International Tax Updates

published on 31 July 2023 | Reading time approx. 3 minutes

1. Mumbai Special Bench of Tribunal concludes DDT is a tax on “companies” profits and, not on shareholders income, thus shall not be subject to rates in respective DTAA

In the case of Total Oil India Pvt. Ltd. & Others, the Special Bench of Mumbai ITAT was to decide, whether non-resident shareholder is to be taxed at the rates under applicable Double Tax Avoidance Agreement in a case where Dividend Distribution Tax (‘DDT’) is paid on dividends.

The Special Bench of Mumbai ITAT analysed several aspects, including the provisions of Section 115-O of the ITA, construed the definition of “dividend” and elaborately discussed the provisions on taxation of dividend under DTAA, concluding that DDT is not a tax on the shareholders income but a tax on domestic company’s distributed profits. The matter would now lie before High Court, in cases where taxpayers challenge this verdict.

2. Delhi Tax Tribunal (‘Tribunal/ ITAT’) rejects allegation of 'Force of Attraction' for taxing revenue from infrastructure projects; taxability as Fees for Technical Services (‘FTS’) on gross basis

The Taxpayer in question was a German Company, engaged in providing planning, designing and consultancy services in relation to complex infrastructure projects in India. During the relevant year, the German company had undertaken contract work for three parties. Status of the same is as follows:

Project Name	Position adopted by Taxpayer	Position adopted by Indian tax department
Jammu & Kashmir State Power Development Corporation-Baglihar Project ('JKSPDC')	Declared PE, receipts offered tax on net basis	No change
Jaypee Karcham Hydro Corporation Limited ('JKHCL')	Offered to tax on gross basis at 10 per cent	Held that PE constituted, taxed receipts on net basis: JKHCL has made office space available to Taxpayer constituting Fixed Place PE. Invoked Force of attraction ('FOA')** with the already constituted PE In India to tax other projects.
Jaypee Ventures Limited ('JVL')	Offered to tax on gross basis at 10 per cent	Invoked FOA to tax receipts on net basis

The ITAT observed that the JKHCL project was completed by the taxpayer within 3 months and services were purely in the nature of technical consultancy. Thus, there was no substantial basis on how PE was constituted. Besides, in the absence of evidence to establish the involvement of the pre-existing PE with the other two projects, directed the Revenue to compute Taxpayer’s income as FTS under Art. 12 of DTAA India-Germany.

** Force of Attraction expands taxing rights of a source jurisdiction. By virtue of this clause in treaties, mere existence of PE in source country would mean that country is empowered to tax profits of the enterprise from sale of similar goods/services undertaken in the source country, even without involvement of the factual PE.

3. Delhi Tribunal upholds no artificial splitting of contract, non-taxation of offshore supply

The taxpayer, a UK based company was awarded below contracts by Power Grid Corporation India Ltd (PGCIL) viz.,

Contract Type	Party
Off-shore contract (Comprising supply of plant and equipment and spares outside India, testing and training)	UK entity
Onshore Supply	Assigned to GE T&D India Ltd (Indian associate entity)
Onshore Service

The Indian tax officer alleged that that the taxpayer had artificially split a single composite contract into three contracts since all the responsibilities and liabilities for the project were with the Taxpayer. Besides, the tax officer also alleged Dependent Agent PE. Consequentially, sought to tax revenue from offshore contract in India.

The Delhi ITAT held in favour of the taxpayer and finally concluded that the revenue authorities erred in holding that there was an artificial split of a composite contract and in the absence of a business connection or PE in India, the attribution of profit from off-shores supplies in India is not sustainable.

Amongst others, the Delhi ITAT made an interesting observation on the overall responsibilities assumed by foreign entities in such turnkey projects and its impact on splitting up of contracts. It opined that “although the ultimate responsibility of execution and liability in case of breach remained with the UK entity, entering into split contracts in such major infrastructure projects was a matter of business prudence. Such a commercial arrangement of the overall responsibility with the foreign entity is targeted to safeguard rights of the Indian customer with the intention that successful commissioning of the project takes place and that it is not abandoned due to involvement of so many parties”.

Taxation of offshore supplies in the hands of non-residents is an often debated and vexed issue in India and often scrutinised by tax officers. This is a welcome decision in favour of taxpayers. There was also another ruling on similar topic in recent times, captured in our article. Read more>>

4. Mumbai ITAT reaffirms that capital gains taxation under Sec.112(1) prevails over general provisions of Sect. 48 in the case of Non-residents

In the case of non-residents, capital gains arising from the transfer of unlisted securities or shares of a company in which public are not substantially interested, are to be computed as per Sect. 112(1) of the ITA. This section categorically mentions that general provisions of computation of capital gains which provide for conversion of cost of acquisition into foreign currency and reconversion into Indian rupees (1st proviso, Sect. 48) and indexation (2nd proviso , Sect. 48) are not to be given effect to. Contrary to the provisions of Sect. 112(1), the taxpayer had computed a capital loss by referring to the 1st Proviso to Sect. 48 and claimed a capital loss. The Mumbai Tribunal affirmed the order of tax officer and dismissed Taxpayer’s appeal by ruling that capital gains must be computed only by reference to specific provisions under Sect 112(1) without giving effect to the 1st and 2nd Proviso to Sect. 112 ITA.

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