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DOMESTIC DIRECT TAX UPDATES

Further Extension of time limits under Income Tax Act, 1961 (“ITA”) for Financial Year (“FY”) 2019-20

Considering the problems faced by the taxpayers due to the outbreak of covid-19, Ministry of Finance further extended the time limit for tax compliances and declaration under Direct Tax Dispute Settlement (“VsV”) Scheme. Relevant extended due dates, yet to expire, are as below:

*Date for payment without additional amount under the VsV Scheme was already extended to 31 March 2021 vide Notification S.O. 3847(E) dated 27 October 2020.

Clarifications issued on VsV Scheme

The Indian Government had introduced VsV Scheme to reduce pending income tax litigation (settle disputes). While the VsV Scheme generated a lot of interest amongst the taxpayers, there were doubts regarding its implementation. The Central Board of Direct Taxes (“CBDT”) had earlier issued a Circular providing clarifications in the form of Frequently Asked Questions (‘FAQ’). Another set of FAQs have been recently released by the CBDT vide Circular No. 21/2020 dated 4 December 2020. The latest Circular contains 34 additional FAQs on issues related to scope/eligibility, computation of tax payable, procedure and consequences when taxpayer opts for settlement under VsV Scheme.

LTC Cash Voucher Scheme (“Scheme”) extended to Non-Central Government (“Non-CG”) employees

Due to covid-19 pandemic, many employees are not able to avail Leave Travel Concession (“LTC”). On 12 October 2020, with a view to boost consumption expenditure, Government of India allowed payment of cash allowance against LTC eligibility to central government employees. Later on, the scheme was also extended to private sector employees. Certain key conditions for income-tax exemption under the scheme are as follows:

Maximum amount of LTC fare is INR 36,000 per person (Round Trip).
Employee spends (upto 31 March 2021) a sum equal to three times of the value of deemed LTC fare on purchase of goods / services which carry a GST rate of not less than 12 per cent.
Employee who spends less than three times of deemed LTC fare on specified expenditure shall not be entitled to receive full amount of deemed LTC fare and related income-tax exemption, which shall be reduced proportionately.

The employee exercising option to pay income-tax at concessional rate under section 115BAC of ITA shall not be entitled to claim income-tax exemption.

No Interest liability on non-resident recipient due to short deduction of taxes by Indian payer

The tax authorities had made addition to the income of Texas Instruments Incorporated (Resident in USA) (“Texas Instruments”) and raised demand in respect of such additional income along with interest under section 234B of ITA for default in making advance tax payment. The Karnataka High Court observed that in respect of non- residents, section 195 of ITA puts an obligation on the payer to deduct income-tax at source at the rates in force and thus, the entire tax is to be deducted at source. High Court upheld that since liability to withhold tax was that of the payer, the question of payment of advance tax would not arise, resulting in no interest for default in payment of advance tax.

International Tax Updates

UN Tax Committee approves Art. 12B on 'Automated Digital services' with Commentary

The UN Committee on International Co-operation in Tax Matters (UN Sub-Committee) introduced a new Article 12B on “Automated Digital Services” earlier in June 2020. The Sub-Committee in November 2020 informed that it would finalise the text of the Article and Commentary at the 22nd session in April next year.

By virtue of proposing to insert Article 12B, the UN Committee advocates gross basis taxation of Income from automated digital services at specified percentages (to be agreed through bilateral negotiations). Certain salient features of automated digital services are as follows:

The term “income from automated digital services” is proposed to mean any payment in consideration for service provided on internet or an electronic network requiring minimal human involvement from the service provider.
Payments qualifying as ‘fees for technical services’ and ‘royalties’ are specifically excluded under Article 12A.
Residents of a Contracting State, carrying on business through a permanent establishment situated in that other State are sought to be excluded from gross basis taxation. The proposed Article 12B gives the beneficial owner an option to be taxed on its qualified profits for a net basis annual taxation, as against the withholding mechanism. This proposal is put forth as a simpler alternative to the ongoing discussions on reaching a consensus for taxation of digital economy.

Germany ratifies the Multilateral Instrument (“MLI”)

Germany ratified the MLI and published it in its Federal Law Gazette on 27 November 2020. Interestingly, Germany significantly reduced the number of Covered Tax Agreements (“CTA”) from 35 as notified in the Provisional List published at the time of signing the MLI to 14 in the revised list of CTAs at the time of ratification. Countries like Bulgaria, China, Denmark, Finland, Ireland, Israel, Korea, Mauritius, Netherlands, New Zealand, Russia were excluded in the revised list of CTA. India was not ratified as a CTA in the provisional list itself. On 18 December 2020, Germany deposited the Instrument of Ratification with the Organisation for Economic Co-operation and Development (“OECD”) and is set to enter into force on 1 April 2021.

Project office in India, carrying on preparatory activities, does not constitute a Fixed Place (“PE”)

A company incorporated in South Korea was awarded a “turnkey” contract by a company incorporated in India for carrying out surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, start-up and commissioning of entire facilities.

The non-resident company set up a project office in Mumbai and filed its tax return in India for FY 2006-07, showing nil profit and claimed a loss of INR 2.35 million for expenses incurred in relation to the activities carried out by it in India.

Supreme court held that the conditions precedent for applicability of Article 5 of DTAA and ascertainment of PE is that there should be an establishment through which the enterprise wholly or partly carries on its business. Further, the profits of the enterprise are taxable only where the said enterprise carries on its core business through a PE which was not the case here. The project office was held to be falling under the exclusion clause of PE, since it was considered an auxiliary office, meant to act as a liaison office between the non-resident company and Indian company.

Danish Tax Council: Employee ‘working from home’ - PE or not a PE?

Danish Tax Council holds that a Danish national working from his home in Denmark due to covid-19 as Head of Sales and Business Development constitutes a PE of his German employer in Denmark.

Danish Tax Agency relied on OECD commentary on PE to arrive at its decision as under:

home office constitutes a 'place of business' that is fixed as employee regularly carries out business activities of the enterprise from it and the German company has no office in Denmark;
the tenure of employment is not limited but long-term in nature;

the employee performs leading and supporting functions within sales and business development, which is considered as a core task for the company .

Tax Challenges arising from Digitalisation - OECD’s report on Pillars one and two Blueprint

OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) has been assigned the task of developing a solution to the tax challenges of the digitalization of the economy. On 12 October 2020, the Inclusive Framework released a package consisting of the Report on the Pillar One Blueprint and the Report on the Pillar Two Blueprint.

The Inclusive Framework welcomes stakeholder input on the Blueprints and will hold public consultation meetings on them in January 2021. In particular, comments are invited on inter-alia the following aspects of the Blueprint:

Activity test related to Automated Digital Services and Consumer facing business.

The design of a specific amount revenue threshold (in addition to a global revenue threshold) to exclude large corporations that have a de minimis amount of foreign source in-scope revenue.
Development of a nexus/source rules.

Reimbursement to Seconded employees not considered as ‘Fees for Technical Services(“FTS”)’

Abbey Business Services India Private Limited (“Abbey India”) is a group company of Abbey National Plc, UK (“ANP”). ANP seconded its employees to Abbey India. In this regard, Abbey India made certain payments (towards salary and hotel and traveling expenses) to ANP. Out of the above ‘salary’ has been subject to withholding tax in India. Revenue Authorities sought to tax the balance amount as FTS in India.

Basis certain factors such as place of work, right to instruct, control and supervision, applicable rules and guidelines, it was held that Abbey India has to be treated as ‘employer’ of seconded employees.

The Karnataka High Court observed that there is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non-resident enterprise and therefore, concluded that the amount paid by Abbey India was not to suffer tax deducted at source under section 195 of ITA.

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