 393 CONTENTS I-32
CHAPTER 21
CHAPTER 22 ASSESSMENTS, APPEALS AND DISPUTE RESOLUTION
PAGE
MAKING PAYMENTS TO NRs & OBTAINING LOWER WITHHOLDING TAX CERTIFICATE 21.1 Scope of the chapter 395 21.2 Payments subject to withholding tax : Sections Attracted 397 21.2-1 Section 195 - General section requiring all payments comprising ‘sum chargeable to tax’ in India to be subject to withholding tax 397 21.2-2 Income of NRs in respect of Global Depository Receipts 403 21.2-3 List of sections and Rules for TDS on payment to NRs 406 21.3 Payments to residents where NR is also liable to deduct tax at source (includes section 194Q) 411 21.3-1 List of sections with description, rate and when such obligation arises 411 21.4 Section 195A - Income Payable “Net of Tax” 412 21.5 Tax Collection at Source (“TCS”) 413 21.5-1 TCS Obligations 413 21.5-2 Clari cations issued by CBDT 414
22.0 Scope of this chapter 417 22.1 Summary Assessment 418 22.1-1 Procedure 418 22.1-2 No adjustments without notice to taxpayer 419 22.1-3 Computation of tax, interest and fee 419 22.1-4 Issuance of refund 420 22.1-5 Time limit 420 22.2 Scrutiny Assessment 420 22.2-1 Mandatory faceless assessment 420 22.2-2 Time limit for notice 431 I-33 CONTENTS
PAGE 22.2-3 Cases not covered under the faceless assessment scheme 431 22.2-4 Opportunity of being heard 431 22.2-5 Time limit for completion of assessment 432 22.3 Best judgment assessment 432 22.3-1 Cases covered under best judgment assessment 432 22.3-2 Time limit for completion 432 22.4 Reassessment 432 22.4-1 Applicability 432 22.4-2 Issuance of notice 433 22.4-3 Relevant provisions pertaining to reassessment 433 22.4-4 Procedure for issuing notice under new section 148 436 22.4-5 Time limit for issuing notice for reassessment 437 22.4-6 Time limit for completing reassessment 437 22.5 Directions by the Commissioner/Joint Commissioner 438 22.5-1 Section 144A - Examination of records by Joint Commissioner 438 22.5-2 Section 263 - Examination of records by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner 438 22.6 Reference to the Dispute Resolution Panel (“DRP”) 439 22.6-1 Applicability 439 22.6-2 Composition 439 22.6-3 Procedure 439 22.6-4 Aspects to be considered by DRP 440 22.6-5 Time limit 440 22.7 Appeals before the Commissioner of Income-tax (Appeals) (“CIT(A)”) 440 22.7-1 Section 246A - Appeal ling 440 22.7-2 Due date for ling appeal 443 22.7-3 Manner of ling appeal 444 22.7-4 Centres for implementation of Faceless Appeal Scheme, 2021 444 22.7-5 Composition of Appeal Units 445 CONTENTS I-34
PAGE 22.8 Appeals before the Income Tax Appellate Tribunal (“ITAT”) 445 22.8-1 Section 253 - ITAT Appeal 445 22.8-2 Due date for ling appeal 448 22.8-3 Time line for passing order 448 22.8-4 Appeal from ITAT order 448 22.9 Appeal before the High Court (“HC”) 448 22.9-1 Due date for ling appeal 449 22.9-2 Scope of HC appeal 450 22.9-3 Appeal from HC order 450 22.10 Appeals before the SC 450
23 GENERAL ANTI AVOIDANCE RULES 23.1 Scope of the chapter 451 23.2 GAAR Provisions 451 23.2-1 Applicability of GAAR 451 23.2-2 Impermissible Avoidance Arrangement 452 23.2-3 Arrangement deemed to lack commercial substance 453 23.2-4 Factors relevant but not suf cient for determining whether or not an arrangement lacks commercial substance 454 23.2-5 Consequences of declaring an arrangement as IAA 454 23.2-6 Section 99 - Actions by the tax authorities 455 23.3 De nitions 456 23.4 Approving panel and process of Invocation of GAAR 458 23.4-1 Reference by Assessing Of cer to the Principal Commissioner or Commissioner 458 23.4-2 Process to be followed by the Principal Commissioner or Commissioner 458 23.4-3 Constitution of the Approving Panel 459 23.4-4 Procedure before the Approving Panel 459 23.4-5 Completion of proceedings by Assessing Of cer 460 I-35 CONTENTS
CHAPTER
PAGE 23.5 Relevant rules under the IT rules 460 23.5-1 Rule 10U - Inapplicability of GAAR 460 23.5-2 Rule 10UA - Consequences 461 23.5-3 Rule 10UC - Miscellaneous 462 23.6 FAQs on GAAR 462 23.7 Judicial Precedents 466 23.7-1 Ajanta Pharma Limited’s scheme of amalgamation and arrangement 466 23.7-2 Panasonic India (P.) Ltd.’s scheme of amalgamation and arrangement 468
24 MISCELLANEOUS 24.1 Section 1 - Equalisation Levy 470 24.1-1 Introduction 470 24.1-2 EL on ‘speci ed services’ (Section 165) 470 24.1-3 EL on e-commerce operators (Section 165A) introduced by Finance Act, 2020 472 24.1-4 Furnishing of statement (Section 167) 474 24.1-5 Interest on delayed payment of EL (Section 170) 474 24.1-6 Penalty for failure to deduct or pay EL (Section 171) 474 24.1-7 Penalty for failure to furnish statement (Section 172) 475 24.1-8 Miscellaneous Provisions for EL 475 24.2 Section 2 - Authority for Advance Rulings (“AAR”) 476 24.2-1 De nitions (Section 245N) 476 24.2-2 Constitution of AAR 478 24.2-3 Application for advance ruling (Section 245Q) 478 24.2-4 Procedure on receipt of application (Section 245R) 479 24.2-5 Appellate authority not to proceed in certain cases (Section 245RR) 480 24.2-6 Advance ruling to be void (Section 245T) 480 24.2-7 Appeal (Section 245W) 480 CONTENTS I-36
CHAPTER
CHAPTER 25 CASE STUDY TO DETERMINE TAXABILITY OF NR, UNDER IT ACT & DTAA
Question 2. Does the JV Co. constitute the BC and PE of know-how LLP in India?
25.5 Question 3. Taxability of the secondee in India - What amount will be taxable in India? Who will be liable to withhold taxes under section 192?
25.6 Question 4. Will the secondee be required to le tax return in India?
25.7 Question 5. How will the licence fee under royalty agreement be taxed in India?
25.8 Question 6. How will the technical services fee be taxed in India?
PAGE 24.3 Section 3 - Mutual Agreements Procedure (“MAP”) 481 24.3-1 Coverage 481 24.3-2 What is MAP 481 24.3-3 Mutual Agreement Procedure 482 24.3-4 Making a MAP Application in India 484 24.3-5 MAP Process 485 24.3-6 Timeframe for resolving and implementing MAP cases 487 24.3-7 Access to MAP 487 24.3-8 Denial of Access to MAP 489 24.3-9 Technical issues 491 24.3-10 Implementation of MAP Outcomes 493 24.3-11 Applicant’s responsibilities 494 24.3-12 In the end 495 24.4 Section 4 - Promotion of International Financial Services Centre (IFSC) 495
25.1 Case Study Facts 503 25.2 Analysis 505 25.3 Question
DTAA 506 25.4
507
1. Determine the eligibility under the
512
515
515
519 I-37 CONTENTS
25.9 Question 7. Will the salary of the secondee form part of the technical services fees?
25.10 Question 8. Taxation of interest payable to know-how LLP
25.11 Question 9. Applicability of TP regulations to all the transactions between know-how LLP and JV Co.
25.12 Question 10. Whether the transfer of interest in know-how LLP by the UK resident 2 to its Netherlands subsidiary would attract any capital gains tax in India
25.13 Question 11. What is the residential status of the secondee in India in all the years that he has been seconded to the JV Co.?
PAGE
520
522
524
526
529 Appendix : List of Forms Referred 537 CONTENTS I-38
5
DETERMINING ELIGIBILITY TO CLAIM BENEFITS OF DTAA
5.1 SCOPE OF THIS CHAPTER
As already mentioned in the earlier chapters for taxability of an NR, who comes from a country outside India with which India has entered into a DTAA, the provisions of the IT Act apply only to the extent that they are more beneficial than the provisions of the relevant DTAA between India and the country from where such NR comes.
The above is enshrined in section 90(2) of the IT Act, which reads as follows :
“(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.”
It is important to note that the above provision is overridden by subsection (2A) of section 90, which was included in the IT Act by Finance Act, 2013, with effect from 1 April, 2016, being the date from which the provisions relating to General Anti Avoidance Rules (“GAAR”) became effective. Sub-section (2A) is reproduced below :
“(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.”
Chapter XA of the IT Act deals with GAAR. This means that though, the provisions of the relevant DTAA will override the provisions of the IT Act as regards taxability of an NR, if GAAR is applicable in the case of an NR then the same would apply even though the application of GAAR provisions results in not applying the provisions more beneficial. This is so since when GAAR is invoked, section 90(2) benefit to the NR would no longer be applicable.
CHAPTER 81
Para 5.2 ELIGIBILITY TO CLAIM BENEFITS OF DTAA 82
Clearly, for any NR entering into transactions in India, it is important and critical to examine whether the arrangement proposed under the transaction is regarded as impermissible avoidance arrangement (“IAA”) under Chapter X-A of the IT Act, else such NR would not get the benefit of the DTAA on which it relies for taxability in India. GAAR is dealt with in this book in Chapter 23. Please refer to it for details.
At the minimum, in order for an NR to seek benefit of a DTAA, section 90(4) of the IT Act requires the NR to furnish a tax residency certificate obtained from the Government of the relevant country. NRs are also required to furnish the following information in Form 10F as per section 90(5):
(
i) Status of the taxpayer (i.e. individual, company, firm, etc.)
(ii) Permanent Account Number or Aadhaar number of the taxpayer if allotted
(
iii) Nationality (in the case of individuals) or Country or specified territory of incorporation or registration (in case of others)
(iv) Taxpayer’s tax identification number in the country or specified territory of residence and if 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
(v) Period for which the residential status as mentioned in the certificate referred to in section 90(4) or section 90A(4) is applicable
(vi) Address of the taxpayer in the country or territory outside India during the period for which the certificate, mentioned in (v) above, is applicable
5.2 FACTORS THAT DETERMINE ELIGIBILITY TO DTAA
After checking that there is a DTAA with the relevant country which is in force as also the MFN clause (refer to Chapter 2 on Tax Treaties), it is necessary to check the following for eligibility to such DTAA:
(
i
) Whether the NR is covered within the scope of the DTAA or within the ‘persons covered’ under the DTAA under Article 1 of the DTAA and therefore also within the definition of ‘person’ as provided in Article 3 of the relevant DTAA.
(ii) Whether the ‘person’ is resident of the other state as provided in Article 4 of the DTAA.
(iii) Whether the taxes for which the DTAA benefits are to be claimed fall within the ‘scope of taxes covered’ in the DTAA.
(iv) If the NR wants to take advantage of beneficial treatment given to different classes of income covered by the DTAA, whether the NR has a permanent establishment (“PE”) in India in terms of Article 5 of the relevant DTAA.
(v) Whether the arrangement or transaction attracts GAAR, which would make the NR ineligible to DTAA benefit.
(
vi) Whether the arrangement or transaction fails the Principal Purpose Test (“PPT”) under the applicable MLI and hence becomes ineligible to get DTAA benefit.
We briefly explain what is entailed in each of these provisions. For this purpose we refer to the articles of the two model conventions: The UN Model and the OECD Model. UN Model provides the basis for negotiating DTAAs by developing countries with the developed countries. The OECD Model is essentially for the developed countries but there are several articles of the OECD Model convention (“OECD MC”)1 that are used by the UN Model convention (“UN MC”). Many of India’s DTAAs are a hybrid between the OECD and the UN Model conventions. Hence, we will refer to the Articles of both the conventions.
5.2-1a Person under DTAA - First, whether the NR falls within the meaning of persons covered under Article 1 of the DTAA: Article 1 of the UN MC provides as follows for the “Persons Covered”:
1. This Convention shall apply to persons who are residents of one or both of the Contracting States.
2. For the purposes of this Convention, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State.
3. This Convention shall not affect the taxation, by a Contracting State, of its residents except with respect to the benefits granted under [paragraph 3 of Article 7], paragraph 2 of Article 9 and Articles 19, 20, 23A [23B], 24 and 25A [25B] and 28.
1. DTAAs are referred to in the international literature as “Conventions”. Since we generally refer to them as DTAAs, we have retained that reference. However, where the word ‘convention’ is used, it also means DTAA, unless the context requires a different meaning.
83 DETERMINE ELIGIBILITY TO DTAA Para 5.2
Para 5.2
ELIGIBILITY TO CLAIM BENEFITS OF DTAA 84
Article 1 of the OECD convention provides as follows for “persons covered”
1. This Convention shall apply to persons who are residents of one or both of the Contracting States.
2. For the purposes of this Convention, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State.
3. This Convention shall not affect the taxation, by a Contracting State, of its residents except with respect to the benefits granted under paragraph 3 of Article 7, paragraph 2 of Article 9 and Articles 19, 20, 23 [A] [B], 24, 25 and 28.
Since the DTAA applies to persons who must be resident at least of one of the states, it is necessary to understand the meaning of “person”.
Article 3(1)(a) of the UN MC defines the term “person” as follows :
‘The term “person” includes an individual, a company and any other body of persons;’
Article 3(a) of the OECD MC defines the term “person” as follows:
‘the terms “person” includes an individual, a company and any other body of persons.’
This definition in both the MCs is identical.
This means that the person must be either a natural person, a company or ‘a body of persons’. It does not say that the body of persons should be incorporated. But since body of persons is regarded as ‘person’, clearly, that body of persons must be resident of one or both the states, the DTAA between whom is to be applied.
This leads to a question on whether a fiscally transparent2 entity such as partnership (in most countries it is fiscally transparent) or trust, which is not a legal entity is regarded as ‘person’ for the purposes of the DTAA.
According to the UN Commentary 2021, if, under the laws of a Contracting State, partnerships are taxable entities, a partnership may qualify as a resident of that Contracting State under paragraph 1 of Article 4 and therefore be entitled to benefits of the Convention. However, if a partnership and any entity other than company (e.g. a trust) is treated as
2. Fiscally transparent entity means that for tax purposes, the form of the entity, i.e. partnership or pass through LLC is disregarded and the income is considered to accrue or arise to the partner or member of the LLC directly and therefore taxed in the hands of the partner or member of LLC.fiscally transparent under the laws of the residence State, and accordingly, the partners are taxed on the partnership’s income, paragraph 2 of Article 1 provides that the provisions of the Convention should be applied at the level of the partners, to the extent that the partners are taxable in the country where partnership is resident.
From this, it follows that if no partner is resident in the country of residence of the partnership, then the DTAA between that country and India would not apply to any part of the income of the partnership. However, whether the DTAA between India and the country where the partners are taxed on this income would apply or not, would need to be considered.
As body of persons is not defined, one would take help from commentaries to ascertain what falls within its meaning.
The OECD Commentary on Article 3(a) states that partnerships will be regarded “persons” either because they fall within the definition of “company” – being body incorporate (where they are body corporates) or, where this is not the case, because they constitute other bodies of persons. From the meaning assigned to the term “company” by the definition contained in sub-paragraph (b) it follows that, in addition, the term “person” includes any entity that, although not incorporated, is treated as a body corporate for tax purposes. The example given in the commentaries is that of a Foundation (also known as stiftung, which is similar to trust but different, being under Civil Law and is taxed as a body corporate in the Civil Law countries).
The following example given in the UN Commentaries 2021 explains the intent of how Article 1, paragraph 2 applies:
State S and State R have concluded a treaty identical to the Model Tax Convention. State S treats the entity established in State R as a company, and taxes that entity on interest that it receives from the borrower who is resident in State S. Under the domestic law of State R, however, the entity is treated as a partnership, and the two members in that entity, who share equally all its income, are each taxed on half of the interest. One of the members is a resident of State R and the other one is a resident of a country with which States S and R do not have a treaty. The paragraph provides that in such case, half of the interest shall be considered, for the purposes of Article 11 (on interest), to be income of a resident of State R. In the above example, there will be no treaty benefit given on the other half of interest which is not taxable in State R in the hands of the other partner.
85 DETERMINE ELIGIBILITY TO DTAA Para 5.2
Example
The same principles as discussed above would apply in case of a trust (which is also regarded merely as an arrangement) as per the commentaries. However, India has clarified that it would give the benefit of the DTAA to income through the arrangement only if the arrangement is resident of one of the contracting states. Thus, the first hurdle to cross is to determine whether the NR falls within the “persons covered” under the DTAA and hence whether the NR is a “person”.
Case study
(1) Let us understand the concept of ‘person’ through a case study.
An individual is employed by a multinational company which is located in Germany. The company has no agent or fixed place of business in India. The individual is a citizen of the UK. In the course of his employment, he is required to travel to several countries to perform his duties. He spends some time in each country he travels to, but not enough to become resident in any of those countries. He also does not spend enough number of days in the UK to be regarded a resident in the UK. However, in the year under consideration, he spends more than 60 days but less than 90 days in India. He has visited India in prior years for very short period of time, not aggregating to more than 365 days in the prior 4 years. In such a situation, would he be eligible to benefits of any DTAA?
As he is an individual, he satisfies the definition of “person” under Article 3. However, in order to be eligible to the benefit of DTAA, he should qualify as a ‘resident’ of at least one country. The next step would be to determine if this individual is a ‘resident’ of any country. The rules of residence in each jurisdiction would need to be applied to determine this.
So, if the individual does not become resident in India under section 6(1), in particular under sub-clause (c), then as far as India is concerned he is not resident in India. But, under section 10(6)(vi) of the IT Act, his salary income, pertaining to his presence in India may be exempt from tax in India provided the following conditions are satisfied:
He is not an Indian citizen
He is employed by a foreign co. (which is a fact in this case)
The foreign enterprise is not engaged in trade or business in India
His stay in India does not exceed 90 days in a FY (this is a fact)
His remuneration is not deductible from the income of his employer, which is chargeable to tax in India.
Para 5.2 ELIGIBILITY TO CLAIM BENEFITS OF DTAA 86
As can be seen in this example, when the person is not tax resident of any jurisdiction, then the benefit of a DTAA may not be available to him.
5.2-1b Association of Persons (“AOP”) as a “person” - As is seen in the definition of ‘person’ in the DTAAs, AOP which is considered resident in India would also fall within the meaning of taxable persons, since India regards an AOP as resident in India if any part of its control & management is situated in India and an AOP is a taxable entity in India. Hence, an AOP formed in India for the Equipment Procurement and Construction (“EPC”) contract or any such AOP, between one or more NRs and/or an Indian person would be a resident of India for Indian tax purposes. The AOP will be taxed in India on its global income i.e. income whether arising in India or outside India, if any. There would not be further tax in India on the member of the AOP. The NR member would not get any benefit in India of the DTAA between its country of residence and India since the NR is not the taxable person in India, the AOP is. Thus, such income of the AOP would be taxed in India and the NR may also be taxed in its home country on its share of the income of the AOP (unless the home country of the NR provides a mechanism to provide credit for such taxes). Whether the NR member will get the benefit of the DTAA in its home jurisdiction on the income from the Indian AOP to relieve double taxation would depend on the laws of that jurisdiction in this regard as they interact with the DTAA.
This is a complex discussion which is outside the scope of a ‘ready reckoner’. We have included it here for the purposes of the reader to be aware of this issue and get it examined in detail by such NR in their home country.
In an Advance Ruling given by the AAR (Mumbai) in January 20203, the term person, resident and therefore eligibility to DTAA between India and the Netherlands has been discussed and ruled upon. The facts are, that there were 3 legal entities which are tax residents of the Netherlands. They were representing two funds in the Netherlands and were NOT considered taxable persons in the Netherlands. The 2 funds which are not taxable in the Netherlands had earned income from investments in India under the Foreign Portfolio Investment regime of the SEBI (“FPI”). On the question whether the benefit of India-Netherlands DTAA would be available to the representatives of the 2 Dutch Funds, the AAR examined whether any of the applicants claiming DTAA benefit falls under the definition of person under the DTAA and is resident
87 DETERMINE
DTAA
ELIGIBILITY TO
Para 5.2
3. ABC, In re [2021] 125 taxmann.com 293 (AAR - Mum).
Para 5.2 ELIGIBILITY TO CLAIM BENEFITS OF DTAA 88
in the Netherlands to claim the benefit under Article 13 of the IndiaNetherlands DTAA.
The benefit was denied because none of the funds satisfied both the conditions of being ‘person’ as well as ‘resident’ under this DTAA as per the Netherlands tax law. The three entities which were legal entities and residents of the Netherlands were not accepted to be ‘representative’ taxpayers of the 2 Funds or the investors in the Funds. Also, the DTAA does not deal with a tax transparent entity and how it should be provided the DTAA benefit. If there was such a provision, then the result could have been different.
Since the definition of “person” necessitates it to be resident in a contracting state, we now turn to the meaning of ‘resident’ as set out in Article 4.
5.2-1c Resident under DTAA - Under both the UN MC and OECD MC, Article 4 deals with the term “resident of a contracting state”. Most DTAAs have this article numbered as 4, but could be different in some DTAAs
“UN MC 2021 Article 4 - Resident
1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of incorporation, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.
2. Where, by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) He shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
(b) If the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
International Taxation Ready Reckoner
AUTHOR : DAKSHA BAXI , SURAJKUMAR SHETTY
PUBLISHER : TAXMANN
DATE OF PUBLICATION : APRIL 2023
EDITION : 2023 Edition
ISBN NO : 9789357782401
NO. OF PAGES : 598
BINDING TYPE : PAPERBACK
Rs. 1795 | USD 54
DESCRIPTION
This book is India's first 'ready reckoner' with a specific focus on international taxation & taxation of cross-border transactions. It covers the entire spectrum of topics, which are as follows:
• Basic provisions of the scheme of taxation in India
• Residence in India
• Role of Double Taxation Avoidance Agreements (DTAA)
• Interaction of DTAA with the Income-tax Act
• How to read a DTAA?
• How to determine eligibility for DTAA?
• How to resolve the conflict between a DTAA & Income-tax Act?
It is an essential handbook for anyone who is dealing with cross-border transactions, including:
• Payments made to non-residents
• Transactions with non-residents
• Digital transactions
• Withholding tax obligation obligations of residents
The Present Publication is the 1st Edition and has been amended by the Finance Act 2023. This book has been authored by CA Daksha Baxi & Adv. Surajkumar Shetty.