India: TAX TRENDS Volume 2 Issue 3 | Oct–Dec 2016

Last Updated: 26 January 2017
Article by SKP  

The Netherlands - Emerging entry route to India due to amendment in India-Singapore Tax Treaty

Over the past few decades, the level of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) in India has been considered as an indicator of the strength and attractiveness of the Indian economy.

Under the Income-Tax Act, 1961 (the Act), the capital gains earned by such investors on the disposal of their FDI/ FPI investments in India are taxable in India. However, investors from countries such as Mauritius, Singapore, Cyprus and Korea can avail capital gains tax exemption in India under the Double Taxation Avoidance Agreements (DTAA) tax treaties between India and their country. Over a period of time, these countries have become the hub for forming holding companies/pooling entities for routing investments into India to avail the capital gain exemption due to favourable DTAA provisions.

In the Indian governments view, these jurisdictions were mainly being used for round tripping funds, tax evasion/avoidance and 'treaty shopping'. The Indian tax authorities in the past have questioned the business/commercial substance of such investments coming in India. Accordingly, in the past few months, India has actively pursued and successfully managed to re-negotiate its DTAAs with these countries to put an end to 'treaty shopping'.

The main highlight of these renegotiated DTAAs is that India now has the right to levy tax on the capital gains of investors from these countries which they gain through the disposal of shares of Indian companies i.e. source based taxation of capital gains from the sale of shares in India. With all four beneficial DTAAs re-negotiated in favour of India, routing of investments into shares of an Indian company after 1 April 2017 through these jurisdictions could result in an Indian tax liability once the capital gains arise on exit.

Interestingly, the India-Netherlands DTAA provides beneficial provisions to exempt capital gains tax in India to a resident of the Netherlands in the following scenarios:

  • When the resident of the Netherlands does not hold 10% or more in the share capital of the Indian company1; or
  • When the Netherlands resident holds 10% or more in the share capital of the Indian company, but the shares are transferred to a person who is not an Indian resident; or
  • Where a resident of the Netherlands holds 10% or more in the share capital of the Indian company and the shares are transferred to an Indian resident but the gains arise in the course of a corporate organisation, reorganisation, amalgamation, division or similar transaction and the buyer or the seller owns at least 10% of the capital of the other.

As mentioned above, the route via the Netherlands could assume significant importance in the years to come as compared to Mauritius, Singapore or Cyprus since the India- Netherlands DTAA is not being amended. The India-Netherlands DTAA would especially benefit FPI investors who are set to lose tax benefits under their preferred route of investing in India i.e. through Mauritius and Singapore. This is because an FPI is permitted to invest only up to 10% of the share capital of an Indian company and hence, the capital gains of FPIs would mostly be covered by the tax exemption under the India-Netherlands DTAA.

However, it must be noted the that shifting of base by any investor (including FPIs) from Mauritius or Singapore to the Netherlands may be viewed as a tax avoidance exercise and may get covered by the General Anti-Avoidance Rule (GAAR) which is proposed to be enforced in India from 1 April 2017. As per the draft GAAR regulations, if any transaction/ arrangement is undertaken in India with the main intention of obtaining a tax benefit under the DTAA, the tax authorities can invoke GAAR and deny the DTAA benefits. In fact, the draft GAAR regulations only exempt FPIs not claiming DTAA benefits in India. Since the India-Netherlands DTAA does not contain a Limitation of Benefit (LOB) clause, the possibility of invoking GAAR in case of FDI or FPI investors from the Netherlands cannot be ruled out if the entity from the Netherlands does not have substance/business purpose in the Netherlands. Accordingly, all investors (especially FPIs) that are migrating operations from Mauritius or Singapore to the Netherlands need to carefully consider GAAR implications before deciding on any investment structure in India after 1 April 2017.

Also, one will have to be mindful of the updates emanating from the BEPS project of the OECD under which various action plans have already been notified in October 2015. As per Action Plan 6, read with the Multilateral Instrument (MLI) published in November 2016, issues of treaty abuse and double non-taxation of income need to be tackled. If India signs the MLI (which is likely, considering the prominent role India has played in the BEPS project). In such a case, the implications arising under the BEPS Action Plans and MLI will have to be carefully studied before undertaking any structuring.

With recent newspaper reports suggesting that India may not pursue revision of the India-Netherlands DTAA at the moment, the Netherlands may emerge as the preferred route for FDI and FPI investments in India after 1 April 2017.


In the absence of Fees for Technical Service (FTS) clause in a tax treaty, the same would be taxed as per other provisions of the tax treaty and not the Income Tax Act, 1961 (ITA).

ABB FZ-LLC vs ITO (Intl) 75 83 (Bangalore Tribunal)

The taxpayer, a company incorporated in the UAE, entered into a service agreement for providing certain services to an Indian entity.

The taxpayer contended that since there is no FTS clause under the India -UAE tax treaty, the income from rendition of services is not taxable in India.

The tax officer contended that in the absence of the FTS clause in the India -UAE tax treaty, the income earned would be taxable under the provisions of the ITA. The tax officer also held that the beneficial provisions of the tax treaty are required to be applied only when there is a conflict between the provisions of the ITA and tax treaty. In the present case, since there is no FTS clause under the tax treaty, there is no conflict and hence, the income earned should be taxable as FTS as per the provisions of the ITA.

The Tax Tribunal held that there is no omission of FTS clause but there is a mutual agreement between India and UAE to not include the FTS clause in the tax treaty. Recourse to the ITA for the definitions of undefined terms is to be taken only in cases where the term is present in the tax treaty but it is not defined. The Tribunal accordingly held that in the absence of a FTS clause in India-UAE tax treaty, the payment received will be considered as a business income and in the absence of a Permanent Establishment (PE) in India, it would not be taxable in India.

Mere provision of a service which requires technical input by a person providing services, cannot be said to be making technical knowledge, skills, etc. available to the service recipient

Outotec Oyj vs DDIT [2016] 76 33 (Kolkata Tribunal)

The taxpayer, a Finnish company, earned income from India through a management service agreement to provide certain communication, business development and information technology related services. The case is in relation to the old tax treaty between India and Finland.

The taxpayer, inter alia, contended that the services are not be taxable as FTS as they do not make technical knowledge, skill, etc. available to the service receiver by making references to examples under the India-USA DTAA.

The tax officer contended that examples under the India-USA Tax Treaty cannot be used for India- Finland Tax Treaty. Since the services and reports provided are used by the Indian company for technical knowledge, the services are taxable as FTS.

The Tax Tribunal observed that parallel treaty interpretation is permissible where the language of the two tax treaties is similar. Accordingly, relying on the Memorandum of Understanding (MoU) of the India-USA Tax Treaty and various judicial precedents, the tribunal observed that a service is said to make technical knowledge available only when the person availing the service could use that service on his own in the future. Therefore, the Tribunal held that the services provided by the taxpayer would not be taxable as FTS.

If protocol requires countries to negotiate the tax treaty to restrict the definition of FTS, then unless such restrictive definition is specifically negotiated, it cannot be read in such tax treaty

Torrent Pharmaceuticals Ltd vs ITO [TS-609-ITAT-2016] (Ahd Tribunal)

The taxpayer, an Indian company, availed consultancy and professional services from a Swiss company. The taxpayer did not withhold any taxes on consultancy fees relying on the protocol to the India-Swiss tax treaty. The protocol provides for application of a lower rate or restrictive scope of taxation if the lower rate or restrictive scope has been agreed by India or Switzerland with a third country after signing the India-Swiss Tax Treaty.

The taxpayer contended that the India- Portuguese Tax Treaty was signed after the India-Swiss Tax Treaty and contains the 'make available' clause. Hence, such clause should also be read in the India-Swiss tax treaty. As per the taxpayer, such services do not satisfy the 'make available' clause and therefore no taxes were required to be withheld.

The tax officer contended that the restrictive definition of FTS under the India-Portuguese Tax Treaty could not be imported into the India-Swiss Tax Treaty unless the 'make available' clause is specifically inserted in the India-Swiss Tax Treaty by way of negotiation. Accordingly, the payment made by the taxpayer would be taxable as FTS and the taxes were required to be withheld.

The Tax Tribunal observed that the India-Swiss Tax Treaty specifically provided that both the countries should enter into fresh negotiations for granting the benefit of lower rate or restrictive scope. Accordingly, it was held that since no negotiation had taken place, the payment made by the taxpayer would be considered as FTS according to the India-Swiss Tax Treaty and the taxes were required to be withheld.

Only the services rendered by a PE would be effectively connected to the PE and any other income earned by foreign enterprise would be taxable as FTS on gross basis.

International Management Group vs ACIT [2016] 75 250 (Delhi Tribunal)

The taxpayer, a UK-based company, entered into a service agreement with the BCCI for providing services for an IPL event in 2009. The employees of the taxpayer were in India for more than 90 days and created a service PE of the taxpayer in India.

The taxpayer earned INR 330 million out of which it offered INR 92 million for taxation as business income attributable to the PE. The taxpayer argued that the remaining INR 238 million was not taxable as FTS since the whole contract was effectively connected to the PE. Therefore, the taxpayer did not offer the balance amount to tax in India, neither as FTS nor as attributable to the PE.

The tax authorities contended that a major part of the services were advisory in nature and therefore the balance income is not effectively connected to the PE and would be taxable as FTS as per Article 13 of the India-UK tax treaty.

The Tax Tribunal observed that only the services which are performed or activities in which the PE was involved in would be effectively connected to the PE. Reference was made to Article 12(6) of the India-USA tax treaty where the word 'attributable to' is used instead of 'effectively connected to' and it also mentions that both the terms are the same. Therefore, the Tribunal held that the income amounting to INR 238 million cannot be considered to be effectively connected to the PE and was accordingly taxable as FTS as per Article 13 of the India-UK tax treaty.


Tax Holiday for start-ups may be increased to five years

[Excerpts from The Financial Express, 29 December 2016]

The Financial Express has reported that the government is actively considering a proposal to extend the Tax Holiday period for eligible start-up entities from the current period of three years to five years.

Tax authorities commence analysis of bank deposits post demonetisation

[Excerpts from The Economic Times, 28 December 2016]

The Economic Times, quoting senior officials from the Income Tax Department, has reported that the tax authorities have started analysing bank deposits made after demonetisation of high value currency notes which was announced on 8 November 2016. The tax authorities have urged taxpayers to avail the Pradhan Mantri Garib Kalyan Yojana (PMGKY) as the last opportunity to come clean on unaccounted money.

India has 2.4 million taxpayers with an income above INR 1 million, yet 2.5 million new cars are bought every year

[Excerpts from The Times of India, 27 December 2016]

The Times of India has reported an interesting statistic that while only 2.4 million taxpayers in India have reported an income above INR 1 million, around 2.5 million cars are being purchased every year. The report also states that 48,417 individuals reported an income of more than INR 10 million whereas 35,000 units of luxury cars are sold every year.

An official said the numbers point to a significant number of people who are liable to pay taxes and aren't doing so.

More online services could attract Google Tax

[Excerpts from The Business Standard, 27 December 2016]

The Business Standard has reported that the government is likely to expand the coverage of Google Tax (Equalisation Levy) as part of the proposals of the Union Budget 2017. This could affect the prices of services/content sold through the internet.

No plan to impose tax on long term capital gains, clarifies Finance Minister Arun Jaitley

[Excerpts from The Times of India, 25 December 2016]

The Finance Minister Arun Jaitley has clarified that the government has no intention of levying tax on long term capital gains arising from share transactions. This was with reference to reports in certain sections of the media that Prime Minister Narendra Modi has made an indirect reference to levying tax on long term capital gains on the sale of shares.

Compliance Calendar (January to March 2017)


1The tax exemption will not be available for capital gains arising from transfer of shares (forming part of a 25% or more interest) of an unlisted Indian company, if the shares derive their value principally from immovable property in India (other than property in which the business of the company was carried on).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.