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INDIA RELATED INTERNATIONAL TAX MATTERS IN NEWS


Top Tax Haven “Virgin Islands” Get More Investment In 2013 Than India And Brazil - U.N. 


January 28th, 2014, The British Virgin Islands got more foreign direct investment last year than the major emerging economies of India and Brazil combined, a United Nations survey said on Tuesday. Paul McCartney and Ringo Starr take the stage together to mark 50 years since The Beatles' legendary debut on The Ed Sullivan Show. The Caribbean archipelago, a tax haven otherwise dependent on tourism, has jumped up the league table of top investment destinations in the past five years. It welcomed $92 billion of foreign cash in 2013, according to preliminary figures compiled by the U.N. trade and economy thinktank UNCTAD (United Nation Conference on trade and Development). That was the fourth biggest haul of investment globally. The world's biggest economy, United States, attracted $159 billion. China, the world's second biggest economy, got $127 billion, while major oil and metals producer Russia took in just $2 billion more than the British Virgin Islands. Brazil and India were further down the ranking, with $63 billion and $28 billion respectively. For most countries, foreign direct investment mainly consists of companies spending on crossborder corporate acquisitions and new overseas projects. But for the British Virgin Islands, most of the money is transferred quickly in and out of the country or cash moved through the treasury accounts of large firms, which UNCTAD terms "transnational corporations" or TNCs. "In the British Virgin Islands there are some financial companies that perform the role of treasuries of the TNCs, as a kind of profit unit or profit centre," said James Zhan, director of UNCTAD's investment and enterprise division. "The TNCs' revenues basically flow from their foreign affiliates in countries with higher tax rates to there," he told a news briefing. The islands' annual inflow of foreign investment was 40 percent up from a year ago and continues a trend that took off after the economic crisis struck and governments began cracking down on tax avoidance. Zhan said the British Virgin Islands' boom in investment would be unlikely to continue at the same pace because regulators were determined to stop such flows. "In the medium or longer term we see that the role in this respect may reduce," he told a news conference. "Governments are looking into the situation and trying to tighten up their regulatory framework both at the national and international level. "The main casualty of such regulation was likely to be big companies' treasury flows, he said, adding that UNCTAD was working on a study to show how big the impact would be. The continued flows to the British Virgin Islands, which UNCTAD has previously referred to as a tax haven, is likely to keep it under the microscope of the Group of 20 leading economies, which has said it wants to put pressure on "non-cooperative jurisdictions". The G20 has asked the Organisation for Economic Co-operation and Development to lead efforts on curbing international tax evasion and avoidance, and the OECD's tax transparency forum has named the British Virgin Islands as one of five countries that failed to meet international standards on tax transparency. Each of the five either failed to share taxpayer information with other countries or to gather information on beneficial ownership of corporate entities registered on their territory, or both. The OECD has said big international companies, banks and agencies may think twice about investing through these jurisdictions. UNCTAD said the total global flow of foreign direct investment rose by 11 percent to $1.46 trillion in 2013, and UNCTAD forecasts it will increase to $1.6 trillion in 2014 and $1.8 trillion in 2015.

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India-Netherlands Tax Treaty -  Income Deemed To Accrue Or Arise In India


December 13, 2013, LD/62/47 Endemol India Private Limited, In Re (AAR) Section 9 of the Income-tax Act, 1961 read with Article 12(5) of the India-Netherlands Tax Treaty.

Where Indian TV program providing company took assistance from its foreign group company in respect of consultancy services such as (a) General Management, (b) International Operations, (c) Legal advisory, (d) Tax Advisory, (e) Controlling and Accounting & ‘reporting, (f) Corporate Communications, (g) Human Resources and (h) Corporate Development, Mergers & Acquisitions which did not meet the requirements of ‘make available’ clause under the India Netherlands DTAA; same is not fees for technical services, neither was it taxable as business profit of foreign company as it has no PE in India and payment was made in foreign The applicant Indian company EIPL is engaged in the business of providing and distributing television programmes.

The applicant EIPL also has a lean organisation in India and requires assistance from group company Endemol Holding to carry out its business efficiently and in a profitable manner and for that purpose entered into a Consultancy Agreement, with Endemol Holding for procuring certain services to the applicant in respect of (a) General Management,(b) International Operations, (c) Legal advisory, (d) Tax Advisory, (e) Controlling and Accounting & ‘reporting, (f) Corporate Communications, (g) Human Resources and (h) Corporate Development, Mergers & Acquisitions. The Authority for Advance Rulings held as follows: Issue of fees for technical services The Consultancy Agreement states that the applicant is an operating and subsidiary company of Endemol Holding B.V., a company registered in Netherlands with the main business of producing television programmes and interactive production of high level of complexity relating to production process.

The applicant has requested the holding company to provide certain consultancy services, hereinafter referred to as the “services” and the services rendered/ to be rendered are listed out in schedule 1 to the agreement. Article 1 of the Consultancy Agreement under the head “general provision” states that the holding company has considerable expertise, knowledge and expertise in the field of management, production, exploitation and development of formats in television programmes and interactive productions, and has established as one of its tasks to disseminate such experience, knowledge and expertise in other operating companies within the Endemol Group. Operating company is not sufficiently staffed and equipped to carry out certain activities deemed necessary for efficient and profitable conduct of its business and therefore requires assistance from the holding company in relation to the services and the holding company is willing to render the services to the operating company on a regular basis. Article 1 of the consultancy agreement clearly shows that it is the “considerable experience, knowledge and expertise” of the holding company that is to be rendered and for which payments are to be made.


It is also made clear that the services that are provided are certain consultancy services as described above. The definition of “Fees for technical Services” in Explanation 2 to section 9(1)(vii), contains three elements, namely managerial, technical or consultancy. The consideration paid for the services rendered by the non-resident company in this case is covered by the broad definition of Fees for Technical Services in the Act. On a plain reading of the definition, consultancy services is clearly included in the Fees for Technical Services. The make available clause as mentioned in clause (b) of article 12(5) also throws light on what services can be included as technical services. These are - technical knowledge, experience, skill, knowhow or processes, or the development and transfer of a technical plan or technical design. The nature of the services listed in the Management Consultancy Agreement requires technical knowledge, experience, skill, know-how or processes. They cannot be termed as merely administrative and support services as tried to be made out by the applicant.

The broad consensus of the interpretation relate to services that require special expertise, skill and knowledge which are not in possession of ordinary person. This being the case the services rendered by Endemol BV to the applicant cannot but be technical in nature. Therefore, the services rendered in this particular case are technical services both under the provision of the Income-tax Act and under the India- Netherlands Tax Treaty subject to fulfillment of requirements of the “make available” clause in the treaty. The broad consensus of the interpretation of the clause seems to be that requirements of “make available” clause in the tax treaty is met if the technology, knowledge or expertise can be applied independently by the person who obtained the services.

In this case the applicant merely took assistance of the Holding company in its business activities outside India and there is no material to suggest that the technical know-how, skill, knowledge and expertise are transferred to the applicant so as to enable the applicant to apply this technical know-how etc. independently. Therefore, the requirement of the ‘make available’ clause in the Article 12(5) of the India-Netherlands Tax Treaty is not satisfied in this case and hence the payment for the services rendered by Endemol BV will not come under ‘fees for technical services’ under the ‘Tax Treaty’. Issue of Business profit.

There is no dispute about the profit arising out of the transaction in the hands of Endemol Holding BV. There is also no dispute about the services rendered outside India for which payments were made by the applicant to Endemol Holding. The applicant is an Indian enterprise and for its business activities outside India, the services on Endemol Holding were utilised. There is no material to show that Endemol Holding has any presence in India. Payments for the services were received by Endemol Holding outside India. There is also no material to suggest that the applicant is fully dependent on Endemol Holding BV. In such circumstances the company Endemol Holding BV does not have any PE in India. Thus, the profits arising out of the transaction for the services rendered by Endemol Holding BV are not taxable in India as Endemol Holding BV does not have PE in India.

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India To Sign Bilateral Investment Protection Agreement With UAE Next Week



December 7th, 2013, New Delhi : The government will finally sign a Bilateral Investment Protection Agreement (BIPA) with the UAE next week, signalling an end to its freeze on signing such pacts after its several run-ins with foreign companies, including Vodafone, over investment issues. Earlier this year, in January, the government had decided to put all discussions over BIPA with foreign countries on hold.

The government said it was going to work on a new model for BIPA before signing the agreement with  any country. India has already inked BIPA with over 80 countries.

Sources confirmed that the agreement with the UAE will be signed under the new model here in the presence of UAE foreign minister Sheikh Abdullah bin Zayed Al Nahyan on December 12. "The template has just been cleared by both sides and it will be signed next week,'' said a source

With the government mulling a new template for BIPA, the first casualty in bilateral relations with the UAE was PM Manmohan Singh's much-awaited visit to the country in March. The trip had to be called off at the last moment as the UAE insisted on signing BIPA during the visit.

On April 23, Jet AirwaysBSE 1.33 % and UAE's Etihad Airways signed a $8-billion agreement under which Etihad would be investing $379 million in Jet Airways for a 24% stake in the airlines. The UAE had earlier insisted that signing BIPA was imperative for the deal.

A notice to UAE telecom major Etisalat for alleged violations of foreign exchange laws also seemed to have irked the UAE, a country with which India's annual trade volume reached $74 billion in 2012-13. Etisalat had been forced to shut its India operations after the Supreme Court cancelled 122 telecom licences, a fallout of the 2G scam case, in 2012.

The government had decided to review the earlier model "in the light of arbitration notices received under different BIPAs". Vodafone had invoked India-the Netherlands BIPA in the tax dispute case as it threatened international arbitration over the issue.

As reported by media earlier, department of economic affairs (DEA) said in an official communication that "pending review of the model text, all BIPA negotiations have been kept on hold'' .

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The Tax-Information Exchange Conundrum


November, 15th 2013It is not uncommon to hear the phrase ‘information overload’ a lot these days. We live in a densely connected world with every nook and corner saturated with information. With the advent of the internet, boundaries of nationalities and cultures are increasingly getting blurred, bringing people from different parts of the world closer.

The same cannot be said for governments, however. Faced with a global slowdown leading to high fiscal deficits on account of foregone tax revenues, countries are increasingly directing their efforts towards extracting information regarding tax foregone on account of beneficial provisions being exploited in tax havens. Information is also crucial as corporations increasingly shift to low tax jurisdictions and tax havens.

A meeting of the G-8 countries hopes to give further momentum to these efforts. Representatives from Germany, France, Britain, Italy and Spain recently convened to discuss and develop mechanisms to clamp down on tax evaders and tax havens by ensuring seamless information exchange. Countries such as Jersey and Cayman Islands, which have many shell corporations, agreed to sign a multi-lateral convention on information-swapping.

India is not far behind—the current government approached various jurisdictions, including Mauritius, for data on offshore bank accounts of certain Indian entities, motivated by the issue taking the spotlight in the run up to the general elections in 2009. The efforts are not limited to purely obtaining information. Indian tax authorities now have provisions in the income tax legislation and double taxation treaties which disincentivise trade and transactions with identified tax havens.
The concept of ‘notified jurisdictions’ legislated vide the Finance Act, 2011, is a step in this direction. The introduction of Section 94A ensures that certain countries which do not effectively exchange information may be notified by the government. As a consequence of the notification, transactions with such territories shall attract increased scrutiny and higher rates of withholding, among other restrictions.

Current Position - The legislative intent behind the introduction of Section 94A is to mandate rigorous documentation on the part of the Indian resident undertaking transactions with entities in the notified territory, allowing Indian tax authorities to scrutinise such transactions in depth.
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Interest Payment
For
Defaults In Payment Of Advance Tax By Foreign Company



November 7, 2013, LD/62/41, DIT-I, International Taxation vs. Alcatel Lucent USA, INC and Alcatel Lucent World Service INC (DEL) Assessment Years 2004-05 to 2008-09, Section 234B of the Income-tax Act, 1961 


Even if a foreign company itself claimed that it did not have any taxable presence in India and, hence, no portion of its Indian business profits was taxable in India, it cannot escape its liability of interest subsequent to assessment of Indian income on the ground that the Indian payers

ought to have deducted the tax The assessee-Alcatel Lucent USA, INC, is a tax-resident of USA and is part of the Alcatel Lucent Group. The Indian subsidiary provided marketing support services to the assessees. Based on the materials found during the survey, the assessing officer concluded that the assessee had a PE in India in terms of the Double Taxation Avoidance Agreement between India and US and was liable to tax in India on the income earned therein. In response to the notice, the assessee filed returns of income for all the assessment years declaring "nil" income. In the returns, a note was appended, explaining why the assessee took the position that it was not liable to tax in India. It was submitted that the assessee-company was incorporated in USA. It was a tax resident of USA and entitled to be governed by the provisions of the Double Taxation Avoidance Agreement between India and USA (the DTAA). b) It did not have any office, premises or other place of business in India. During the year under consideration, the assessee had supplied certain goods and equipments to Indian customers engaged in telecom business. The sales of these goods were made from outside of India. The payments for the same were also received outside of India. In view of above, the Company did not have any taxable presence in India and hence no portion of its business profits was taxable in India.

The assessing officer however did not accept the assessee's stand and computed profit attributable to the PE in India. In addition to the aforesaid income, the assessing officer also directed that interest under Sections 234A, 234B and 234C would be charged. However, the CIT (Appeals) held that the assessee was not liable to pay any interest under Section 234B.

The High Court of Delhi held as follows:
The assessee claimed that the Indian payers ought to have deducted the tax irrespective of the fact that the assessee itself claimed the Indian income to be not taxable. It must be remembered that in the note appended to the return the assessee was quite categorical in denying its liability to be assessed in India. It relied on the double taxation avoidance agreement between India and USA and pointed out that there was no permanent establishment in India. It further stated that the telecom equipments were sold outside India and the payments were also received outside India and thus the assessee did not have any taxable presence in India so as to be liable for tax on its Indian income. If this was the stand of the assessee, it is not impermissible or unreasonable to visualise a situation where, the assessee would have represented to its Indian telecom dealers not to deduct tax from the remittances made to it. On the contrary it would be surprising if the assessee did not make any such representation; such a representation would only be consistent with the assessee's stand regarding its tax liability in India. Moreover, no purpose would have been served by the assessee taking such a categorical stand regarding its tax liability in India and at the same time suffering tax deduction under Section 195(1). Therefore, even though there may not be any positive or direct evidence to show that the assessee did make a representation to its Indian telecom dealers not to deduct tax from the remittances, such a representation or informal communication of the request can be reasonably inferred or presumed. The Tribunal ought to have accorded due weightage to the strong possibility or probability of such a request having been made by the assessee to the Indian payers since otherwise the denial of its tax liability on its Indian income would have served little purpose for the assessee The Tribunal ought to have drawn the inference that the Indian payers did not deduct the tax under Section 195(1) because of the request made by the assessee, consistent with its stand that it was not liable to be taxed in India.

Taking a practical view of the matter, it is difficult to see how the Indian payers could have resisted the request which was made by the assessee to them not to deduct tax from the remittances. The Indian payers have to keep in mind the future business prospects and it was necessary for them to keep the assessee in good humour so that the business relationship remains profitable for them. They would have been in no position to resist the request. Moreover, since the sales were claimed to have been concluded outside India, again it would be a fair and reasonable inference to be drawn that the Indian dealers would have had an interface with the assessee in USA while concluding the sale contracts and on such an occasion it is normal for the parties to finalise all aspects touching on their relationship including the tax compliances. It should also be remembered that no reason whatsoever has been given by the assessee as to why it did not press its appeals before the CIT (Appeals) on the question of liability to tax on its Indian income.

Having denied its tax liability, it seems unfair on the part of the assessee to expect the Indian payers to deduct tax from the remittances. It is also open to the assessee to change its stand at the first appellate stage and submit to the assessment of the income. When it does so, all consequences under the Act follow, including its liability to pay interest under Section 234B since it would not have paid any advance tax. Such liabilities would arise right from the time when the income was earned. Advance tax was introduced as a PAYE Scheme – “pay as you earn”. It is not open to the assessee, after accepting the assessment at the first appellate stage to claim that the Indian payers ought to have deducted the tax irrespective of the fact that the assessee itself claimed the Indian income to be not taxable. An assessee who admits its tax liability right from the beginning to contend that it was the responsibility of the payers to deduct the tax and if they did not, even then the tax which ought to have been deducted by them should be set off against the assessee's advance tax liabilities.
It further seems inequitable that the assessee, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers for not deducting the tax at source from the remittances, after leading them to believe that no tax was deductible. The assessee must take responsibility for its volte face. Once liability to tax is accepted, all consequences follow; they cannot be avoided. After having accepted the liability to tax at the first appellate stage, it is unfair on the part of the assessee to invoke section 201 and point fingers at the Indian payers. The argument advanced by the learned counsel for the assessee that the Indian payers failed to deduct tax at their own risk seems to us to be only an argument of convenience or despair. It is difficult to imagine that the Indian telecom equipment dealers of the assessee would have failed to deduct tax at source except on being prompted by the assessee. It may be true that the general rule is that equity has no place in the interpretation of tax laws. When the facts of a particular case justify it, it is open to the court to invoke the principles of equity even in the interpretation of tax laws. Tax laws and equity need not be sworn enemies at all times.
The rule of strict interpretation may be relaxed where mischief can result because of the inconsistent or contradictory stands taken by the assessee or even the revenue. Moreover, interest is, inter alia, compensation for the use of the money. The assessee has had the use of the money, which would otherwise have been paid as advance tax, until it accepted the assessments at the first appellate stage. Where the revenue has been deprived of the use of the monies and thereby put to loss for no fault on its part and where the loss arose as a result of vacillating stands taken by the assessee, it is not expected of the assessee to shift the responsibility to the Indian payers. The assessee should take responsibility for its actions. The present case is one where such considerations should prevail in the interpretation of section 234B; otherwise, it will not merely result in injustice but the purpose of the provision would not have been achieved. For the aforesaid reasons the issue was to be decided against the assessee.
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Prosecution Under OECD Pact Prior Approval Is Required


20 October, 2013, New Delhi: Switzerland has signed the Organisation for Economic Co-operation and Development  (OECD) pact which provides for sharing of tax information and mutual cooperation by signatories, but any penal action against money launderers and terrorists can be initiated only after obtaining prior sanction from the country that gave details. Switzerland on October 15 signed OECD's Multilateral Convention on Mutual Administrative Assistance in Tax Matters. India had joined the convention in 2012. Switzerland singing the OECD pact is seen as major boost for India and other countries seeking details on suspected black money stashed in Swiss banks as it virtually pulled down the famed secrecy wall surrounding Swiss banks. It would lead to Switzerland providing all forms of mutual assistance exchange on request, spontaneous information sharing, tax examinations abroad, and assistance in tax collection. 
"What this convention essentially means is that while we would be able to get spontaneous financial information on request, get to do tax examination abroad and obtain assistance in tax collection, taxpayers' right is the cornerstone of the treaty. Any penal action or efforts to probe laundering and terror financing cases will need a approval from the contracting nation," a senior Finance Ministry official said. 

The confidentiality clause and the pledge to keep the data classified after taking it from a partner nation is by and large in force in case of other treaties that India has signed as well, the official said. India's two exclusive and standalone treaties with various countries, the Double Taxation Avoidance Agreement ( DTAA) and the Tax Information Exchange Agreement are also in place to do the rest of the job, another tax sleuth said. Indian economic crimes investigators, Increasing number of countries becoming a member of this agreement ease the prior hurdles in getting classified tax and financial data of a suspect or doubtful entities being probed for tax evasion or economic crimes. The multilateral convention "provides the option to undertake automatic exchange while requiring an agreement between the parties interested in this form of assistance."The convention has strict rules to protect the confidentiality of the information exchanged. It provides that information shall be treated as secret and protected in the receiving state in the same manner as information obtained under its domestic law but also with the safeguards that may be required to ensure data protection under the domestic law of the supplying party," the mandatory clause of the convention states.

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Tax Information Exchange Between India And Other Nations


18 October, 2013, New Delhi: Ever considered purchasing a property in Switzerland or making any investment or banking transaction to avoid tax authorities in India,chances are that such information may get shared with Financial Intelligence Unit (FIU) here and prosecution may have to be faced by you for tax evasion. Switzerland does not guarantee guarding your investment details any longer as per its historical secrecy clause after it became a signatory to the Paris-based Organisation for Economic Cooperation and Development's (OECD) multilateral convention on mutual assistance on tax matters.

India is among 58 countries which are signatories to the OECD mutual tax information sharing convention. But it still will have to sign another pact with the Swiss government for automatic information sharing. Double Taxation Avoidance Agreement (DTAA) with Switzerland may not be adequate in this case. On October 15, Switzerland signed the OECD's multilateral convention for mutual administrative assistance on tax matters which provides for sharing of investment details with member countries automatically.

India has been receiving information from other countries on its citizens who have made investments abroad (legal ones in particular) through this automatic route. Coming to information received from France, Denmark and Finland, details of over 2,000 bank accounts of Indians in those countries got disclosed. France even shared a list of 700 Indian bank accounts in Geneva-based HSBC Bank, which was part of the stolen data. This information was passed on to Income Tax Investigation units for further investigation. Details of 700 accounts in the Geneva bank threw up many surprising names including those of high-profile industrialists and politicians who were found to have made huge deposits. India amended its DTAA with 81 other countries and signed tax information exchange agreements with certain tax havens for automatic exchange of information.

But even after a revised DTAA with Switzerland, automatic exchange of information on all investments made there by Indians, was not made possible as it first required a case to be registered in India  for the required exchange. Now, with Switzerland becoming a signatory to the OECD's multilateral convention, it has become possible to receive information on any Indian investment made there.
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Long Term Capital Gains Tax
On 
Sale of Equity Shares by Foreign Company


October 7, 2013, LD/62/39, Cairn UK Holdings Ltd. vs. Director of Income-tax  (DEL) , Assessment Year 2010-2011. Section 112 read with Section 48 of the Income-tax Act, 1961.

Tax payable on long term capital gains arising to a foreign company on sale of equity shares held by it in an Indian company will be 10% of amount of capital gains as per proviso to Section 112(1).

Petitioner CUHL, a Scottish company, transferred 4, 36, 00,000 equity shares of R10 each of an Indian company CIL to a Malaysian company PCIL for consideration of US$ 241,426,379. This transaction dated 12th October, 2009, pursuant to an agreement dated 14th October, 2009, was an off market transaction i.e. not through a stock exchange. The transaction resulted in long-term capital gain of US$ 85,584,251 in the hands of the petitioner, after applying the benefit under first proviso to Section 48. The question raised as to whether the tax payable on long term capital gains arisen to petitioner CUHL on sale of equity shares of CIL will be 10% of the amount of capital gains as per proviso to Section 112(1).

The High Court of Delhi held as follows: 
A non-resident assessee is entitled to benefit of the proviso to Section 112(1). The proviso to Section 112(1) does not state that an assessee, who avails benefits of the first proviso to Section 48, is not entitled to benefit of lower rate of tax @ 10%. The said benefit cannot be denied because the second proviso to Section 48 is not applicable. The stipulation for taking advantage of the proviso to Section 112(1) is that the aggregate of long-term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to Section 48. Inflation indexation shall be ignored. In case the Legislature wanted to deny the said advantage/benefit where the assessee had taken benefit of the first proviso to Section 48, it was easy and this would have been specifically stipulated, that an assessee, who takes advantage of neutralization of exchange rate fluctuation under the first proviso to Section 48 would not be entitled to pay lower rate of tax @10%. Legislature had a far easier and simpler way to deny benefit of the proviso to Section 112(1) by using different words and phrases had thus been the intention. The legislature in fact did not intend to deny the said benefit.

Non-resident under the first proviso to Section 48 are entitled to neutralise exchange rate fluctuation for computing long-term capital gains, when the shares/derivatives were purchased utilising foreign currency. The second proviso is not applicable to non-residents covered by the first proviso and entitles an assessee to claim benefit of indexation while computing long-term capital gains. Thus, the second proviso to Section 48 has object of neutralizing the effect of inflation. Proviso to Section 112(1) is certainly not applicable in case where an assessee is entitled to benefit of indexation under the second proviso to Section 48. If an assessee does not take benefit of indexation under the second proviso of section 48, they are eligible for the lower rate of tax @ 10%. Otherwise, an assessee is liable to pay tax @ 20% after taking benefit of indexation. If an assessee covered by the first proviso to Section 48 is allowed benefit of the proviso to Section 112(1), two consequences flow:

(i) a non-resident become entitled to two or double deductions. Firstly, under the first proviso to Section 48 and then benefit of lower rate of tax under the proviso to Section 112(1); and 

(ii) this interpretation would discriminate between the assessees covered by the first proviso and those covered by the second proviso to Section 48. The argument of double benefit was not a taboo under law and protection against exchange rate fluctuation under the first proviso to Section 48 does not go against the concept of lower rate of tax. It has been further observed that enquiry to delve into legislative intent and purpose would be a hazardous guess. First proviso to Section 48 is applicable when a non-resident had purchased an asset being a share or debenture with foreign currency, converted into Indian rupee. It stipulates that on transfer or sale of the said share or debenture the consideration received in Indian rupee should be reconverted into the same foreign currency. Sale and purchase of shares has to be in Indian rupee, the legal tender in India, but the foreign investor had brought in foreign currency and, therefore, logically and naturally for him, the gain should be computed in foreign currency. The said investor would like to convert the sale consideration received in Indian rupee into foreign currency. This would reflect the true gain or income earned. For a nonresident who has utilised/brought in foreign currency for purchase of shares or debentures in Indian rupee, inflation in India is immaterial and inconsequential. For him, the gain or loss is to be computed with reference to the foreign currency utilized for purchase and foreign currency available to him for repatriation after the sale. From the said assessee's view point and objective, he is most concerned with exchange rate fluctuation and his true and actual gain should take into account the exchange rate fluctuation. The second proviso is applicable to all others including non-residents, who are not covered by the first proviso and they are entitled to benefit of cost of indexation which neutralise inflation.

The first proviso to Section 48 ensures that a non-resident, who utilised his foreign currency, is taxed after taking into consideration the fluctuation in exchange rate. Indian rupee can and has in past appreciated against foreign currencies. In such cases, the long-term capital gains payable can increase. On the contrary we are not aware of occasions of deflation in India in last two decades and it would be incorrect to hold that the Legislature while enacting the second proviso had in mind or assumed that there would be deflation. The two provisos cannot be equated as granting same relief or benefit. They operate independently and have different purpose and objective.  In view of the above, it is difficult to state that benefits under the first proviso and the second proviso to Section 48 are identical or serve the same purpose. There is some merit in the contention that if proviso to Section 112(1) is applied, then almost all assessees covered by the first proviso to Section48 would be liable to pay tax @ 10% only and not @ 20% on long-term capital gains. This appears to be correct and a logical consequence of the proviso to Section 112(1), but this cannot be a ground to contextually read the proviso to Section 112(1) differently. The said proviso is applicable to listed securities or units or zero coupon bonds. Long-term capital gain is not payable on listed securities sold through stock exchanges as STT is payable. First proviso to Section 48 is applicable on sale of shares or debentures in Indian company, whether or not the said shares or debentures are listed or not. Thus, proviso to Section 112(1) is more restrictive and will not necessarily apply in all cases covered by the first proviso to Section 48. Secondly, the proviso to Section 112(1) is not applicable to debentures. Nevertheless, the proviso to Section 112(1) is applicable to units and zero coupon bonds, which are not covered by the first proviso to section 48 of the Act. Second proviso to Section 48 is not applicable on transfer of long-term capital asset being bond, debenture other than the capital index bond. Zero coupon bonds are, however, specifically made eligible for benefit under the proviso to Section 112(1).

The purpose and object behind the proviso to Section 112(1) itself is somewhat debatable, except that the legislative intention was to tax long-term capital gain on listed shares, bonds and units @ 10%, without benefit of indexation under second proviso to Section 48 of the Act. Legislative policy and object is nothing more, and it is impermissible to read into the said provision an affirmative legislative intention on assumption and guess work and this would be beyond the acceptable principles of interpretation.

It is declared that the petitioner will be entitled to benefit of proviso to Section 112(1) on sale of equity shares in question.

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India Signs DTAA With Latvia To Prevent Income Tax Evasion



18 September, 2013, New Delhi: India has signed a Double Taxation Avoidance Agreement with Latvia to prevent Income Tax Evasion by business entities. Latvia is the third Baltic country with which DTAA is signed by India. The DTAA have already come into force with Lithuania and Estonia. DTAA provides that business profits will be taxable in the source country if the activities of an enterprise constitute a permanent establishment there. The agreement with the provides for fixed place PE, building site, construction or assembly PE, Off-shore exploration PE and agency PE. Dividends, interest and royalties & fees for technical services income will be taxed both in the country of residence and in the country of source.

The low level of withholding rates of taxation for dividend, interest and royalties and fees for technical services (10 per cent) will promote greater investments, flow of technology and technical services between the two countries. The agreement will provide tax stability to the residents of India and Latvia and will facilitate mutual economic cooperation. The pact has been signed here by External Affairs Minister Salman Khurshid and Edgars Rinkevics, Minister of Foreign Affairs of Latvia.

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Avoidance of Double Taxation If You Have Foreign Salary


May 14, 2013: As per the current economic state of affairs, before accepting any foreign assignment, it is vital for employees to consider various tax implications. An Indian resident would be liable to tax on worldwide income, irrespective of place of receipt of salary. In this case, it’s relevant for the employee to analyze whether the employer in India has already considered his foreign salary/allowances for the purpose of Indian taxes and has mentioned the same in Indian Form 16. In case it is not mentioned then such foreign income has to be offered to be taxed in India (even though it is taxed in foreign nation). In order to avoid double taxation in this situation, India has entered into Double Taxation Avoidance Agreements with over 80 countries. Section 91 of Income Tax Act, 1961, provides similar relief to avoid double taxation of income where any treaty does not exist. The tax credit is available on specific taxes defined in treaties, paid on double taxed income, subject to various restrictions.

Every salary component should be analyzed to arrive at the appropriate double taxed income. The foreign tax return may not be available at the time of filing tax return in India due to separate tax years in two countries or on due to exemption available from the tax return filing requirement. This would complicate the procedure of claiming tax credit in India. In such position, one could look at the possibility of claiming the tax credit based on pay slips or tax deduction statement provided by the employer in foreign country. If the same does not match with the final tax liability as per tax return filed in foreign nation subsequently, then the tax return in India may have to be revised. Furthermore, the tax authorities may not process the tax credit cases electronically and might transfer the same to tax officers for manual processing. The taxes paid in foreign country, which are claimed as credit in the tax return, will not show in the Indian tax authority’s database. This may call for detailed scrutiny and verification proceeding. It is essential for the employee to understand the compliance requirements related documents for the same.

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This blog is Created by CA Anil Kumar Jain.