Can the Most Favored Nation(MFN) clause be invoked automatically to apply the lower withholding tax rate?
Concentrix Services Netherlands B.V Vs ITO (TDS) and Optum Global Solutions International BV Vs DCIT
W.P.(C) 9051/2020 and W.P.(C) 882/2021, CM Appl. 2302/2021
Concentrix Services Netherlands BV and Optum Global Solutions International BV (the taxpayers) had applied for a Lower Deduction Certificate (LDC) with the jurisdictional tax officer to receive dividend payments from its Indian counterpart. The taxpayers applied for 5% rate in light of the MFN clause provided in the India-Netherlands Double Tax Avoidance Agreement (DTAA). The taxpayers referred to India’s tax treaties with Slovenia, Lithuania and Columbia for MFN as it provides for a lower withholding rate of 5% on dividend income as compared to 10% under India-Netherlands DTAA.
The Revenue Authorities denied the request and issued a LDC for 10% withholding tax.
The Revenue Authorities contended that the MFN’s benefit could be provided only when the countries whose treaties are referred were members of the Organisation for Economic Co-operation and Development (OECD) at the time of signing India-Netherlands DTAA and their respective treaties with India. Slovenia, Lithuania and Columbia were not members of the OECD when India-Netherlands DTAA was executed. Furthermore, DTAAs were signed with Slovenia, Lithuania and Columbia before they became members of the OECD.
Also, the Revenue Authorities were of the view that where there is no notification for providing the benefit of lower withholding tax rate under treaties with Slovenia, Lithuania and Columbia, the benefit of a lower rate provided in these treaties cannot be extended to the Netherlands residents.
Ruling in favor of the taxpayers, the Hon’ble Delhi High Court(HC) made the following observations.
- The Delhi HC affirmed the view expressed by the division bench of the same court in the case of Steria (India) Ltd, [(2016) 386 ITR 390 (Delhi)] that protocol forms an integral part of the Tax Treaty and that the government requires no separate notification.
- The protocol incorporates the principle of parity between the India-Netherlands Tax Treaty and the conventions executed thereafter between India and any OECD member nations. Accordingly, if India agrees to a lower or restricted rate or scope with a third country, which is an OECD member, such a lower rate can be applied to the India-Netherlands Tax Treaty.
- The Delhi HC also held that the third country (whose treaty is invoked to take benefit) should be an OECD member when a taxpayer intends to avail the benefit, irrespective of the fact whether such third country was an OECD member (or not) at the time of signing the Tax Treaty.
- Furthermore, the Delhi HC relied on the Supreme Court’s judgment in the case of Union of India and Anr. vs. Azadi Bachao Andolan and Another, (2004) 10 SCC 1, to hold that while interpreting international treaties including Tax Treaties, the rules of interpretation that apply to domestic or municipal law need not be applied, as the international treaties, conventions and tax treaties are negotiated by diplomats and not necessarily by men instructed in the law. Therefore, their interpretation is liberated from the technical rules which govern the interpretation of domestic/municipal law.
This is a welcome decision for the Dutch residents deriving dividend income from India, as withholding taxes would be restricted to 5%. It would certainly reduce the undue hardship faced by non-residents while taking benefit of the MFN clause in their respective treaties where the language of the treaty is similar to the language of the India-Netherlands DTAA. The DTAA of India, with Sweden, France, Hungary, etc., has a language similar to the India-Netherlands.
However, it would be interesting to see if the benefit can be extended to treaties where the language of the MFN is not in line with India-Netherlands DTAA, e.g., Switzerland DTAA.
Can a non-resident carry forward capital losses even if the capital gains are exempt under the treaty governing the non-resident?
Goldman Sachs India Investments (Singapore) PTE Limited Vs. DCIT [TS-294-ITAT-2021(Mum)]
Goldman Sachs India Investments (Singapore) Pte Limited (the taxpayer) is a company incorporated in Singapore and registered with the SEBI. During the concerned financial year, the taxpayer had incurred Short Term Capital Loss (STCL). The taxpayer, in its return of income, carried forward such losses in light of the provisions of the ITA.
The Assessing Officer (AO) denied the carry forward of losses on the basis that the capital gains earned by the taxpayer are exempt under the provisions of the India-Singapore DTAA, thus the capital losses should be ignored.
Aggrieved by the order, the taxpayer filed an appeal before the Mumbai ITAT.
On analyzing the contentions of both the parties, the Tribunal was of the opinion that during the concerned financial year, the taxpayer has elected to be governed by the beneficial provisions of the ITA. In any case, the Tax Treaty cannot be thrust upon a taxpayer simply because it’s a tax resident of a country with which India has entered into a Tax Treaty or on account of AO’s mere perception that the taxpayer may claim benefits under the Tax Treaty in subsequent years. In case the taxpayer, during one year, does not opt for the Tax Treaty, it would not preclude him from availing the benefits of the said treaty in the subsequent years.
The Tribunal’s view was also supported by the Mumbai Tribunal’s judgment in the case of the taxpayer’s sister concern.
The Mumbai Tribunal has reiterated the principle that a tax treaty is not binding on the non-resident taxpayer, and the taxpayer is free to opt for the beneficial provisions provided under the ITA.
Whether investments made by a non-resident in India through remittance from abroad can be subject to tax under Section 68 and Section 69?
Iqbal Ismail Virani [TS-164-ITAT-2021(PAN)]
Iqbal Ismail Virani (taxpayer) is a nonresident Indian and is a citizen of the USA. He had acquired two properties in India, and the funds for purchase consideration were repatriated from Dubai. The AO called upon the taxpayer to explain the sources of money for investment. The taxpayer stated that the above investments were from the income from jewelry and hotel business carried out in the USA. It was further submitted that the credits in the bank account of Bank of Baroda, Dubai were out of sale proceeds of gold bars and maturity proceeds of the FDs held in the name of a company owned by the appellant and his wife in Dubai. The taxpayer had also submitted the financial statement and copies of returns of income filed in the USA for the last two years.
The AO observed that the business in the earlier years was not making a profit and being dissatisfied with the taxpayer’s response, the AO made additions under Section 68 and Section 69 of the Act on account of unexplained investment.
Aggrieved by the order, the taxpayer filed an appeal with the Tribunal.
The ITAT granted relief to the assessee, citing the following observations: The taxpayer provided explanations of the source of money and the lower authorities rejected the explanation merely based on conjectures, surmises and presumptions. It was held that the explanation offered in support of the sources of money for the acquisition of properties could not be rejected without giving any cogent reasons.
The taxpayer had been carrying the jewelry and hotel business in the USA for the last 30 years. Even if the taxpayer had incurred losses for the last two preceding years, it does not mean that he does not have funds for making remittances to India.
The ITAT ruled that the impugned addition cannot be sustained as investments were made from the money remitted by the taxpayer himself from his own account in Dubai. The appellant received money for the first time in Dubai, and the income, if any, had accrued at Dubai only. It does not represent any receipt or deemed receipt in India and is thus, beyond the scope of jurisdiction of the AO.
The Tribunal reaffirms the principle that in the absence of any allegations of the round tripping, no addition can be made under Section 68 and Section 69 of the Act in the hands of the non-resident on account of foreign remittance received in India.
Tata Coffee Limited – IT(TP)A Nos.568 & 729/Bang/2015 (AY 2010-11)
The taxpayer had incurred certain expenses to carry out due diligence for acquiring an overseas company. However, due to certain business reasons, the acquisition was shelved. Subsequently, an overseas Associated Enterprise (AE) acquired that overseas company. Hence the taxpayer raised a debit note for reimbursement of expenses incurred towards such due diligence. Initially, the taxpayer stated such recovery as ‘refund of advance’ and no mark-up was to be applied.
The Transfer Pricing Officer (TPO) alleged that income received from the AE was taxable and expenditure incurred was determined to be Nil. However, the Dispute Resolution Panel (DRP) held that the TPO was not right in making Transfer Pricing (TP) adjustment of the entire amount. It held that the adjustment should be restricted to mark-up and limited the adjustment to 10% only.
The taxpayer submitted that there is “no income” element in this transaction as it is a case of mere reimbursement of expenses. It was said that it had initially intended to acquire the company, thus it cannot be held that the expenses were incurred on behalf of AE.
The ITAT held that due to a change in the group's strategy, the same company was acquired by AE. The taxpayer is transferring the benefit of work done by it. Accordingly, in a normal course, a company would have charged a markup as its resources, infrastructure, skills, time, etc., were invested in the said activities.
It was unable to accept the contentions that this transaction itself would fall outside the scope of transfer pricing provisions in the absence of any income element. Accordingly, the adjustment was upheld. However, the matter was remanded to determine appropriate mark-up.
A refund of expenses cannot always be reimbursement of expenses. The nature of the parties' conduct and the situation is critical to determine whether mark-up is to be charged.
Aerzen Machines(India) Pvt. Ltd. - IT(TP)A No. 111/AHD/2016 (AY 2011-12)
The taxpayer is engaged in the manufacture of machinery and components. The assessee had entered into certain international transactions – purchases, design charges, etc. It had determined the arm’s length price (ALP) using the Cost Plus Method (CPM) and adopted Profit Before Depreciation, Interest and Tax (PBDIT) as the Profit Level Indicator (PLI).
The AO dissatisfied with the taxpayer's working rejected the same and adopted Transactional Net Margin (TNM) method as the Most Appropriate Method (MAM) and proposed an adjustment. The (CIT(A)) also upheld the view.
The taxpayer contended that PBDIT should have been taken as PLI while computing operating margin instead of PBIT because it was a new set-up. Thus, there was a huge difference in the depreciation amount claimed by the taxpayer, viz a viz claimed by the comparable companies.
Ruling by ITAT
- If items such as capital employed, turnover is not comparable to the tested party for any reason, then the necessary adjustments must be made.
- The depreciation-to-turnover ratio of the taxpayer was 9.36%, whereas that of comparables was 2.08%
- It also rejected the CIT(A)’s argument of equating the amount of depreciation with the repair and maintenance expenses, being independent items of expenses as there is no guarantee that if the depreciation is higher then, the repair and maintenance expenses will be lower or vice versa.
Hence, the ITAT viewed that the PBDIT should have been taken as the appropriate PLI.
For the determination of ALP, a comparison needs to be made in terms of functions, capital employed, debtequity ratio, turnover, risk, contractual terms, assets employed, etc. If any of the items are not comparable to the tested party for any reason, then the necessary adjustments are required to be made.
(i) Whether a writ petition challenging the orders of provisional attachment (under Section 83 of CGST Act) is maintainable under Article 226 of the Constitution before the High Court? and
(ii) If the answer to (i) is in the affirmative, whether the orders of provisional attachment constitute a valid exercise of power?
M/s Radha Krishan Industries vs. State of Himachal Pradesh & Ors. [2021 (4) TMI 837 - Supreme Court]
- A memo under Section 70 of GST law was issued to the appellant requiring it to appear and produce invoices for inward and outward supplies, copies of GST returns, etc.
- Later, a Show Cause Notice(SCN) was issued to Fujikawa Power, one of the customers of the appellant, for provisionally attaching an amount of INR 50 million due to the appellant – An order was then passed for provisional attachment of the receivable of INR 50 million.
- The Commissioner of State Taxes and Excise, Himachal Pradesh, delegated his powers under Section 83 to the Joint Commissioner (JC).
- The JC issued two orders of provisional attachment, attaching the receivables of the appellant from its customers, Fujikawa Power and M/s Deepak International.
- The order stated that the appellant was found to be involved in an ITC fraud of INR INR 50.3 million during FY 2017-18 and FY 2018-19.
- The appellant filed a representation and objections against the attachment and denied liability. However, by an order, the JC rejected the objections of the appellant.
- The language of the statute indicates:
- First - Necessity of the formation of opinion by the Commissioner;
- Second - Formation of opinion before ordering a provisional attachment;
- Third - Existence of opinion that it is necessary so to do for the purpose of protecting the interest of the government revenue;
- Fourth - Issuance of an order in writing for the attachment of any property of the taxable person; and
- Fifth - Observance by the Commissioner of the provisions contained in the rules in regard to the manner of attachment.
- Each component of the statute is integral to a valid exercise of power.
- Further, as per Rule 159(5), it is a mandatory requirement to furnish an opportunity of being heard to the person whose property is attached.
- It is not open to the Commissioner to hold a view that the only safeguard under sub-rule 5 is to submit an objection without an opportunity of a personal hearing.
- There has, hence, been a fundamental breach of the principles of natural justice.
- Sub-Rules 5 and 6 of Rule 159 do not expressly contemplate a situation in which the person can object on the ground that the attachment is in excess of the amount likely to be due, nor does it provide for a specific opportunity to the taxable person to offer any alternative form of security in lieu of the attachment. Such an opportunity must be read into the provision to allow fair working in practice.
- Furthermore, ex facie, the order passed by the JC does not indicate any basis for the formation of the opinion that provisional attachment was necessary to protect the interest of the government revenue.
- Given that there were no pending recovery proceedings against the appellant (order of provisional attachment was passed before initiation of proceedings under Section 74), the mere fact that proceedings under Section 74 had concluded against GM Powertech would not satisfy the requirements of Section 83.
- The order of provisional attachment was accordingly set aside.
In a crucial judgment, the Supreme Court has delved into various aspects involved in the interpretation of a taxation statute, especially in the context of stringent provisions such as provisional attachment under the GST law.
Given the wider ambit of Section 83 after amendment made in Finance Act, 2021, this judgment can assist taxpayers to get relief in matters of provisional attachment by the department.
Can the applicant claim ITC in relation to debit notes issued by the supplier in the current financial year,i.e., 2020-21, towards the transactions for the period 2018- 19?
Facts and applicant’s contentions
- The applicant submitted that a supplier sought to issue debit notes concerning transactions entered into and goods supplied to it during the period 2018-19.
- The proposed debit notes were in relation to price variation as the supplier had mistakenly charged a low price, and the said error was noticed by the supplier recently.
- The applicant further submitted that amendment in Section 16(4) of the CGST Act had done away with the requirement of correlating the invoice to the debit note.
- The earlier words, “invoice relating to such debit note,” were restricting the ITC to a particular time limit which otherwise was a legitimate right of an assessee.
- This anomaly was detected and recognized by the government and vide the Finance Act, 2020, the same had been corrected.
Based on the above, the Authority for Advance Rulings (AAR) ruled as follows:
- The amendment to Section 16(4) is not such a drastic or far-reaching change as interpreted by the applicant.
- Just because the words “invoice relating to such,” connected to “debit note pertains,” were omitted does not mean that the relation of the debit note with the invoice has been cut-off or that omission of the above words mean that the year in which the debit note was issued would be considered as the ‘financial year’ as per amended Section 16(4).
- The debit note is not an independent document or an invoice in itself. It’s connected to an invoice as it’s issued in pursuance of a change in the value of an invoice. It, therefore, follows that the financial year to which a debit note pertains is invariably the financial year in which the original invoice (related to the said debit note) was issued.
- Therefore, the applicant cannot claim ITC in relation to debit notes issued by the supplier in the current financial year, i.e., 2020-21, towards the transactions for the period 2018-19.
While the AAR has ruled that the amendment does not result in any change in the time limit for availing ITC in relation to a debit note, it has failed to provide its understanding of the purpose of the amendment.
In fact, the Explanatory Notes to the Finance Bill 2020 clearly provide that “Clause 118 of the Bill seeks to amend sub-section (4) of Section 16 of the Central Goods and Services Tax Act so as to delink the date of issuance of debit note from the date of issuance of the underlying invoice for purposes of availing ITC.”
This ruling showcases the view and interpretation adopted by the GST Department and could potentially lead to litigation in similar cases.