India: Direct Tax Verdicts July 2017

Last Updated: 23 August 2017
Article by SKP  

Foreword

The Indian Courts/Tribunals have pronounced several judgements on varied issues relating to Corporate and International Taxation in July. We are pleased to publish the first edition of 'Direct Tax Verdicts' where we have picked six judgements of significant importance and prepared a brief analysis on them1.

Employee Secondment Taxation

Taxability of amount received towards reimbursement of salary costs of seconded employee2

Facts

  • The taxpayer, a company incorporated in USA, was engaged in the business of manufacturing and marketing storage network infrastructure products.
  • Pursuant to Secondment Agreement dated 15 February 2010, an Indian subsidiary (Ico) had engaged the services of an employee of the taxpayer.
  • During Assessment Year (AY) 2010-11, the taxpayer received a certain amount from Ico towards the reimbursement of expenses paid for the salary, bonus and other perquisites to the seconded employee.
  • The Assessing Officer (AO) took a view that the amount received by the taxpayer was in the nature of Fees for Technical Services (FTS) taxable in India.
  • Upon objections filed by the taxpayer, the Dispute Resolution Panel (DRP) confirmed the AO's view.

Bangalore Tribunal's ruling

  • The Bangalore Tribunal observed the following:

    • The secondment of employee to Ico was only for a temporary period.
    • The secondment was not for providing the general managerial/administrative service, but it was for the purpose of rendering specialised and expertise services of setting up an independent design centre.
  • Therefore, having regard to the business profile of Ico, the services provided by the seconded employee to Ico were technical in nature.
  • Accordingly, the payment by Ico to the taxpayer is taxable as FTS on a gross basis under the provisions of the Income Tax Act, 1961 (Act) as well as the Double Taxation Avoidance Agreement (DTAA) between India and USA. The fact that such payment is without any mark- up is irrelevant.
  • The Bangalore Tribunal distinguished various rulings relied on by the taxpayer and relied on its earlier decision in Flughafen Zurich AG vs DDIT [TS-96- ITAT-2017] dated 10 March 2017.

SKP's comments

The Bangalore Tribunal is consistently taking a negative view (against the taxpayer) on the issue of taxation of expatriate secondment. The Delhi High Court in Centrica India Offshore (P) Ltd had also taken a negative view on this issue. However, the recent decisions of the Bombay High Court in Marks & Spencer Reliance India (P) Ltd and the Ahmedabad Tribunal in Burt Hill Design Pvt Ltd have taken favourable views on this issue. In light of this, the litigation arising from the taxation of expatriate secondment will most likely be aggravated in the time to come and only the Supreme Court could put this litigation issue to rest. In the meanwhile, taxpayers are advised to carefully plan and examine their expatriate secondment arrangements.

India-Mauritius DTAA - Capital Gains Taxation

Taxability of Mauritius company selling shares in an Indian company under the India-Mauritius DTAA3

Facts

  • The taxpayer was incorporated in Mauritius on 4 April 1996. The Financial Services Authority of Mauritius has issued a Category 1 Global Business License to the taxpayer.
  • The taxpayer had acquired shares in Tata Industries Ltd (TIL) in June 1996 and thereafter, sold these shares to Tata Sons Ltd (TSL) in July 2009. Thereafter, the entire sale proceeds were reinvested by the taxpayer in Tata Power Limited (TPL).
  • The Mauritius Revenue Authority had also issued a Tax Residency Certificate (TRC) to the taxpayer evidencing that it was a tax resident of Mauritius during the relevant period.
  • Upon an application filed by the taxpayer, the Authority for Advance Rulings (AAR) had ruled that the transfer of shares in TIL by the taxpayer to TSL shall not be taxable in India under Article 13(4) of the India-Mauritius DTAA.
  • Being aggrieved, the Revenue filed a writ petition before the Bombay High Court.

Bombay High Court's decision

The Bombay High Court dismissed the writ petition of the Revenue after considering the beneficial provisions of the India-Mauritius DTAA overriding the Act, the beneficial Central Board of Direct Taxes (CBDT) circulars binding on the revenue and the principles laid down in Union of India vs Azadi Bachao Andolan [2003] 263 ITR 706 (SC). In this regard, the Bombay High Court observed the following:

  • The fact that the taxpayer held shares in TIL for a long period of 13 years goes to suggest the bona fide intentions of the taxpayer. Furthermore, the proceeds from the sale of shares in TIL were again invested in TPL and these shares are held by the taxpayer.
  • Considering these aspects, the AAR had observed that the taxpayer is not a fly- by-night or a shell company. While considering the factual matrix of the matter, the AAR had not perversely recorded any findings and its findings were based on the appreciation of evidence on record.
  • The objection of the Revenue, which questions the AAR ruling on the ground that the transaction/issue was designed prima facie to avoid income-tax, would not arise at this stage.
  • The reliance placed by the Revenue on Indirect Transfer Provisions of the Act (i.e. shares deriving, directly or indirectly, its value substantially from the assets located in India) would not be of any avail as the taxpayer's case was covered under the India-Mauritius DTAA.

SKP's comments

It may be noted that the India-Mauritius DTAA has been amended vide CBDT Notification dated 10 August 2016. As per the amended India-Mauritius DTAA, gains arising to a Mauritian company from alienation of shares in an Indian company up to 31 March 2019 shall be taxable at a lower rate (i.e. 50% of the tax rate applicable in India on such gains) if these shares are acquired on or after 1 April 2017. This benefit of lower rate of taxation is subject to the fulfilment of conditions in Limitation of Benefits (LoB) Article of the amended India-Mauritius DTAA.

Accordingly, it may be difficult to simply resort to this decision of the Bombay High Court for shares acquired in an Indian company by a Mauritian company on or after 1 April 2017 since independent fulfilment of conditions in the LoB Article of the amended India- Mauritius DTAA shall also be critical. Additionally, the impact of the General Anti Avoidance Rules (GAAR) provided in the Act should also be analysed.

However, this decision of the Bombay High Court could be relied on in the case of pending litigations on the eligibility of relief under the Capital Gains Article of the India-Mauritius DTAA for alienation of shares, which were acquired in an Indian company by a Mauritian company before 1 April 2017.

To view the full article click here

Footnotes

1 Please note that any judgements or key developments in Direct Taxation for which specific SKP Tax Alert had

already been published in July 2017 are not covered again in this newsletter.

2 Emulex Design & Manufacturing Corporation vs DCIT in ITA No. 268/Bang/2015 (Bangalore Tribunal)

3 CIT vs JSH (Mauritius) Ltd [2017] 84 taxmann.com 37 (Bombay High Court)

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 Mondaq.com.

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

Authors
Events from this Firm
11 Dec 2017, Webinar, Mumbai, India

Mon, Dec 11, 2017 7:00 AM - 8:00 AM GMT

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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