INTERNATIONAL TAX DEVELOPMENTS — GLOBAL REGIONAL- INDIA

“INTERNATIONAL TAX DEVELOPMENTS - GLOBAL & REGIONAL- INDIA ”

AGENDA Ø FINANCE BILL 2012 – INTERNATIONAL TAX PROPOSALS q ROYALTIES q WITHHOLDING TAXES q TAX RESIDENCY CERTIFICATE (TRC) q ADVANCE PRICING AGREEMENT (APA) q GENERAL ANTI AVOIDANCE RULE (GAAR) Ø INDIA – MAURITIUS TAX TREATY (DTAA) Page 2

ROYALTY – S. 9(1)(vi) of IT Act 1961. ØExplanation 2 to clause (vi) of sub-section (1) of section 9 : “Royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for – (i) The transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) The imparting of any information concerning the working of or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) The use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva)the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44 BB; (v) The transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) The rendering of any services in connection with the activities referred to in sub-clauses (i) to (v); Page 3

ROYALTY – Finance Bill 2012 Ø Amendments in Finance Bill 2012: (retro. ) 01/06/1976 Explanation 4. — Consideration for transfer of all or any right for use or right to use a computer software, (including grant of a licence) irrespective of medium of transfer, constitutes royalty u/s 9 (1) (vi) Ø Case laws neutralised: DIT Vs. Ericson A. B. , New Delhi, (2011) 16 taxmann. com 371 (Delhi), Motorola inc (SB) 95 ITD 269 Explanation 5. — Royalty u/s 9(1)(vi) includes consideration in respect of any right, property or information, whether or not its possession or control with the taxpayer, it is used directly by the taxpayer, or its location is in India. Ø Case law neutralised: DIT Vs. Ericson A. B. , New Delhi, (2011) 16 taxmann. com 371 (Delhi) Page 4

ROYALTY – Finance Bill 2012 Ø Explanation 6. — Term ‘process’ u/s 9(1)(Vi) includes transmission by satellite (including up-linking, amplification, conversion for down – linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is a secret. Ø Case law neutralised: Asia Satellite Telecommunication Co. Ltd. 332 ITR 340 (Del) Page 5

ROYALTY – OECD MCC Ø Paras 12 – 17 of the MCC on Art. 12 provides guidance as to what is royalty/ business profits – software payments. Ø Amndt. makes sale of copyrighted article resulting in royalty under domestic law (Expln-4). Ø Payment for information/ databases is royalty- domestic law Amndt. (Expln. 5) Ø Transmission by satellite is a process whether or not a secret – domestic law – Amndt. (Expln. 6)- whether or not in the possession / control of payer (Expln. 5) – royalty. - para 9. 1 of Art. 12 of MCC holds otherwise. Ø Most software payments/telecom services come within tax net unless protected by treaty or source rule exclusion u/s 9(1)(vi)(b)/(c) of domestic law Page 6

Sec. 195 – Withholding Taxes Ø Explanation 2 to Sec. 195 (1) – Obligation to deduct tax u/s 195((1) applicable to all persons, whether resident or non – resident, whether or not the non – resident has a residence, place of business or business connection in India: or any other presence in any manner whatsoever. Applicable retrospectively from April 1, 1962: Case law neutralised: Vodafone International Holdings BV Vs UOI 341 ITR 1 (SC) q payments from non – resident to another non – resident covered without exceptions Ø Insertion of S. s 7 to Sec. 195 – To provide that class of persons or cases (to be notified by CBDT) responsible for making payment to a non – resident, whether or not such payment is chargeable under the Act, shall make an application to the AO to determine the appropriate proportion of sum chargeable. Case law neutralised: GE India Technology Centre P. Ltd 327 ITR 456 (SC) q unwelcome compliance burden running contrary to the principle of charging section affecting non- resident payees. Page 7

Tax Residency Certificate (TRC) Ø Sec. 90 & 90 A amended to provide that a non – resident to whom tax treaty applies shall necessarily obtain a certificate with prescribed particulars from the Govt. of such country of which he is a resident. Ø TRC essential to claim relief under treaty, but not a sufficient condition for availing benefits. Ø Effective from financial year 2012 -13. Ø CBDT cir. 786 providing that Mauritian TRC was sufficient to avail benefits of Indo – Mauritius DTAA was upheld by SC in Azadi Bachao case , now neutralised – Vodafone case followed for amendment. Page 8

Advance Pricing Agreement Ø Insertion of Sec. 92 CC and 92 CD – Advance Pricing Agreement (APA) - Effective from 1 st July 2012 in relation to intl. transactions. - Board to enter into APAs with approval of Central Govt. - ALP/ manner to compute ALP - void if obtained by fraud/ change in law - modified return on basis of APA Ø APA shall be valid for such years- in no case shall exceed five consecutive years. Page 9

Advance Pricing Agreement Ø Board to prescribe scheme- forms , procedure etc. Ø Unilateral / bilateral APAs ? Ø How effective the Directorate would be is the key for success Ø Provides certainty for the future Ø Reduction of double taxation not certain unless bilateral APA Page 10

GAAR Ø Insertion of Chapter – XA – Sec. 95 -102 - General Anti Avoidance Rule Ø The provisions of this Chapter may apply to any step in, or a part of, the arrangement. Ø “Impermissible avoidance arrangement” (IAA) means an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it - creates rights and obligations – not at arm’s length - results in abuse/misuse- provisions of this Act. - lacks/ deemed to lack commercial substance - not ordinarily applied for bona fide purposes Page 11

GAAR Ø Presumption – tax benefit- main purpose- unless proved otherwise. Ø Even if a step in, or a part of, the arrangement, is to obtain tax benefit, - main purpose gets tainted. Ø Deemed to lack commercial substance if - substance/ effect of arrangement as a whole differs significantly from individual steps - round trip financing - accommodating party - offsetting/ cancelling each other - disguises the value, location, source, ownership - location of asset/ residence of any party for obtaining tax benefit Page 12

GAAR Ø Following not to be considered for commercial substance - period for which the arrangement exists - payment of taxes – directly/ indirectly - fact that an exit route is provided criteria for substance test of Vodafone case overruled Ø Consequences – not exhaustive - disregard / combine / recharacterise any step in/ part or whole - treating IAA as not entered into - disregard accommodating party - deeming persons connected – as all one and the same Page 13

GAAR Ø Consequences – not exhaustive - reallocation among the parties to the arrangement any accrual, receipt, expenditure etc. - place of residence/ situs of asset to be determined - look through any corporate structure - equity may be treated as debt or vice-versa - capital as revenue and vice-versa Ø Guidelines/ procedure to be prescribed. Ø Board has formed a six member committee to draft guidelines etc. Page 14

GAAR v. DTAA Ø Section 90(2) provides for opting for IT provisions only when more beneficial Ø Position judicially recognised in 263 ITR 706 SC and 267 ITR 654 SC Ø Section 90(2 A) provides that notwithstanding anything contained in sec 90(2), provisions of Chapter X-A to apply to the assessee, even if such provisions are not beneficial to him – to override tax treaty. Page 15

GAAR Vs. Indo – Mauritius Tax treaty Ø Hot topic since more than a decade. Ø Settled when Apex court ruled Azadi Bachao’s case(2003) 263 ITR 706 Ø LOB article could not be renegotiated Ø GAAR introduced to override treaty in deserving cases Ø Ind- Mau treaty cases are primarily targeted. Ø There is great need for commercial substance to avail treaty benefits Page 16

Latest Case law – Indo Mauritius Tax treaty Ø Subsidiary of UK coy in Mauritius held shares in India coy, sold the same to German coy and claimed exemption of capital gains in India as per Article 13(4) of DTAA. Revenue argued that beneficial owner is UK coy and claimed that Indo –UK tax treaty would apply – AAR held that as per Azadi Bachao’s case of SC shares sold by Mauritius sub is exempt from capital gains in India per Art. 13(4) - Ardex Investments Mauritius Ltd. , in re [2011] 16 taxmann. com 84 (AAR) Ø Mauritius shareholder in an Indian coy transferred shares pursuant to a buy back arrangement whereas other shareholders i. e. US & Singapore coys did not subscribe to the share buy back. No dividend paid by Indian coy since 2003 and allowed the reserves to grow in view of DDT. AAR accepted Revenue’s contention that buy back scheme is a tax avoidance scheme and held the same as colorable device. Income from buy back was held to be taxable in India as dividends and disallowed claim of capital gains exemption under Art. 13(4) of DTAA - XYZ India in re [2012] 20 taxmann. com 89 (AAR) Page 17

Latest Case law – Indo Mauritius Tax treaty Ø Sale of compulsory convertible debentures (CCDs)(Issued by India coy) by Mauritius coy was claimed as exempt from capital gains under Art. 13(4) of DTAA. AAR applied “Look at” test of Vodafone ruling to lift corporate veil and found subsidiary to be puppet of holding company and denied exemption under DTAA. Held that sale of CCDs would result in accrual of interest and thereby taxable by under Art. 11 of DTAA - Z Mauritius [2012] 20 taxmann. com 91 (AAR-New Delhi) Page 18

Indo – Mauritius tax treaty - way forward Ø Vodafone case “Look at” principle being applied as substance test in denying treaty benefits Ø GAAR would be invoked in all DTAA cases where substance is poor Ø GAAR wider than LOB Ø Any person claiming benefits of DTAA must establish q Commercial substance q legitimacy of Mauritius entity q Activity report of Mauritius entity Ø More economic activity expected in Mauritius through intermediate holding coys in future. Page 19

Indo – Mauritius tax treaty - way forward Ø Finance Secretary R. S. Gujral clarified in an interview on GAAR provisions - FIIs – Long term capital gains - no issue as there is no tax in India. - FIIs - Short term capital gains taxable if no tangible activity/trading in Mauritius becomes impermissible arrangement and GAAR would apply - overriding DTAA if tax paid GAAR would not be invoked. - GAAR is only prospective w. e. f 1 st April, 2012 - no reopening of old assessments. - Onus of proof on tax payer - however many safeguards like permission from Commissioner and then further reference to GAAR panel are proposed in the Bill. - Whether GAAR panel includes independent third party is being examined. Ø Representation by various Chambers to attach onus on the Revenue to prove that there is impermissible arrangement, lest every transaction would be questioned. Ø TRC - Azadi Bachao’s case overruled by GAAR and amended S. 90/90 A. Page 20

Indo – Mauritius tax treaty - way forward Ø News Flash - Govt. may dilute GAAR regulations by prescribing thresh hold of 150 million rupees ($2. 9 million) - Govt. may defer implementation of GAAR by one year - Fin. min official says that the Govt. did not have Participatory Notes(PN) of FIIs in mind when introduced provisions in Budget regarding underlying asset transfers – no capital gains tax - Finance Minister said that he may modify some provisions of GAAR - “Substantial commercial interest” in Mauritius critical for availing treaty benefits Page 21 (Source – Economic Times)

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