Few Points on Advanced International Tax

By TaxbyManish (November 2014).

·         There cannot be any withholding tax on payment to foreign branch and also there cannot be any transfer pricing study for international transactions with branch.

·         In the case of concluding contracts, there may be case of dependent agent.

·         A subsidiary cannot be a PE for holding company and vice versa due to clause of article 5(6) of DTAA. However, it may happen due to satisfaction of other conditions in the DTAA.

·         For preparatory & auxiliary services, PE cannot be created ( refer articles of DTAA & Nike Inc  case law).

·         PE means unincorporated activity in other country jurisdiction. (means fiction)

·         Effects of creation of PE.

Ø  Primary  - taxation in other country.

Ø  Secondary – (i) Taxation of employee (however not applicable to dependent agent as fiction cannot have employee).

(ii) Interest & FTS covered under different articles.

·           Important case law reference for PE.

(i)            Nike Inc.

(ii)          Morgan Stanley

(iii)         SAP India

(iv)         Mondeal

·          The reimbursement of secondment employees salary to other country is covered under section  9 (vii), explanation 2 where it mentioned that including the provision of services of technical or other personnel and hence payment accordingly covered under 195. Now assesse should refer the DTAA with respective country and check in the FTS clause to claim any kind of relief. Example, relief is available in the US, Singapore DTAA with India, but not there in Japan India DTAA.

·         Also refer the DTAA of country where foreign company is legally registered and not the DTAA of country where branch is located. Ex. Payment made to Citibank Singapore. Refer the DTAA of US and not Singapore.

·         Similarly obtain PAN & TRC of head office country and not branch country.

·         While referring any European country DTAA, also refer MFN clause and read the explanations provided at the end.

·         In case of secondment employee, PE can be triggered. However, as per OCED guidelines, there cannot be any PE in case of economic employer relationship.

·         As per CBDT clarification 2/2014 dated dated February 26, 2014, it has been clarified that  WHT is only on sum chargeable to Income Tax. There cannot be any tax or interest or penalty on amount which not subject to tax in India.

·         Protocol of US India DTAA contains explanation of make available.

·         In the decision of TaJ hotels it had been decided that reimbursement cannot be considered as FTS.

·         For definition of FTS, please refer section 2(d) of India contact act 1872.

·         For application of section 195, there should be some income component.

·         In case of E Commerce, there is CST for sale from one state to another otherwise it is only VAT for sale in same state.

·         As per WTO 1998 circular, there cannot be any custom duty on any downloading electronic data.

·         Providing online facility to seller is FTS.

·         The location of server constitutes the PE.

·         Websites from ISP does not creates PE.

·         Read the following for e commerce understanding.

(i)            India Contracts Act, 1872

(ii)          Sale of good Act 1930

(iii)         Constitution of India Article 286(1), 286(2), 366(29A) & Entry 54 List II. 

(iv)         Copyright Act 1962.

·             No Tax on movement of goods from one warehouse to another.

·         Branded software is good under sales tax, but for unbranded software no decision yet and under service tax all software is service and under income tax all software is royalty.

·         There cannot be any SDT (specified domestic transfer) for allocation of expenses in the different units of same company.

·         271AA & 271G penalty both cannot apply together.

·         SDT can disallow the expenses but cannot increase the income.

·         In the decision of Vodafone & Shell India it had been decided that share issue transaction at lower than market price cannot bring deemed share premium under TP.

·         The major change in budget 2014 is in respect of SDT with third party where third party may have direct/indirect relationship with related company.

·         GAAR cannot covert permissible arrangements into impermissible arrangements.

·         Deeming section or anti avoidance sections cannot apply to other country.