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IFA Conference - Mauritius
10th & 11th May 2012
Hyderabad, India firstname.lastname@example.org
FINANCE BILL 2012 – INTERNATIONAL TAX PROPOSALS
ROYALTIES WITHHOLDING TAXES TAX RESIDENCY CERTIFICATE (TRC) ADVANCE PRICING AGREEMENT (APA) GENERAL ANTI AVOIDANCE RULE (GAAR)
INDIA – MAURITIUS TAX TREATY (DTAA)
ROYALTY – S. literary. secret formula or process or trade mark or similar property. design. artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting. invention. invention. design.9(1)(vi) of IT Act 1961. (ii) The imparting of any information concerning the working of or the use of. but not including consideration for the sale. a patent. secret formula or process or trade mark or similar property. secret formula or process or trade mark or similar property. commercial or scientific knowledge. experience or skill. Explanation 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. (v) The transfer of all or any rights (including the granting of a license) in respect of any copyright. industrial. design. distribution or exhibition of cinematographic films. model. (iva)the use or right to use any industrial. model. Page 3 . invention. (iii) The use of any patent. model. commercial or scientific equipment but not including the amounts referred to in section 44BB. or (vi) The rendering of any services in connection with the activities referred to in sub-clauses (i) to (v). (iv) The imparting of any information concerning technical.
. it is used directly by the taxpayer. (2011) 16 taxmann. New Delhi. Case law neutralised: DIT Vs.B.— Royalty u/s 9(1)(vi) includes consideration in respect of any right. Ericson A. whether or not its possession or control with the taxpayer.com 371 (Delhi) Page 4 .B.) 01/06/1976 Explanation 4. New Delhi. Motorola inc (SB) 95 ITD 269 Explanation 5.— Consideration for transfer of all or any right for use or right to use a computer software. (2011) 16 taxmann. (including grant of a licence) irrespective of medium of transfer. or its location is in India. constitutes royalty u/s 9 (1) (vi) Case laws neutralised: DIT Vs.ROYALTY – Finance Bill 2012 Amendments in Finance Bill 2012: (retro. Ericson A..com 371 (Delhi). property or information.
— Term „process‟ u/s 9(1)(Vi) includes transmission by satellite (including up-linking. 332 ITR 340 (Del) Page 5 . cable.ROYALTY – Finance Bill 2012 Explanation 6. Case law neutralised: Asia Satellite Telecommunication Co. optic fibre or by any other similar technology. Ltd. whether or not such process is a secret. conversion for down – linking of any signal). amplification.
whether or not in the possession / control of payer (Expln. . Payment for information/ databases is royalty.(Expln.12 of MCC holds otherwise.para 9.domestic law Amndt.12 provides guidance as to what is royalty/ business profits – software payments. makes sale of copyrighted article resulting in royalty under domestic law (Expln-4).5) – royalty.5) Transmission by satellite is a process whether or not a secret – domestic law – Amndt.ROYALTY – OECD MCC Paras 12 – 17 of the MCC on Art. Amndt. (Expln. 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 .1 of Art.6).
Sec. 1962: Case law neutralised: Vodafone International Holdings BV Vs UOI 341 ITR 1 (SC) payments from non – resident to another non – resident covered without exceptions Insertion of S. shall make an application to the AO to determine the appropriate proportion of sum chargeable.s 7 to Sec.resident payees. place of business or business connection in India: or any other presence in any manner whatsoever.Ltd 327 ITR 456 (SC) unwelcome compliance burden running contrary to the principle of charging section affecting non. whether or not the non – resident has a residence.195 – To provide that class of persons or cases (to be notified by CBDT) responsible for making payment to a non – resident.195 – Withholding Taxes Explanation 2 to Sec.195 (1) – Obligation to deduct tax u/s 195((1) applicable to all persons. whether or not such payment is chargeable under the Act. whether resident or non – resident. Applicable retrospectively from April 1. Case law neutralised: GE India Technology Centre P. Page 7 .
of such country of which he is a resident. but not a sufficient condition for availing benefits. 786 providing that Mauritian TRC was sufficient to avail benefits of Indo – Mauritius DTAA was upheld by SC in Azadi Bachao case . TRC essential to claim relief under treaty. Page 8 . 90 & 90A amended to provide that a non – resident to whom tax treaty applies shall necessarily obtain a certificate with prescribed particulars from the Govt.Tax Residency Certificate (TRC) Sec. CBDT cir. now neutralised – Vodafone case followed for amendment. Effective from financial year 2012-13.
in no case shall exceed five consecutive years. transactions.Effective from 1st July 2012 in relation to intl. . .ALP/ manner to compute ALP .Advance Pricing Agreement Insertion of Sec. Page 9 .modified return on basis of APA APA shall be valid for such years.Board to enter into APAs with approval of Central Govt. 92CC and 92 CD – Advance Pricing Agreement (APA) .void if obtained by fraud/ change in law .
Unilateral / bilateral APAs ? How effective the Directorate would be is the key for success Provides certainty for the future Reduction of double taxation not certain unless bilateral APA Page 10 .Advance Pricing Agreement Board to prescribe scheme. procedure etc.forms .
lacks/ deemed to lack commercial substance . the arrangement.not ordinarily applied for bona fide purposes Page 11 . or a part of. the main purpose or one of the main purposes of which is to obtain a tax benefit and it .results in abuse/misuse.95-102.GAAR Insertion of Chapter – XA – Sec.creates rights and obligations – not at arm‟s length . “Impermissible avoidance arrangement” (IAA) means an arrangement.provisions of this Act.General Anti Avoidance Rule The provisions of this Chapter may apply to any step in. .
location of asset/ residence of any party for obtaining tax benefit Page 12 .offsetting/ cancelling each other .main purpose. . Even if a step in.main purpose gets tainted. source. ownership . the arrangement. is to obtain tax benefit. Deemed to lack commercial substance if . or a part of. location.round trip financing .unless proved otherwise.substance/ effect of arrangement as a whole differs significantly from individual steps .accommodating party .disguises the value.GAAR Presumption – tax benefit.
treating IAA as not entered into .GAAR Following not to be considered for commercial substance .disregard / combine / recharacterise any step in/ part or whole .payment of taxes – directly/ indirectly .fact that an exit route is provided criteria for substance test of Vodafone case overruled Consequences – not exhaustive .disregard accommodating party .period for which the arrangement exists .deeming persons connected – as all one and the same Page 13 .
Board has formed a six member committee to draft guidelines etc. Page 14 .look through any corporate structure .reallocation among the parties to the arrangement any accrual.equity may be treated as debt or vice-versa .GAAR Consequences – not exhaustive . expenditure etc.place of residence/ situs of asset to be determined . receipt.capital as revenue and vice-versa Guidelines/ procedure to be prescribed. .
Page 15 .GAAR v. provisions of Chapter X-A to apply to the assessee. DTAA Section 90(2) provides for opting for IT provisions only when more beneficial Position judicially recognised in 263 ITR 706 SC and 267 ITR 654 SC Section 90(2A) provides that notwithstanding anything contained in sec 90(2). even if such provisions are not beneficial to him – to override tax treaty.
GAAR Vs. Indo – Mauritius Tax treaty Hot topic since more than a decade. There is great need for commercial substance to avail treaty benefits Page 16 . Settled when Apex court ruled Azadi Bachao‟s case(2003) 263 ITR 706 LOB article could not be renegotiated GAAR introduced to override treaty in deserving cases Ind.Mau treaty cases are primarily targeted.
com 84 (AAR) Mauritius shareholder in an Indian coy transferred shares pursuant to a buy back arrangement whereas other shareholders i. AAR accepted Revenue‟s contention that buy back scheme is a tax avoidance scheme and held the same as colorable device. US & Singapore coys did not subscribe to the share buy back.com 89 (AAR) Page 17 . No dividend paid by Indian coy since 2003 and allowed the reserves to grow in view of DDT.13(4) Ardex Investments Mauritius Ltd. 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) of DTAA . Income from buy back was held to be taxable in India as dividends and disallowed claim of capital gains exemption under Art.Latest Case law – Indo Mauritius Tax treaty Subsidiary of UK coy in Mauritius held shares in India coy.XYZ India in re  20 taxmann.e. sold the same to German coy and claimed exemption of capital gains in India as per Article 13(4) of DTAA. in re  16 taxmann.
Latest Case law – Indo Mauritius Tax treaty 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.11 of DTAA .Z Mauritius  20 taxmann. 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.com 91 (AAR-New Delhi) Page 18 .
Indo – Mauritius tax treaty .way forward Vodafone case “Look at” principle being applied as substance test in denying treaty benefits GAAR would be invoked in all DTAA cases where substance is poor GAAR wider than LOB Any person claiming benefits of DTAA must establish Commercial substance legitimacy of Mauritius entity Activity report of Mauritius entity More economic activity expected in Mauritius through intermediate holding coys in future. Page 19 .
FIIs .no issue as there is no tax in India.Azadi Bachao‟s case overruled by GAAR and amended S.however many safeguards like permission from Commissioner and then further reference to GAAR panel are proposed in the Bill. . . Gujral clarified in an interview on GAAR provisions .overriding DTAA if tax paid GAAR would not be invoked. TRC . .Whether GAAR panel includes independent third party is being examined.90/90A.Onus of proof on tax payer .Short term capital gains taxable if no tangible activity/trading in Mauritius becomes impermissible arrangement and GAAR would apply . Page 20 .FIIs – Long term capital gains . lest every transaction would be questioned. 2012 .S.f 1st April.way forward Finance Secretary R.no reopening of old assessments.GAAR is only prospective w.Indo – Mauritius tax treaty . Representation by various Chambers to attach onus on the Revenue to prove that there is impermissible arrangement.e. .
may defer implementation of GAAR by one year .way forward News Flash .Indo – Mauritius tax treaty . did not have Participatory Notes(PN) of FIIs in mind when introduced provisions in Budget regarding underlying asset transfers – no capital gains tax .9 million) . may dilute GAAR regulations by prescribing thresh hold of 150 million rupees ($2.“Substantial commercial interest” in Mauritius critical for availing treaty benefits Page 21 (Source – Economic Times) .min official says that the Govt.Govt.Fin.Finance Minister said that he may modify some provisions of GAAR .Govt.
THANKYOU Page 22 35 .
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