News Updates

1. The Income Tax Department has issued Circular No. 3/2011 which basically deals with the digital authentication of form 16A for the purposes of Tax Deducted at Source. It was felt important as for 16A is filed quarterly.

2. India has also entered into DTAA's with Ethiopia (Press release & DTAA) and Tanzania (Press release and DTAA). Both the agreements incorporate the provisions of effective exchange of information, based on Article 26 of the OECD Model DTAA.

If a foreign company is liable to tax in India, even if not actually paying tax, has to necessarily file a return u/s 139(1): AAR

Also held:

The transfer pricing provisions from section 92 to 92F of the Act not attracted when sale and purchase of shares between non- resident companies.

VNU International v. Director of Income Tax, 28^th March, 2011

AAR No. 871 of 2010

Relevant Facts:

1. The applicant states that it is a tax resident of the Netherlands and does not have any permanent establishment in India.

2. The applicant first transferred 50% of shares it held in ORG-IMS, a company incorporated in India to IMS-AG, a company incorporated in Switzerland. After the transfer, the applicant was left with 50,765 shares of ORG-IMS, amounting to 50% of the total shares.

3. In a subsequent SPA, the applicant transferred 50% of the shares (50,765 shares) to IMS-AG & Interstatistik AG for a total consideration of ` 74,08,643. The shares were acquired for a consideration of ` 4,61,500.

Questions for consideration:

1. On the facts and circumstances of the case, whether any capital gain earned by VNU International on transfer of 50,765 shares of ORG-IMS to the purchasers would be liable to tax in India as per the provisions of the Act and the Tax Treaty between India and the Netherlands?

2. On the facts and circumstances of the case, if the capital gain is not taxable in India, whether the applicant is required to file any return of income under section 139 of the Act?

3. On the facts and circumstances of the case, whether the transfer of shares by the applicant to IMS AG attracts the transfer pricing provisions of section 92 to 92F of the Act?

4. On the facts and circumstances of the case, whether IMS AG were liable to withhold taxes under section 195 of the Act and if so, on what amount would the tax have to be deducted?

Partly upholding the application of the applicant, the Hon’ble Court held that:

Para 7: “ Transfer pricing provisions from section 92 to 92F of the Act would not be attracted as the sale and purchase of shares is between non- resident companies of the Netherland and Switzerland. Since there is no income chargeable to tax, there would be no liability to deduct tax u/s.195 of the Act.”

Para 8: “We are in agreement with the Learned Advocate that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the Netherlands, the state in which the transferor is a resident.”

Para 13: “...Then, as per the third proviso, every company is required to file its return of income, whether it has an income or a loss. The applicant being a foreign company, is covered within the definition of a company under section 2(17) of the Act. The applicant does not dispute that the income arising from the sale of shares is liable to be taxed in India by virtue of section 5(2) of the Act, though no tax is actually paid in India. It is a different matter that by virtue of DTAA the applicant is actually paying tax in the Netherlands. If the power to tax be granted it is difficult to appreciate the argument that when the resulting income is nil, there is no obligation to file return of income. It may be mentioned that where it is not necessary for a non- resident to furnish return under section 139(1) of the Act, the statue has specifically provided, as is the case under section 115AC(4) of the Act. Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a vide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules 1962. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income tax department.”

The decision is available here.

AAR: Denial of benefit of Indexed cost of acquisition of asset to a non-resident in a LTCG not discriminatory under Art. 24 of the India-Canada DTAA

Applicant: Transworld Garnet Company Limited on 22^nd February, 2011

AAR No. 843 of 2009

Assessment Year: 2009-10

Question/s before the Hon’ble Authority:

(1) The Second proviso to section 48 provides that no indexation benefit is available to a non-resident in the computation of long term capital gain arising from transfer of shares in an Indian company. Will not the denial of indexation benefit tantamount to discriminatory tax treatment under Article 24 of the India-Canada tax Double Taxation Avoidance Agreement

(2) Whether in computing the capital gains, deduction is admissible under section 48 of the Act on account of the following expenses incurred in connection with transfer of shares? Fees for valuation of business, professional fees for advice in connection with transfer, legal expenses, fees for escrow account, travel and hotel charges incurred in connection with transfer.

http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITAC&schT=&csId=b2ad777a-30b9-4442-9a64-5a501395669c&rdb=sec&yr=707cfd24-61fa-4e54-afbd-a98ca85903da&sec=48&sch=&title=Taxmann%20-%20Direct%20Tax%20Laws

Relevant facts: The applicant entered into a share purchase agreement with VV Minerals, a partnership firm registered in India for transfer of its shareholding in TGI. The Applicant submits that it had incurred expenses wholly and exclusively in connection with transfer of the shares mentioned supra. These expenses are: Fees for valuation of business, professional fees for advice in connection with transfer, legal expenses, fees for escrow account, travel and hotel charges. It is contended that section 48 of the Act provides that expenditure incurred wholly and exclusively in connection with transfer will be deducted from the full value of consideration from computation of capital gains. As these expenses are allowable deductions in computing capital gains under section 48, the same should be reduced in calculating the taxable capital gains.

Dismissing the plea of the assessee, the Hon’ble Authority held that:

Para 6: “The Art.24 therefore seeks to prevent differentiation solely on the ground of nationality and against nationals as such. A comparison cannot be made between a resident and a national of a state and a national of another state to contend that they must be taxed in the same way. The state is not obliged to extend the same privileges which it accords to its own residents to one who is not. For example the residents are taxable on their worldwide income and the non-residents are not. Therefore, discrimination on account of nationality other than residence may be prohibited. A foreign national may be resident and an Indian national may be non-resident. Both the nationals may be non-residents. But being of different nationalities and being non- residents, the nationals cannot be said to be discriminated in terms of Art 24 of the DTAA.”

Para 11: “The denial of the benefit of the second proviso to section 48 of the Act to the applicant, a non-resident assessee while computing capital gains arising from the sale of shares of TGI would not amount to discriminatory treatment in terms of article 24 of the DTAA with Canada.”

The decision is available here.

Tax Information Exchange Agreements

Exchange of information between the tax authorities of states can be done through Double Taxation Avoidance Agreements (DTAAs) and Tax Information Exchange Agreements (TIEAs).

Tax Information Exchange Agreements (“TIEAs”) are generally bilateral agreements under which territories agree to co-operate in tax matters through exchange of information. The OECD Global Forum Working Group on Effective Exchange of Information (“the Working Group”) is the organization behind the development of the TIEAs. Various low tax jurisdictions such as Bermuda, the Cayman Islands, Cyprus, the Isle of Man, Malta, Mauritius, and the Netherlands Antilles form a part of the Working Group. The mandate of the Working Group was to develop a legal instrument that could be used to establish effective exchange of information.

TIEAs are intended for use with countries where DTAAs are not considered appropriate. They are entered into with jurisdictions which levy very low or no tax at all. Thus, it enables the tax authorities to exchange information on specific points. The corresponding article in a DTAA is modeled similar to Article 26 of the OECD Model Convention on Income and Capital.

Governed by the terms of the agreement, the requesting party generally would furnish the following information:

• the identity of the taxpayer/person under examination or investigation;
• the period for which information is requested;
• the tax purpose for which the information is sought;
• Grounds for believing that information is held in requested state;
• Name and address of person believed to be in possession of requested information;
• Statement that request is in conformity of law and administrative practice of applicant state;
• Statement that request is in conformity of law and administrative practice of applicant state;

This information would be then processed and the requested party would proceed to provide for:

• information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees, as well as;
• full information regarding the ownership of companies, partnerships, trusts, foundations and other entities and all persons in an ownership chain, including settlers, trustees, beneficiaries, founders, members of foundation council and so on, as the case may be.

It is clear that TIEAs are a positive step towards tax transparency and to bring to book, the probable offenders. As per the terms of the agreement/s, the requesting state is not required to state a ‘probable cause’ to get the relevant information. The terms used in these treaties run along the lines of the country requesting the information claiming that they believe the information to be relevant to their tax investigation. This means that the scope for seeking information is not limited, and can be sought in a variety of causes.

On the other hand, there may be a violation of the privacy of individuals as their information would be open to access by the government. Also, there is a limitation on the lines that there is no automatic exchange of information. The request document is supposed to contain a lot of information, including the purpose for which the information is sought and exhaustion of local remedies. This may then be a stumbling block to the free access of information.

Similarly, the old argument of the non-existence of an independent tribunal raises concern as to the impartial adjudicator. Though the agreement provides for a Mutual Agreement Procedure (MAP), the absence of a time limit for the conclusion of the same raises concerns. It is argued that the information may be provided too late, be outdated or worse, help the person/tax evader cover his tracks.

However, the major limitation stems from the simple fact that most low-tax jurisdictions do not maintain any financial records, nor have any norms to identify shareholders or KYC (Know Your Client) norms. The absence of information with the jurisdiction itself gives it a valid reason to avoid providing relevant information, if at all provide any information. Therefore, there may not be any information to share at all!

As is seen from the limited practice of these treaties across various jurisdictions, The Model TIEA is a slow, largely ineffectual, resource-intensive process that seems unlikely to be used much more in the future than it has been in the past, despite the increased number of haven jurisdictions adopting it. At the same time, it would be completely unfair to rubbish these treaties as a mere hogwash since these are the first steps towards tax transparency across jurisdictions.

Under the Indian laws, these agreements (TIEAs) are duly executed by the Government of India under the provisions of section 90(c) of the Income Tax Act, 1961 and are notified thereunder.

The text of the agreement as drafted by the Working Group of the OECD is available here.