India: CBDT Clarifies That Cyprus Shall Not Be A Notified Jurisdictional Area With Retrospective Effect From 1 November 2013

The Government of India (GOI) had introduced Section 94A in the Income Tax Act, 1961 to discourage transactions between taxpayers and persons located in a Notified Jurisdictional Area (NJA) that does not engage in effective exchange of information with India.

Consequently, the Central Board of Direct Taxes (CBDT) notified Cyprus as an NJA through Notification No. 86/2013 dated 1 November 2013. This resulted in adverse tax consequences for transactions with an entity based in Cyprus, such as the application of Indian transfer pricing regulations, application of Withholding Tax (WHT) at a minimum rate of 30%, potential disallowance of expenditure paid to an entity in Cyprus if the prescribed documentation is not maintained, etc.

Subsequently, India negotiated a revised Tax Treaty with Cyprus¹ and issued Notification No. 114/2016 dated 14 December 2016 along with Corrigendum No. 119/2016 dated 16 December 2016 to the effect that Cyprus is no longer considered an NJA from the date of publication of the Notification in the Official Gazette (1 November 2013). Based on the language used in these notifications, the Tax Authorities was of the view that Cyprus continued to be an NJA till 14 December 2016 in certain cases.

The CBDT has now issued a clarification through Circular No. 15/2017 dated 21 April 2017 clarifying that Cyprus ceases to be an NJA retrospectively with effect from 1 November 2013.

Footnotes

1 India-Cypus tax treaty revised: Signals revival of trade ties between countries

SKP's comments

This circular is a welcome move from the CBDT to remove doubts regarding whether Cyprus would be considered an NJA during the intervening period from 1 November 2013 till 14 December 2016. It is now clear that Cyprus shall not be considered an NJA from 1 November 2013. This CBDT clarification will set to rest any ongoing proceedings initiated pursuant to Section 94A since such proceedings would stand cancelled.

However, a few open questions regarding the transactions concluded during the intervening period still persist. For instance, Section 94A provided that payments to entities in Cyprus would attract WHT at a minimum rate of 30%. Where the burden of higher WHT has been borne by the taxpayer, a question arises whether such taxpayer will be able to seek a refund of the higher WHT already deposited into the Indian government treasury.

CBDT Circular No. 7/2007 dated 23 October 2007 permits the person applying WHT to claim a refund in certain circumstances and subject to the fulfilment of certain conditions. However, such claim of refund needs to be made within two years from the end of the relevant Financial Year (FY) in which the WHT is applied. In view of this limitation period, such person may be able to claim a refund of excess WHT applied from 1 April 2015 onwards, but not for FY 2013-14 and FY 2014-15. An alternative mechanism to claim a WHT refund would be to revise the WHT statements (Tax Deducted at Source (TDS) returns) for the respective quarters and seek a refund by approaching the Tax Authorities.

Given the practical difficulty experienced in obtaining a WHT refund claimed through a WHT statement and the limitation period around obtaining refunds for excess WHT as per CBDT Circular No. 7/2007 dated 23 October 2007, it is necessary for the CBDT to issue appropriate clarifications in this regard to rectify this anomaly and enable refunds of WHT applied during FY 2013-14 and FY 2014-15.

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