International Tax Updates

The OECD sought public comments on the two consultation documents released on 27 May 2022 relating to Tax Certainty Framework for Amount A and Tax Certainty for Issues Related to Amount A under pillar one.

The Tax Certainty Framework for Amount A intends to guarantee certainty for in-scope multinational groups in relation to all aspects of the Amount A rules, including the elimination of double taxation. For addressing the risks posed by the new rules, the document incorporates following elements:

The Tax Certainty for Issues Related to Amount A provides draft provisions to ensure in scope multinational groups benefits from dispute prevention and resolution mechanisms on the disputes related to transfer pricing and Permanent establishment profit attribution that are unable to be resolved through the Mutual Agreement Procedure (MAP) within two years of the presentation of the MAP case to the Competent Authorities, in a mandatory and binding manner. The document comprises of access to dispute resolution, mandatory dispute resolution mechanism for issues related to Amount A, an alternative elective binding dispute resolution for disputes involving developing countries subject to specified criteria. The OECD had invited written comments on the two documents by 10 June 2022.

In this case, the tax authorities provided lower withholding tax certificate to the taxpayer prescribing the tax rate of 10 per cent on dividend income. It did not accept the taxpayer’s contention that the beneficial tax rate of 5 per cent is applicable under the DTAA India - Switzerland read with the MFN clause and the Amending Protocol to the DTAA. Accordingly, the taxpayer filed writ petition before Delhi HC against the order of the tax authorities.

Delhi HC relied on its judgments in the case of Concentrix Services Netherlands B. V. ([127 taxmann.com 43 (Delhi), 2021]) as well as in Nestle SA (W.P.(C) No. 3243 of 2021) wherein it was held that no separate notification is required insofar as the applicability of the protocol is concerned and the same forms an integral part of the DTAA. Thus, MFN clause was held to be applicable. Accordingly, the Delhi HC directed the tax authorities to issue a lower withholding tax certificate with beneficial rate of 5 per cent.

Based on a perusal of the Sub-licensing agreement, the court concluded that the taxpayer transferred to the Malaysian company, only a right to use technical know-how and not the right to manufacture.  The taxpayer neither owned the technical know-how, nor had it capitalized or depreciated the same in its books.  It had a mere right to use the said technical know-how; granted by its Associated enterprise Bosch Germany; and sub-license it to the Malaysian company.  The Tribunal also negated taxpayer’s argument that the sub-licensing resulted in ‘transfer’ as envisaged by Explanation 2 to section 2(47) of the Act, since the transfer of right to use know-how cannot be equated to creation of interest.  Accordingly, the Tribunal held that the lump-sum amount received by the taxpayer from the Malaysian company was taxable as royalty income.

There have been similar decisions in the past in the context of interest specifically, which have upheld non-taxation of such interest on gross basis in the hands of the HO. ITA has been amended since then to provide for deemed taxation of interest in the hands of the HO and as such, this matter has been put to rest as far as interest pay outs are concerned. 

It may be noted that similar amendments have not been made in the deemed taxation scheme for fees for technical services and royalties earned by non-residents, and while some jurisprudence exists in the context of tax withholding on payments by PE to HO's, the matter has not been analysed with respect to the facets explained above. Thus, the question of taxability of cross charges, service payments and consequential tax withholding by PE to its HO, as such remains open and needs to be analysed having regard to the specific facts.