International Tax Updates

published on 30 October 2023 I reading time approx. 5 minutes

1. Spanish Court recognises the importance of Tax Residency Certificate and Tie Breaker Test in determination of Treaty Residency

In the instant case, the taxpayer was a National of Morocco and the United States of America (‘USA’). The taxpayer held several properties and also had several bank accounts in Spain. He also received professional fees for acting in the capacity of a financial adviser. 

The Spanish tax authorities concluded that the taxpayer qualified as a tax resident of Spain basis ‘the centre of economic interests’ criteria as per the definition of ‘resident’ given under the personal tax laws of Spain. The taxpayer denied the alleged tax residency in Spain and claimed that he qualified as a tax resident of Morocco and US and furnished TRC issued by the respective government authorities. This issue travelled right up to the Supreme Court of Spain.

The issue inter-alia predominantly was whether the tax authorities could question the validity of the TRC issued by other jurisdictions. The Spanish Supreme Court held in favour of the taxpayer and opined that the tax authorities could not question the validity of the TRC issued by other jurisdictions. It also held that the conflict of tax residence must be resolved under the tiebreaker rules contained in the respective DTAAs. The decision of the Spanish Supreme Court is important as it establishes the importance of TRCs.

In India too, this is a matter of significant debate. CBDT had issued a Circular in the past, that a TRC shall constitute valid evidence for availing treaty benefits; however, the Indian tax authorities often dispute the same.

2. Bangalore ITAT upholds that SanDisk India is not an Dependant Agent Permanent Establishment (‘DAPE’) of SanDisk Ireland since the sales were concluded by independent third party distributors and not by SanDisk India 

In the instant case, SanDisk India had entered into an agreement with SanDisk Ireland and was involved in market research and support services. Pursuant to a survey conducted on SanDisk India by Revenue department, wherein emails and documents were verified and statement of employees were recorded, Revenue subjected SanDisk Ireland to reassessment proceedings and found that SanDisk India is fully accountable for SanDisk Ireland’s sales in India thus, held it to be SanDisk Ireland’s DAPE. Revenue adopted global profit rate of 4.19 per cent and made an addition of INR 272.6 Million which was confirmed by the Dispute Resolution Panel (‘DRP’). On facts, the ITAT noted following:
  • Sales of SanDisk Ireland in India are effected through its distributors whereby the sales and marketing team of SanDisk India engage in educating the customers about SanDisk products and once the customer is interested in a product, SanDisk Ireland’s distributors are notified who then negotiate the price and place purchase order with the SanDisk Ireland. 
  • Agreement between SanDisk Ireland and SanDisk India prohibits SanDisk India from negotiating, concluding, signing, executing or in any other manner, accepting sales or other contracts in the name of or on behalf of the SanDisk Ireland.
  • Orders are secured by the independent distributors of the SanDisk Ireland and not by SanDisk India. SanDisk India is not entirely responsible for concluding contracts on behalf of the SanDisk Irelan.
  • Revenue in the final assessment order has itself recorded that SanDisk India does not procure goods, neither delivers them and nor collect the payments.
Considering the above, ITAT deleted attribution of profits to SanDisk Ireland by holding that SanDisk India is not an DAPE since it only provides marketing support services and does not engage in securing, negotiating or  concluding contracts on behalf of the SanDisk Ireland.

ITAT further noted that the amendment made in Explanation 2 to Section 9(1)(i) of ITA by Finance Act 2018, which provides for business connection where Indian AE habitually plays the principal role leading to conclusion of contracts, cannot be directly imported into treaty unless DTAA is modified through protocol or Multilateral Instrument (‘MLI’). 

3. Supreme court allows Foreign tax credit (‘FTC’) in respect of dividend income received from Oman company even though no taxes thereon have been paid in Oman under its domestic tax law

In the case of Krishak Bharati Cooperative Ltd., Supreme court of India affirms the order of the Delhi High Court wherein it was held that as per the provisions of India – Oman DTAA, the taxpayer was eligible to avail the FTC in India on the dividend income received from a Oman company which is exempt as per the provisions of the Oman domestic tax laws.

The taxpayer had a permanent establishment in Oman which received tax exempt dividend income from a Joint Venture company in Oman. As per the provisions of India-Oman DTAA, FTC is available in India for the ‘income tax’ paid in Oman. Also, it is provided that such ‘income tax’ is deemed to include the tax that would have been payable but has not been paid because of the tax incentive granted under the domestic tax law of Oman. 

To promote the economic development and attracting investment, the domestic tax laws of Oman provide tax exemption on the dividend income received by the shareholders. It was clarified by the finance ministry of Oman that FTC should be available on exempt dividend income as per the provisions of the India – Oman DTAA, on which tax would have been payable, if not for the tax exemption provided under its domestic tax law.

In view of the provisions of the India-Oman DTAA and Oman domestic tax laws, the Supreme court allowed FTC of the tax payable in Oman which was otherwise exempted due to the incentive provisions under the Oman domestic tax law. This is an important decision by the Supreme Court on interpretation of tax treaty provisions, where the Court has recognised that interpretation to the tax treaty provisions as accorded by tax authorities of the foreign country play a significant role in deciding tax claims in India.

4. Delhi ITAT holds receipts in nature of consultancy services do not qualify as Fees for Included Services (‘FIS’) under Article 12(4)(b) of India-USA DTAA

Bain & Company Inc. (‘Assessee’) is a global business consulting organization and provides consulting services like supply chain management, data collection, market research to its Indian affiliate and its group entities on the basis of facts of the project continuously since 2010.

ITAT observed that nature of services provided in the consulting service agreement are related to client engagement, strategic research, and planning, etc. which do not fall under the category of technical services. As per example 7 of Memorandum of understanding to India – USA DTAA, a receipt will be treated as FIS when any technical expertise, knowledge or skill is transferred. Hence, ITAT held that if Assessee had made available technical knowledge, skill to its group entities, then Bain India would be able to apply the said knowledge and technical skills independently without Assessee’s assistance and hence such receipts are not in the nature of FIS under Article 12(4)(b) of India US DTAA.

Further, the Assessee has received the amount from Bain India towards reimbursement of expenses on cost to cost basis without any mark up as per cost reimbursement agreement and no technical skill or knowhow is employed in such services. Based on various judicial rulings, ITAT held that receipts being in the nature of pure reimbursement of actual expenses are not taxable and therefore, withholding of tax is not required.

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