Photo of S.R. Patnaik

Head and Partner in the Tax Practice at New Delhi office of Cyril Amarchand Mangaldas. Mr. Patnaik specialises in various aspects of direct tax, such as international tax, transfer pricing, corporate tax etc. He can be reached at sr.patnaik@cyrilshroff.com

The Income Tax Act, 1961 (IT Act) contains several provisions to prevent tax evasion. One such provision seeks to tax loans and advances made to shareholders by a closely held company as deemed dividends in the hands of the shareholders. This is intended to prevent tax evasion in situations where closely held companies distribute accumulated profit as loans or advances which are not chargeable to tax under the IT Act, instead of distributing it as dividends which is chargeable to tax under the IT Act. However, the said provision of deemed dividend is attracted subject to the satisfaction of the following conditions:

Continue Reading Supreme Court Rules: Deemed Dividends Are Taxable Only in the Hands of Shareholders

Permanent Establishment (PE) is a significant feature of bilateral tax treaties and is a key threshold adopted by source countries to tax profits earned by non-resident entities from the business activities carried out by the non-resident in the source country.

A ‘Fixed Place PE’ relates to a non-resident entity having a fixed place of business in the source country. But certain tax treaties also provide for a ‘Service PE’. A Service PE is established if: (i) the non-resident delivers services for longer than the prescribed threshold; and (ii) the said services are furnished in the source country through the employees or other personnel of the non-resident.

Traditionally, a Service PE required the physical presence of employees of the non-resident in the source country. However, in the present digital economy, this understanding is being challenged as more and more jurisdictions are doing away with this requirement.

The governments of Saudi Arabia and Israel, for example, have passed internal guidelines that suggest a non-resident would have a Service PE if it furnished services, including consultancy services, through employees or other personnel who are offshore and not physically present in the Source State. This would only be the case, however, if the activities continue (for the same or connected projects) within the Source State for more than 183 days in any 12-month period.

Continue Reading Service PE Does Not Require Physical Presence of Employees

The real estate industry has experienced unprecedented growth in the past couple of decades. This has led both landowners and developers to enter into several innovative business models to optimise their resources and maximise returns. The landowners try to ensure that they participate in the future substantial value accretion of the project being developed while developers try to avoid shelling out the entire consideration for the land before commencing any work, to avoid depletion of their resources.

Thus, entering into a joint development agreement (JDA) has become particularly common. This is where the landowner and developer collaborate on the basis that the landowner contributes his land to the project while the developer brings in his expertise in construction to develop the project and both parties share the income earned from the developed project in a pre-determined ratio. Of course, depending on the facts and circumstances of the case, multiple variations of this structure can be seen in the marketplace, with the broad contours of the arrangement remaining the same.

For a long time, litigation has arisen over the taxability of income accruing or arising from a JDA. Primarily, Indian tax authorities contend that the landowner should be liable to pay tax at the time of entering into the JDA, whereas taxpayers have been contending that the tax should be payable only at the time of registration of the JDA.

This contentious issue has hopefully been resolved with the Hon’ble Supreme Court (SC) delivering its verdict in the case of Balbir Singh Maini [CIT v. Balbir Singh Maini, Civil Appeal No. 15619 of 2017]. In the said case, the SC upheld the contentions of the taxpayers, by confirming the decision of the Hon’ble Punjab & Haryana High Court (HC).

Continue Reading Landowners to Breathe Easy – No Tax on JDA until its Registration

One of the most widely litigated issues in India is the disallowance of expenditure incurred on earning income that is exempt from tax. In an endeavor to put the controversy to rest, the Supreme Court (“SC”) in the recent case of Godrej & Boyce Manufacturing Company Ltd. v. DCIT,[1] has held that expenditure should be disallowed if it is incurred in connection with the earning of tax-exempt income.

Facts

Godrej & Boyce Manufacturing Company Limited (“Taxpayer”) is engaged in the business of manufacture of steel furniture, electrical equipments, etc. It is also a promoter of various other companies and invests funds into these companies to maintain control over them.

Continue Reading Clearing the Air: SC Confirms Disallowance of Expenses Pertaining to Exempt Income

With globalisation spreading economic activities across jurisdictions, enterprises nowadays have a presence in several jurisdictions. The taxability of activities undertaken by companies on foreign soil is closely linked to whether they are conducted through a permanent establishment (PE). This is a concept widely used in the context of international taxation wherein a particular business transaction leaves its footprint in multiple jurisdictions. Under the terms of various tax treaties, existence of a PE in the source State is a pre-requisite to hold a non-resident liable to pay taxes on business profits. The term PE is generally defined in the tax treaties as “a fixed place of business through which the business of a foreign enterprise is carried on wholly or in part”.

Under the various tax treaties executed with other countries, India imposes tax on any business income accruing or arising to a non-resident, whether directly or indirectly through or from any PE in India.

Continue Reading Formula One: SC Lays Down the Formula for Permanent Establishment

Indian income tax law exempts long-term capital gains arising from transfer of listed equity shares provided such transfer takes place through the stock exchange, and securities transaction tax (STT) is paid. However, the Government believes that this exemption is being misused by certain unscrupulous elements to convert unaccounted money into legal money. The law was therefore recently amended to remedy the situation, restricting this benefit only to such cases where STT is paid both at the time of purchase as well as sale.

However, since this amendment is being introduced as an anti-abuse provision, it also provided that the Government would notify certain types of acquisitions where this restrictive provision would not apply so that genuine business transactions are not impacted.

A draft notification has recently been issued by the Central Board of Direct Taxes (CBDT) attempting to list out such instances and inviting comments from stakeholders. Through this blogpost, we will discuss the efficacy and appropriateness of this draft notification.

Draft CBDT Notification

As discussed above, the recent amendment provides that the capital gains exemption shall be available only in such cases where STT is paid both at the time of purchase as well as at the sale of such listed shares, unless the shares were acquired through a mechanism which has specifically been notified to be unaffected by this provision. In other words, the import of this provision is very wide and could deny capital gains exemption to all such instances unless the notification exempts them. To protect genuine business transactions, the Government has been empowered to come up with instances where the exemption will not be denied. Hence, the nature of transactions to be specified by the notification shall be very important to determine the taxability of capital gains.

Continue Reading Draft CBDT Notification on Withdrawal of Capital Gains Exemption – Clearing the Maze or Further Compounding it

The Finance Bill 2017 proposes certain significant amendments in respect of the direct tax regime, especially in the area of M&A and restructuring / reorganisation. While some of the suggested changes are designed to ensure that the provisions are not abused by taxpayers through aggressive tax planning, the Finance Bill also attempts to provide much needed clarity on certain long-standing issues. This blog post briefly deals with some of the key points regarding restructuring / reorganisation and M&A transactions. Continue Reading M&A and Internal Restructuring – Providing Clarity & Plugging Loopholes

India has time and again shown its commitment to curbing base erosion and profit shifting (BEPS), an initiative of the Organisation of Economic Co-operation and Development (OECD) and the G20 nations. The Finance Act 2016 is testimony to this fact as it enabled the introduction of an equalisation levy, country-by-country reporting and the Indian patent box regime. The Government has been continuously revising various tax treaties to plug loopholes, strengthen information sharing between the contracting states and prevent double non-taxation under the garb of avoidance of double taxation.

In continuation of the Government’s support of the BEPS project, the Finance Bill 2017 proposes to introduce measures to curb thin capitalisation in India. Continue Reading Thin Capitalisation – The Line Is Getting Blurred!

Putting to rest the speculation surrounding the Double Taxation Avoidance Agreement (DTAA) with Singapore, the Government of India has finally announced that it has been revised. This announcement was made on December 30, 2016, and the text of the new protocol amending the India-Singapore DTAA (Protocol) has since been made available. The Protocol is along expected lines on the taxation of capital gains front. But, surprisingly, it has not granted incentives on taxation of interest income and Singapore based investors would be at a significant disadvantage as compared to Mauritius based investors.

KEY REVISIONS TO THE DTAA
Continue Reading India-Singapore DTAA Meets the Same Fate as Mauritius & Cyprus

India and Cyprus have recently revised the Double Taxation Avoidance Agreement (DTAA) to be effective from April 01, 2017 and January 01, 2017 in India and Cyprus respectively.

Before 2013, Cyprus was a favoured jurisdiction for investments into India as capital gains from the sale of shares held by Cyprus based investors in Indian companies was not taxable in India. However, due to non-compliance of its information sharing obligations, India declared Cyprus a Notified Jurisdictional Area (NJA). This led to significant uncertainties. While the DTAA had not been rescinded, this development resulted in adverse implications for Cyprus based investors, including, inter alia, higher rate of withholding taxes, application of transfer pricing provisions to transactions with Cyprus based entities even though they are not related, etc. Thus, conducting regular business transactions between entities of both countries became difficult with many transactions getting deferred.

The revised DTAA is the culmination of prolonged negotiations and discussions between both the countries to address this situation. Pursuant to the execution of the revised DTAA, the notification declaring Cyprus as NJA has been rescinded. Continue Reading Revision of the India-Cyprus DTAA: On Expected Lines