ANNEXURE 4 Transfer Pricing Implication on Various Entity Structures Purchase of software by QAD India would required to comply with the arm’s length test Undertaking the new business in a new entity would not any have significant Transfer Pricing implications Undertaking the new business under the existing entity, would create the need for segmental reporting Appropriate cost allocation keys would be required to be put in place for common costs amongst different business segments Need to document accurate functional analysis and determine appropriate Transfer Pricing methodology in all structures Determine an arm’s length consideration based on the functional analysis of the Indian entity in all structures C and h aFor ldistribution l eUndertaking n g e U activities s Sales and Alternate ModesProposed of India Presence Distribution Activities sales in India | 1 INTERNATIONAL FISCAL ASSOCIATION March 2, 2014 Mukesh Butani | Partner, BMR Legal All rights reserved | Preliminary & Tentative OVERVIEW OF IMPORTANT JUDGMENTS ON INTERNATIONAL TAX CONTENTS All rights reserved | Preliminary & Tentative SECTION I – PERMANENT ESTABLISHMENT SECTION II – ROYALTY SECTION III – OUTSOURCING SECTION IV – TRANSFER PRICING SECTION V - MISCELLANEOUS Act Income Tax Act, 1961 CG Central Government RBI Reserve Bank of India HC High Court LO Liaison Office PE Permanent Establishment BO Branch Office CoR Certificate of Residence PO Project Office CBDT Central Board of Direct Taxes HO Head Office DEPB Duty Entitlement Pass Book DTA Double Taxation Avoidance Agreement SC Supreme Court DTC Direct Tax Code Bill, 2010 LTCG Long Term Capital Gain PBT Profit Before Tax CoA Cost of Acquisition RA Revenue Authorities LoB Limitation of Benefits DAPE Dependent Agent Permanent Establishment TP Transfer Pricing AMP Advertising, Marketing, Promotion TPO Transfer Pricing Officer DRP Dispute Resolution Panel FV Face Value Overview of important judgments on international tax All rights reserved | Preliminary & Tentative GLOSSARY | 4 SECTION I – PERMANENT ESTABLISHMENT § LO engaged in sourcing activities (CIT and ACIT / DCIT vs Nike Inc) Virtual presence does not create PE (ITO vs Right Florists Pvt Ltd) All rights reserved | Preliminary & Tentative § LO ENGAGED IN SOURCING ACTIVITIES [1/3] CIT and ACIT / DCIT vs Nike Inc (264 CTR 508) – Karnataka HC (2013) Facts: (US) Service charge Global buyers Outside India India Activities of LO were to identify and supervise manufacturers, design goods as per specifications of buyer (affiliates of the taxpayer), ensure timely dispatch of goods, communicate decisions of the taxpayer to the manufacturer Goods were shipped to the buyers by manufacturers; consideration was directly paid by the buyers LO Taxpayer was remunerated in US by the buyers Issue: Supervision, communication etc Manufacturers Whether income of the taxpayer is deemed to accrue or arise in India? Export sales Consideration Revenue’s contentions: Activities of LO were income generating and beyond the scope prescribed by RBI regulations Overview of important judgments on international tax | 6 All rights reserved | Preliminary & Tentative Nike Inc The taxpayer, a US entity, engaged in sale of sports apparel globally, had set up a LO in India LO ENGAGED IN SOURCING ACTIVITIES [2/3] CIT and ACIT / DCIT vs Nike Inc (264 CTR 508) – Karnataka HC (2013) Revenue’s contentions (cont): Nike Inc (US) Service charge Global buyers Income of taxpayer taxable under section 5; exemption under Explanation 1(b) to section 9(1)(i) not available as taxpayer did not purchase goods for the purpose of export Taxpayer’s contentions: Outside India LO was involved in identifying manufactures, assisting buyers in purchase India LO Transaction for purchase of goods for export specifically exempt under section 9(1)(i) Supervision, communication etc Manufacturers HC Ruling: Export sales Consideration The taxpayer was not engaged in business activities in India The taxpayer did not have a right in income of the manufacturer Overview of important judgments on international tax | 7 All rights reserved | Preliminary & Tentative No contract was entered into between the taxpayer and the buyers / manufacturers in India; no payments were received by taxpayer in India LO ENGAGED IN SOURCING ACTIVITIES [3/3] CIT and ACIT / DCIT vs Nike Inc (264 CTR 508) – Karnataka HC (2013) HC Ruling (cont): Nike Inc (US) Service charge Global buyers Taxpayer did not have a ‘business connection’ in India which expressly excludes activities confined for the purpose of export Supervisory activities of the taxpayer are to ensure that manufactured goods enjoy an international market Outside India India LO All rights reserved | Preliminary & Tentative Object of the transaction was to purchase goods for export purposes, hence the taxpayer was eligible to avail exemption under Explanation to section 9(1)(i) of the Act Supervision, communication etc Manufacturers Export sales Consideration Overview of important judgments on international tax | 8 VIRTUAL PRESENCE DOES NOT CREATE PE [1/2] ITO vs Right Florists Pvt Ltd (154 TTJ 142) – Kolkata ITAT (2013) Facts: The taxpayer, a florist, used advertising space on search engines viz Google and Yahoo Advertisements were displayed along with web search when a user punched certain ‘key words’ Google Yahoo Ireland The taxpayer made payments to Google / Yahoo for online advertising without withholding taxes US India AO disallowed under section 40(a)(ia) as taxpayer failed to withhold taxes from payments Payment for advertising Taxpayer Whether recipients of advertising charges ie Google / Yahoo had taxable presence in India? Taxpayer’s contentions: Recipients did not have a PE in India, hence their business income was not taxable in India Advertising charges were not taxable as royalty under the Act / India-US DTA / India-Ireland DTA Overview of important judgments on international tax | 9 All rights reserved | Preliminary & Tentative Issue: VIRTUAL PRESENCE DOES NOT CREATE PE [2/2] Google Yahoo Ireland US India Payment for advertising Taxpayer Revenue’ s contentions: Regardless of issue of taxability in India, the taxpayer should have approached the AO prior to making payments to Google / Yahoo ITAT Ruling: Traditional PE concept stipulates physical presence of a foreign entity in the source country The traditional PE test fails when commercial activities are undertaken through a virtual presence (report of High Powered Committee) Search engines presence through its website cannot be a PE unless servers are located in the same jurisdiction Advertising charges were not royalty income of the recipients as the hosting service did not involve use of right to use of any industrial, scientific or commercial equipment Income not FTS as services rendered were automated and did not involve human intervention Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative ITO vs Right Florists Pvt Ltd (154 TTJ 142) – Kolkata ITAT (2013) SECTION II – ROYALTY § Payment for live feed – not royalty (ADIT vs Neo Sports Broadcast Pvt Ltd) Payment for dedicated bandwidth usage taxable as royalty (Verizon Communications Singapore Pte Ltd vs ITO) All rights reserved | Preliminary & Tentative § PAYMENT FOR LIVE FEED - NOT ROYALTY [1/3] ADIT vs Neo Sports Broadcast Pvt Ltd (144 TTJ 412) – Mumbai ITAT (2011) Facts: The taxpayer sought a Nil withholding tax certificate for payments to be made to Nimbus for grant of license for broadcast as it was not in the nature of royalty Cricket Board The matches were to be broadcasted on the Indian territory and revenue from advertisement / subscription would be received by Nimbus Bangladesh Nimbus Singapore India License for broadcasting Taxpayer Consideration for grant of license There was business connection between Nimbus and receipts in India as the matches were to be broadcasted in India and without the receipt of signal of the matches to be played, no income would accrue to Nimbus Explanation 2 to section 9(1)(vi) covered payments for broadcasting live and recorded matches, being in the nature of royalty for transfer of ‘copyright’ Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Revenue’s contentions: (Agent) PAYMENT FOR LIVE FEED - NOT ROYALTY [2/3] ADIT vs Neo Sports Broadcast Pvt Ltd (144 TTJ 412) – Mumbai ITAT (2011) Revenue’s contentions (cont): The payments were covered by the definition of copyright as defined under Copyright Act, 1957 being ‘to perform the work in public, or communicate it to the public’ Cricket Board Playing cricket is akin to performing work in public, thus payment for live broadcasting means payment for transfer of copyright Bangladesh Nimbus ITAT Ruling: (Agent) Singapore India License for broadcasting Taxpayer Consideration for grant of license Existence of work is a pre-condition and must precede the granting of exclusive right for doing of such work ‘Royalty’ does not include ‘live coverage of any event’. Copyright and live coverage are independent of each other. DTC expressly includes ‘live coverage of any event’ Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative ‘Copyright’ means exclusive right to use the ‘work’ in the nature of cinematography PAYMENT FOR LIVE FEED - NOT ROYALTY [3/3] ADIT vs Neo Sports Broadcast Pvt Ltd (144 TTJ 412) – Mumbai ITAT (2011) ITAT Ruling (cont): Nimbus has no business connection in India; to constitute business connection some business activity must be carried out in India Cricket Board Permitting a resident to exploit certain rights vested in it on commercial basis, it cannot be said that the non-resident had carried out any business activity in India Bangladesh Nimbus Singapore India License for broadcasting All rights reserved | Preliminary & Tentative Transaction between Nimbus and the taxpayer was on a principal-to-principal basis hence Nimbus had no business connection in India (Agent) Consideration for grant of license Taxpayer Overview of important judgments on international tax | PAYMENT FOR DEDICATED BANDWIDTH USAGE – TAXABLE AS ROYALTY [1/4] Verizon Communications Singapore Pte Ltd vs ITO (263 CTR 497) – Madras HC (2013) Facts: The taxpayer, was engaged in providing international connectivity services through international private lease circuit (“IPLC”) Overseas India } } Services rendered by the taxpayer outside in India Customers’ Indian premises Services rendered by VSNL in India The taxpayer not being a licensed service provider in India, entered into an agreement with VSNL to provide the Indian leg of the services VSNL transmits the traffic from the customer's Indian office to a virtual point outside India; the taxpayer transmits it therefrom to the customers’ location outside India Issue: Whether payment received by the taxpayer for providing bandwidth services via IPLC was taxable as royalty? Taxpayer’s contentions: The customers did not use any equipment; access to knowledge / process deployed by the taxpayer Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Customers’ overseas premises PAYMENT FOR DEDICATED BANDWIDTH USAGE – TAXABLE AS ROYALTY [2/4] Verizon Communications Singapore Pte Ltd vs ITO (263 CTR 497) – Madras HC (2013) Taxpayer’s contentions (cont): The consideration received was for services rendered and not for use or right to use any equipment / process, thus consideration did not fall within the ambit of definition of royalty Overseas India } } Services rendered by the taxpayer outside in India Customers’ Indian premises Services rendered by VSNL in India Services provided involved transmission of data and voice in the same form through fiber cables; no conversion of data or voice was carried out Network equipment were under the possession, control, operation and use of the taxpayer / VSNL Revenue’s contentions: There exists nexus between the user and the situs of usage (ie India) Cable is regarded as commercial equipment; thus for the equipment usage and the services utilized, the payment falls within the definition of royalty Customers had substantial economic interest in the equipment to the extent of the bandwidth hired Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Customers’ overseas premises PAYMENT FOR DEDICATED BANDWIDTH USAGE – TAXABLE AS ROYALTY [3/4] Verizon Communications Singapore Pte Ltd vs ITO (263 CTR 497) – Madras HC (2013) HC Ruling: In the backdrop of the agreements with VSNL, the customers, VSNL-customers - it is clear that they are part and parcel of a composite agreement only split for commercial purposes Overseas India } } Services rendered by the taxpayer outside in India Customers’ Indian premises Services rendered by VSNL in India To achieve high speed connectivity, the equipment at the customer's site must have the requisite data exchange capacity. Such equipment at the customer's site was provided by the taxpayer The taxpayer provided essential equipment (viz modem, routers etc) to ensure uninterrupted connectivity. The contract between the customer and taxpayer ensured that the customer had a dedicated active internet at a particular speed There was use of equipment / cable for transmission of data / voice, thus the taxpayer’s view that only services were provided was improper as the provision of service was not possible without the use of the equipment Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Customers’ overseas premises PAYMENT FOR DEDICATED BANDWIDTH USAGE – TAXABLE AS ROYALTY [4/4] Verizon Communications Singapore Pte Ltd vs ITO (263 CTR 497) – Madras HC (2013) HC Ruling (cont): Even if payment not treated as one for use of equipment, it tantamounts to use of the process provided by the taxpayer Customers’ overseas premises India } } Services rendered by VSNL in India All rights reserved | Preliminary & Tentative Overseas Services rendered by the taxpayer outside in India Usage of bandwidth by the taxpayer has to be seen in light of technology governing the process and consideration for usage of bandwidth fell within the ambit of ‘royalty’ Customers’ Indian premises Overview of important judgments on international tax | SECTION III – OUTSOURCING § Profit attribution should be based on TP principles (Convergys Customer Management Group Inc vs ADIT) Rendition of services through Indian affiliate – does not per se constitute PE (DIT vs eFunds Corporation) All rights reserved | Preliminary & Tentative § PROFIT ATTRIBUTION SHOULD BE BASED ON TP PRINCIPLES [1/3] Convergys Customer Management Group Inc vs ADIT (159 TTJ 42) – Delhi ITAT (2013) Facts: The taxpayer was engaged in providing IT-enabled customer management services (US) Employees of the taxpayer visited I Co to provide supervision / control over the operations of I Co Services Outside India India The Indian affiliate of the taxpayer, I Co, provided IT-enabled call-centre / back-office support services to it on principal to principal basis Issue: I Co Taxpayer’s contentions: Does I Co constitute PE of the taxpayer in India? What are the attributable profits to the PE? Obtaining services is akin to procurement of goods – fixed place for procuring services will not constitute PE of the taxpayer in India Existence of subsidiary company does not by itself constitute PE of the taxpayer Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Customers Taxpayer PROFIT ATTRIBUTION SHOULD BE BASED ON TP PRINCIPLES [2/3] Convergys Customer Management Group Inc vs ADIT (159 TTJ 42) – Delhi ITAT (2013) Taxpayer’s contentions (cont): Basis of profit attribution by the AO were realistic and unreasonable (US) India Services Outside India I Co I Co had been remunerated at ALP; thus no further attribution required Risk of procurement of services from I Co lay with the taxpayer; since customers were outside India, the aforesaid risk resided outside India – no profits should be attributed for management of risks Revenue’s contentions: Keeping in view the interlinking and interlacing, the taxpayer had a PE in India Profit attribution exercise was reasonable ITAT Ruling: I Co was projection of taxpayer’s business in India as I Co’s business was carried out under control and supervision of employees of the taxpayer Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Customers Taxpayer PROFIT ATTRIBUTION SHOULD BE BASED ON TP PRINCIPLES [3/3] Convergys Customer Management Group Inc vs ADIT (159 TTJ 42) – Delhi ITAT (2013) ITAT Ruling (cont): The taxpayer’s employees had a fixed place of business at their disposal; hence PE created (US) Profit attribution should be based on TP principles Outside India Correct approach for attributing profits: Services India Methodology for profit attribution by RA not acceptable as revenue of the taxpayer was the starting point for arriving at the attributable profits I Co § Step 1: Compute global operating income / profit percentage as per annual report of the taxpayer § Step 2: Profits of I Co = percentage (computed under step 1) * end customer revenues with regard to contracts / projects § Step 3: PBT - operating income from Indian operations (residual profits attributable between India and US) § Step 4: Profits attributable to the PE should be estimated on residual profits Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Customers Taxpayer RENDITION OF SERVICES THROUGH INDIAN AFFILIATE – DOES NOT PER SE CONSTITUTE PE [1/4] DIT vs eFunds Corporation (42 taxmann.com 50) – Delhi HC (2014) Facts: eFunds IT eFunds Inc The taxpayers inter alia obtained call center and software development services from eFunds India 100% US Netherlands 100% IDLX Whether any profits were further attributable to the Indian PE Revenue's contentions: Facilities viz call center services were at the disposal of taxpayers Professional service contract executed fully in India Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Whether taxpayers have business connection/ PE in India? Services eFunds For provision of aforesaid services, eFunds India accessed database of the taxpayer, stored on servers located outside India Issue: 100% India The taxpayers, US entities, were inter alia engaged in providing ATM management and professional services to customers outside India RENDITION OF SERVICES THROUGH INDIAN AFFILIATE – DOES NOT PER SE CONSTITUTE PE [2/4] eFunds IT eFunds Inc 100% US Netherlands 100% IDLX Services 100% India eFunds Revenue's contentions (cont): Terminals to which eFunds India had access constituted fixed place PE of the taxpayers in India Core business activities of the taxpayers conducted in India; hence taxpayers had business connection Taxpayers assumed risk / responsibility of the services provided to the clients, thus the taxpayers also undertook responsibility of the activities performed by eFunds India Employees of taxpayers operated from India Taxpayers’ contentions: Revenue generated from profession service contract was trivial – no core business activities carried out in India other than preparatory/ auxiliary Taxpayers had no LO / PE or business connection in India and premises of eFunds India were not at the disposal of the taxpayers; terminals belonged to eFunds India not to the taxpayers Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative DIT vs eFunds Corporation (42 taxmann.com 50) – Delhi HC (2014) RENDITION OF SERVICES THROUGH INDIAN AFFILIATE – DOES NOT PER SE CONSTITUTE PE [3/4] eFunds IT eFunds Inc 100% US Netherlands 100% IDLX Services 100% India eFunds Taxpayer’s contentions (cont): Mere outsourcing of some work by the taxpayers does not result in business connection in India Employees operating in India were of eFunds India Since eFunds India was paid at ALP – no further attribution warranted ITAT Ruling: The scale of services, duration and relationship between the taxpayers and eFunds India create business connection of taxpayers in India Responsibility vests with the taxpayers, significant risk is not borne by eFunds India Considering nature of activities carried out in India, eFunds India constituted PE of the taxpayers Based on the ‘Global Annual report’, the activities carried out by eFunds India were not preparatory / auxiliary but income generating activities eFunds India not remunerated at ALP Annexure Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative DIT vs eFunds Corporation (42 taxmann.com 50) – Delhi HC (2014) RENDITION OF SERVICES THROUGH INDIAN AFFILIATE – DOES NOT PER SE CONSTITUTE PE [4/4] eFunds IT eFunds Inc 100% US Netherlands 100% IDLX Services 100% India eFunds HC Ruling (cont): No material to hold that taxpayers had right to use premises of eFunds India Taxpayers had business connection in India as eFunds India provided details to taxpayers for entering into contracts and contracts were fully / partly executed in India – however not a sufficient business connection or taxability Fact that eFunds India did not bear significant risks – irrelevant for determining PE constitution eFunds India does not result in PE of non-resident taxpayer – separate legal entity concept prevails Independence of subsidiary not negated incase of sub-contract between AEs unless generic conditions for PE constitution are satisfied Employees were of eFunds India – employees must be of taxpayers to constitute service PE No DAPE - requirements of Article 5(4) not satisfied ITAT appropriately determined attribution of profits Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative DIT vs eFunds Corporation (42 taxmann.com 50) – Delhi HC (2014) SECTION IV – TRANSFER PRICING § AMP expenses incurred for AEs warrant TP adjustments (LG Electronics India Pvt Ltd vs ACIT) Share issuance to AE (Vodafone India Services Pvt Ltd vs UoI ) All rights reserved | Preliminary & Tentative § AMP EXPENSES INCURRED FOR AEs WARRANT TP ADJUSTMENTS [1/3] LG-K Korea India 100% 1% royalty on sales LG-I Technical assistance & royalty agreement Facts: LG-K and LG-I entered into an agreement that granted LG-I inter alia right of manufacture, sales of agreed products on payment of 1% of sales LG-K licensed LG-I the use of its brand name and trademarks without any consideration During the course of TP proceedings, the TPO and DRP held that LG-I had incurred excessive AMP expenses vis-à-vis its comparable entities Excessive expenditure was regarded as incurred for brand promotion of LG-K Issue: Whether TPO was justified in making TP adjustments for AMP expenditure? Whether TPO was justified in holding that LG-I should have earned a mark from LG-K for brand promotion (ie excessive expenditure on AMP) incurred on behalf pf LG-K? Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative LG Electronics India Pvt Ltd vs ACIT (152 TTJ 273) – Delhi ITAT - SB (2013) AMP EXPENSES INCURRED FOR AEs WARRANT TP ADJUSTMENTS [2/3] LG-K Korea India 100% 1% royalty on sales LG-I Technical assistance & royalty agreement Taxpayer’s contentions: TPO could not suo-moto assume jurisdiction over AMP matter in the absence of reference by AO AMP expenses were incurred for LG-I’s business In the absence of agreement between LG-K and LG-I, AMP expenses could not be regarded as brand building AMP not to be split into parts for LG-I and LG-K AMP expenses were not ‘international transaction’ as payment for AMP was made to third parties Bright Line Test (“BLT”) not prescribed method for determining ALP in relation to AMP expenses ITAT-SB Ruling: Suo-moto assumption of jurisdiction by the TPO covered by sub-section 2B to section 92CA No agreement required between AEs for brand promotion – LG-I had incurred AMP expenses for brand legally owned by LG-K Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative LG Electronics India Pvt Ltd vs ACIT (152 TTJ 273) – Delhi ITAT - SB (2013) AMP EXPENSES INCURRED FOR AEs WARRANT TP ADJUSTMENTS [3/3] LG-K Korea India 100% 1% royalty on sales LG-I Technical assistance & royalty agreement ITAT-SB Ruling (cont): When licensed manufacturers incur AMP expenses for brand promotion and MP expenses exceed that of comparables – manufacturer deemed to render service to the brand owner By incurring excessive AMP expenses by LG-I, there was a transaction of creating, improving marketing intangibles for LG-K – such transaction was in the nature of service rendered to LG-K BLT – a tool to measure the cost of unusual marketing expenses – not a method for stating ALP of such transactions RA used mark-up over non unusual cost to arrive at the value of brand promotion service by using cost plus method Applied by: Canon India Pvt Ltd vs DCIT (24 ITR 694) Distinguished by: BMW India Pvt Ltd vs Addl CIT (157 TTJ 36) Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative LG Electronics India Pvt Ltd vs ACIT (152 TTJ 273) – Delhi ITAT - SB (2013) SHARE ISSUANCE TO AE [1/3] Vodafone Mauritius India 100% Issue of equity shares Consideration for issue of shares Taxpayer Facts: The taxpayer, issued equity shares of FV INR 10 at a premium of INR 8,591 to its holding company in FY 2008-09 The transaction was reported in Form 3CEB Adjustments of TPO enhanced value per share to – INR 53,775 on NAV basis The difference between NAV and issue price was treated as a deemed loan to the holding company and notional interest was charged thereon Taxpayer approached DRP on quantum of adjustments made by the AO / TPO Issue: Whether TP regulations are applicable on issue of shares? Taxpayer’s contentions: Earning income is sine non qua to invoke TP provisions Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Vodafone India Services Pvt Ltd vs UoI (264 CTR 30) – Bombay HC (2013) SHARE ISSUANCE TO AE [2/3] Vodafone Mauritius India 100% Issue of equity shares Consideration for issue of shares Taxpayer Taxpayer’s contentions (cont): Intent of TP provisions was to ensure avoidance of tax with respect to taxable income Consideration for issue of shares – capital receipt and was not income of the taxpayer Transaction of issuance of shares - creation of an asset and not a transfer of an asset Invoking TP provisions on share issuance – implied taxation of hypothetical income Section 56(2)(viib) – not applicable for the subject FY; Section 92 was not a charging provision Revenue’s contentions: Disparity in ALP computed by TPO - part of notional income; statutory provision not required to tax the same Share issuance – an international transaction; thus differential between issue price and ALP impacted income of the taxpayer Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Vodafone India Services Pvt Ltd vs UoI (264 CTR 30) – Bombay HC (2013) SHARE ISSUANCE TO AE [3/3] Vodafone India Services Pvt Ltd vs UoI (264 CTR 30) – Bombay HC (2013) HC Ruling: Matter remanded to DRP – to determine applicability of TP provisions on share issuance transaction DRP to consider whether income of the taxpayer was impacted by the subject transaction Vodafone Mauritius India 100% Issue of equity shares Consideration for issue of shares Taxpayer Earning income from an international transaction sine non qua for application of TP provisions, else exercise of determining the ALP only academic in nature Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative AO bound to grant opportunity of hearing to the taxpayer before referring the matter to TPO where the taxpayer objects to the applicability of TP regulations SECTION V – MISCELLANEOUS § Capital gain tax rate in off-market sale of shares by non-residents (Cairn UK Holdings Ltd vs DIT) Indirect transfer of shares not taxable under India-France DTA (Sanofi Pasteur Holding SA vs DoR) All rights reserved | Preliminary & Tentative § CAPITAL GAIN TAX RATE IN OFF-MARKET SALE OF SHARES BY NON-RESIDENTS [1/2] Taxpayer M Co Malaysia UK India Equity shares Transfer of shares I Co Facts: The taxpayer transferred its equity shareholding held in an Indian listed company, to M co in an offmarket transaction The taxpayer computed its capital gains tax liability @ 10% as per proviso to section 112(1) Issue: Whether the proviso to section 112(1) was applicable to a non-resident taxpayer? Revenue’s contentions: Tax rate of 10% under proviso to section 112(1) is available to taxpayers who were eligible for indexation benefit under section 48 If lower rate is applied, it would result in double benefit - protection against currency fluctuation and lower tax rate of 10% If lower rate is applied, then 20% rate on LTCG would become redundant, which was not the intent of the statute Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Cairn UK Holdings Ltd vs DIT (359 ITR 268) – Delhi HC (2013) CAPITAL GAIN TAX RATE IN OFF-MARKET SALE OF SHARES BY NON-RESIDENTS [2/2] Taxpayer M Co Malaysia UK India Equity shares Transfer of shares I Co Taxpayer’s contentions: Proviso to section 112(1) does not mandate applicability of second proviso to section 48 Shares transferred were listed, no indexation benefit availed - proviso to section 112(1) thus applicable [Relied on Timken France SAS (AAR)] HC Ruling: First and second proviso to section 48 operate independently and have different purposes Section 112(1) did not restrict a taxpayer who availed the benefit of neutralization of foreign exchange risk from claiming 10% tax rate Section 112(1) benefit could not be denied merely because the indexation benefit was not applicable to a non-resident taxpayer Legislative intent is to tax LTCG on listed shares at 10% without availing the benefit of indexation If the legislature intended to deny the benefits, it would have explicitly provided for in the statute Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Cairn UK Holdings Ltd vs DIT (359 ITR 268) – Delhi HC (2013) INDIRECT TRANSFER OF SHARES NOT TAXABLE UNDER INDIA-FRANCE DTA [1/3] Sanofi Aventis 100% MA GIMD Sanofi Pasteur 19.63% 80.37% Transfer of shares ShanH France India 80% SBL Facts: Sanofi Pasteur had acquired shares of ShanH The AAR held that transaction was taxable in India; Sanofi liable to withhold tax from consideration The buyer/ sellers filed a writ petition before the HC Issue: Whether ShanH was a colourable device / arrangement was a sham for avoidance of capital gains tax under the Act? Whether the retrospective amendments to the Act impact the provisions of the DTA? Whether the transaction was taxable in India? Taxpayer’s contentions: Transfer of shares of ShanH does not tantamount to transfer of shares of SBL As per DTA , capital gains taxable only in France An asset of an entity is not an asset of shareholder Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Sanofi Pasteur Holding SA vs DoR (354 ITR 316) – Andhra Pradesh HC (2013) INDIRECT TRANSFER OF SHARES NOT TAXABLE UNDER INDIA-FRANCE DTA [2/3] Sanofi Pasteur Holding SA vs DoR (354 ITR 316) – Andhra Pradesh HC (2013) 100% MA GIMD Sanofi Pasteur 19.63% 80.37% Transfer of shares ShanH shares of SBL as a nominee § ShanH did not make payment for acquiring shares of France India 80% SBL – it was not a party to the resolution for purchase of shares of SBL § ShanH is the alter ego of MA / GIMD, the beneficial and legal owner of shares SBL Retroactive amendments to section 2(47) deems to have always included direct / indirect disposal of an asset Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Sanofi Aventis Taxpayer’s contentions (cont): Since the CoA of the controlling interest is not determinable, the capital gain computation mechanism fails thus the gain, if any, cannot be regarded as chargeable to tax Revenue’s contentions: Share transfer was effected to gain control / management in SBL Corporate veil should be lifted on account of: § ShanH has no commercial substance and holds INDIRECT TRANSFER OF SHARES NOT TAXABLE UNDER INDIA-FRANCE DTA [3/3] Sanofi Aventis 100% MA GIMD Sanofi Pasteur 19.63% 80.37% Transfer of shares ShanH France India 80% SBL HC Ruling: ShanH was an investment vehicle ShanH held shares of SBL since inception, thus was the legal and beneficial owner of shares ShanH continues to be shareholder of SBL after transfer of shares by MA / GIMD France was not a tax haven, the tax liability of the transaction being higher in France, hence the transactions undertaken were not abusive and lifting the corporate veil is not permitted Even if corporate veil is pierced, the transaction was for sale of shares of ShanH by MA and GIMD and the case was not that of transfer of shares of SBL Retroactive amendments under the Act do not have a bearing on the provisions of DTA Transfer of shares of ShanH not taxable under Article 14(5) of the DTA, hence Sanofi not liable to withhold taxes from consideration paid Overview of important judgments on international tax | All rights reserved | Preliminary & Tentative Sanofi Pasteur Holding SA vs DoR (354 ITR 316) – Andhra Pradesh HC (2013) ANNEXURE 4 Transfer Pricing Implication on Various Entity Structures Purchase of software by QAD India would required to comply with the arm’s length test Undertaking the new business in a new entity would not any have significant Transfer Pricing implications Undertaking the new business under the existing entity, would create the need for segmental reporting Appropriate cost allocation keys would be required to be put in place for common costs amongst different business segments Need to document accurate functional analysis and determine appropriate Transfer Pricing methodology in all structures Determine an arm’s length consideration based on the functional analysis of the Indian entity in all structures C and h aFor ldistribution l eUndertaking n g e U activities s Sales and Alternate ModesProposed of India Presence Distribution Activities sales in India | ANNEXURE Mechanism to compute profits attributable to eFunds India: Determination of proportion of Indian assets to Global assets ie including eFunds India’ s assets Aggregate of global profits of Group (inclusive of eFunds India’ s profits) Working of total profits attributable to India out of global profits in same proportion as above Aggregate India attributable profits of group - X Less: Indian subsidiary’s international assessed Profits - Y All rights reserved | Preliminary & Tentative Profits attributable to taxpayers Indian PE is Z = (X-Y) Overview of important judgments on international tax |
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