“OVERVIEW ON 

INTERNATIONAL TAXATION”
INTERNATIONAL TAXATION”
Seminar on International 
Mergers Acquisitions &
Mergers, Acquisitions & 
Valuations ‐

Jointly Organised by EXIM 
i l O i db E I
Bank, FKCCI & vitc

Bangalore, December 20,2008
FCA Director
Sunil Arora FCA,
Sunil Arora 
 FLOW OF PRESENTATION

c SECTION I ‐ PAYMENTS TO NON‐RESIDENTS

c SECTION II – HOLDING STRUCTURES – USE OF

FAVORABLE TAX TREATIES

PAYMENTS TO NON‐
PAYMENTS TO NON‐RESIDENTS
 PAYMENTS TO NON‐RESIDENTS

c Guiding Section (Section 195)

c DTAA vs. Domestic Law

c Nature of Payments

c Permanent Establishment

c Royalty/ FTS

c Other Issues

c Consequences of Non Compliance

 GUIDING SECTION (SEC 195)

Any person responsible for paying to a non resident

including a foreign company any sum (other than interest on

securities and dividends) which is chargeable to tax in India

is required to deduct tax at source on such income at the

time of payment.
 GUIDING SECTION (SEC 195) 
‐ INTERPRETATION

Transmission Corporation of AP (TCAP)

c TCAP made payments to Swiss companies towards cost of

equipment, erection, installation and commissioning under separate
contracts
c The tax authorities held above payments subject to withholding tax,
which was subsequently confirmed by the High Court of AP
c On appeal, the apex court held that
f Withholding tax is applicable to all sums payable to non‐
residents
f However, tax is deductible only on the appropriate portion of
income subject to tax in India
 PAYMENTS TO NON RESIDENTS
‐ DTAA VS DOMESTIC LAW
DTAA VS DOMESTIC LAW

c Provisions of Double Taxation Avoidance Agreement

(DTAA) overrule domestic tax laws of contracting states.

c Difference may arise on account of

f Tax Rates

f Scope of Taxability
 DTAA VS DOMESTIC LAW
‐ CASE STUDY
CASE STUDY

c The payee is entitled to avail benefit as per provisions of relevant

DTAA i.e.i l
lower rate or exclusion
l i off service
i f
from scope off
definition. A typical case is withholding tax on services. Since no
surcharge is applicable on DTAA rates, these are generally
beneficial.
beneficial
Legislation Basic  Surcharge  Cess  Total (%) Remarks
(%) (%) (%)
Domestic Law
Domestic Law 10 0 25
0.25 0 301
0.301 10 56
10.56 note 1
note 1 
DTAA 10 Nil Nil 10 note 2
note 1 ‐ Surcharge of 2.5% is applicable when payment exceed INR 10,000,000
note 2 ‐ Surcharge and Cess not applicable on rates prescribed under DTAA
 DTAA Vs DOMESTIC LAW – CASE STUDY

Background
Extracts of ‘management
management service
service’ contract between an Indian
Company (ABC) and its Asia Pacific Headquarter (XYZ) in Singapore

“XYZ will pprovide the ffollowingg service to ABC

f Strategic planning in the field of finance and logistics, particularly in the
area of global supply chain management
f Internal control policy and administrative matters
f D i i making
Decision ki on investment
i t t andd human
h resource assignment
i t
f Regional marketing and operational activities
f Organizing business planning conferences
f Coordinate communications
f Liaison regarding management and/ or administrative policies
f Any other ancillary services”
 DTAA Vs DOMESTIC LAW – CASE STUDY

Issues Under Consideration

1. Whether Management fee is taxable in hands of XYZ,

Singapore in India under
f Domestic Law
f Provisions of DTAA

2. Withholding Tax Liability

DTAA Vs DOMESTIC LAW – CASE STUDY
Analysis

[Definition of Technical Services]
D
Domestic Law
i L DTAA

“fees for technical services means any “The term ʺfees for technical servicesʺ as
consideration for the rendering of any used in this Article means payments of any
managerial, technical or consultancy services kind to any person in consideration for
but does not include ………” services of a managerial, technical or
consultancy nature if such services:
(a)……..
(b) make available technical knowledge,
experience, skill, know‐how or processes,
which enables the person acquiring the
services to apply the technology contained
th i or
therein;
(c)………….”
 DTAA Vs DOMESTIC LAW – CASE STUDY
Analysis

[Definition of Technical Services]
Domestic Law DTAA

any consultancy of technical nature is only those services which make available
covered technical knowledge or process available to
other person are covered

In the instant case all services were of an advisory nature or directory nature
In the instant case, all services were of an advisory nature or directory nature. 
Accordingly, XYZ argued that benefit is available under DTAA provision 
y p
since it did not make available any know how or process to ABC, India. 
Hence no taxability in hands of XYZ
 PAYMENTS TO NON RESIDENTS
‐ GENERAL

c For purposes of withholding tax, income falls under three main 

categories
f Technical / Managerial Services i.e. incomes which accrue or deemed 
to accrue or arise in India
f Business Income i.e. incomes earned through a fixed base of business 
in India
f Other incomes i.e. interest, dividend etc

c Rate of withholding tax under domestic law
f Technical Managerial Services/ Royalty –
Technical Managerial Services/ Royalty 10% on gross fee
10% on gross fee
f Business Income – 40% on business profits
f Interest etc – 30%
 PERMANENT ESTABLISHMENT

c Permanent Establishment (PE) is a “ Business Connection” of a

non‐resident in the source country to which profits can be

attributable on a reasonable basis

c A PE is generally represented by a fixed place of business viz.

branch, office, factory, warehouse etc but also includes a

notional base.
 PERMANENT ESTABLISHMENT
‐ INCLUSIONS

c Place of Management

c Branch

c Office( Not including Liaison office)
( g )

c Factory

c Warehouse

c Mine, Oil or Gas well 

c Store or other sales outlet
Store or other sales outlet

c Dependent Agent
 PERMANENT ESTABLISHMENT
‐ EXCLUSIONS

f Independent Agent

f Any activity of preparatory or auxiliary character

f Use of facilities solely for the purpose of storage or display of

goods belonging
g g g to the enterprise
p

f Maintenance of stock of goods

„ solely for the purpose of storage or display
„ Solely for the purpose of processing
 WITHHOLDING TAX RATES UNDER DTAA 
‐ILLUSTRATIVE
Income Head IT Act Singapore US UK Mauritius Netherland
s

FTS 10 10 10/15/20 10/15/20 Nil 10/20

Royalty 10 10 10/15/20 10/15/20 15 10/20

Interest 20 10/15 10/15 10/15 20 10

Dividends Nil 15/20 15/20 15 5/15 10

Capital Gains 20/40 20/40 20/40 20/40 Nil 20/40

Business 10/20/40 20/40 20/40 20/40 20/40 20/40

Profits as PE
 ROYALTY / FTS
No Not taxable
If covered under Sec 9
Yes
If DTA No Gross taxation as per
Yes 44D
No
If resident as per DTA Gross taxation as per
Yes 44D
No No
If it is FTS/ Royalty
y y If it is Business Income
Business Income other income
If it is other income
Yes Yes
No
tax as per DTA If effectively No
connected with PE If there is a PE Not taxable
Yes
Yes

Yes Deduction limited for Whether non‐dis Yes

If attributable expenses under Yes crimination clause Tax on net basis
to PE Article 7(3)
( ) applicable
No
No No
Non taxable
 SERVICE PE 
SERVICE PE –– CASE STUDY
Morgan Stanley Ruling 

c MS Co,
Co USA provides financial advisory services to its clients located
across globe
c MSAS, India, a wholly owned subsidiary of MS Co, USA provided
support back office services to MS CO, USA on an arm’s length basis
c In order to maintain quality, MS Co, USA sent its personnel on short‐
t
term ‘ t
‘stewardship’
d hi ’ to
t MSAS,
MSAS India.
I di The
Th costt off stewards
t d was paid
id by
b
MSAS, India to MS CO, USA
c AAR held that MS Co,, USA has a PE in India through
g employees
p y sent
on stewardship with MSAS, India
 SERVICE PE 
SERVICE PE –– CASE STUDY
Morgan Stanley Ruling

c In a landmark judgment,
judgment the apex court has held that MSAS,
MSAS
India would amount to a service PE of MS Co, USA on account of
services p
performed by
y the deputed
p staff but not on account of
stewardship activities. Hence service PE will emerge.

c But since the transactions was at arms length price, nothing

further was added to compute the income of PE.
 PAYMENTS TO NON RESIDENTS
– PERMANENT ESTABLISHMENT 
PERMANENT ESTABLISHMENT

c Under a PE situation, withholding tax is applied at 42.23 percent i.e. the 

maximum tax rate applicable to foreign companies

c In case the margins are lower, either the payee or payer can make an
application to the tax authorities for determining appropriate rate of tax
Estimated Project Receipts INR 100,000,000
Estimated Net Profit INR 20,000,000
Net Profit/ Receipts Ratio
Net Profit/ Receipts Ratio 20%
Tax @ 42.23% on Net Profit of 20% 8.45%
Withholding Tax on receipts at Normal Rates 42.23%

c The non‐resident should provide adequate basis of arriving at the estimated net 
profit
 PAYMENTS TO NON RESIDENTS
– OTHER ISSUES
OTHER ISSUES

c Credit of taxes paid in India is generally available as a set off against

final tax liability in home country.

c The scope and the manner of providing such credit is contained in

A i l 25 off the
Article h DTAA

c Credit is available only to the extent of tax liability on that income in

home country.
country

c For instance, tax withheld on technical fee of INR 1,000,000 in India is

INR 100,000 (10%). If this fee is taxable in Singapore
g p at 20%, credit
will be available in Singapore only to the extent of INR 100,000.
 PAYMENTS TO NON RESIDENTS 
‐ OTHER ISSUES
OTHER ISSUES

c Payments between project office and head office are subject to

withholding tax

c Payment by one ‘non‐resident’ to other ‘non‐resident’ outside

India is subject to withholding tax

c M/s ABC, a UK resident, renders engineering services to a

project office of M/s Gemini Engineering, UK in India. Even

though both parties are non‐residents and the payment to M/s
ABC will
ill be
b made
d in
i UK,
UK these
th are subject
bj t to
t withholding
ithh ldi tax
t
 PAYMENTS TO NON RESIDENTS 
‐ OTHER ISSUES
OTHER ISSUES

Payments made under a ‘Net of Tax’ are grossed up to arrive

at gross fee and withholding tax thereon. For instance

Technical Fee (net of tax)  INR 90,000
Rate of Withholding Tax 10%
Grossed Up Fee Amount INR 100,000
INR 90,000 X  100%
90%
Withholding Tax on Gross Fee i.e. 10% of  INR 10,000
INR 100,000
 PAYMENTS TO NON RESIDENTS 
‐ OTHER ISSUES
OTHER ISSUES

Dividend Distribution Tax Paid by Subsidiary in India –
Whethe A ailable a Ta C edit i Ho e Cou t y?
Whether Available as Tax Credit in Home Country?

c Dividend Distribution Tax (DDT) is tax levied on distribution

of profits by Indian companies. In India, no credit is
available in respect of DDT.

c However, such credit may be available in the home country

of the non‐resident recipient of dividend subject to the
provisions of the DTAA
 PAYMENTS TO NON RESIDENTS 
‐ OTHER ISSUES
OTHER ISSUES

In case of India Singapore DTAA, article 25 is relevant. It states that

“Subject to the provisions of the Laws of Singapore……Indian tax

paid…..in respect in respect of income from sources within India shall be
g
allowed as a credit against Singapore
g p tax ppayable…..Where
y such income is a
dividend paid by a company which is a resident of India to a resident of
Singapore which owns not less than 25% of the share capital of the company
paying the dividends, the credit shall take into account Indian tax paid in
respect of its profit by the company paying the dividends
dividends”

In summary, the DTAA does provide a mechanism for claim of credit

of Indian tax paid on dividend.
dividend However,
However the claim is dependent
upon domestic tax provisions of the home country
 PAYMENTS TO NON RESIDENTS 
‐ OTHER ISSUES
OTHER ISSUES

Authority for Advance Ruling – Mechanism

cAuthority to determine tax liability of non‐residents on existing or proposed

transactions. Specified residents viz. those dealing with non‐residents eligible
g
to obtain ruling

cAAR is lead by a retired Judge of the Supreme Court of India and supported
by one member each from the Indian Revenue Service (IRS) and the Indian
Legal Service (ILS)

cAssists
A i non residents
id to plan
l income
i tax affairs
ff i well
ll in
i advance
d b obtaining
by b i i
a binding ruling for their tax matters pending before any tax authorities
OVERSEAS HOLDING STRUCTURES 
O
OVERSEAS HOLDING STRUCTURES –
E EA O I U U E –
USE OF FAVOURABLE TAX TREATIES
 OVERSEAS HOLDING STRUCTURES

c Need for Overseas Structuring

c Ideal Holding Company Jurisdiction

c Routing of Foreign Investments to India

c Some Case Studies

 NEED FOR OVERSEAS HOLDING 
STRUCTURES
c Retention of p
profits in offshore jurisdiction

c Greater flexibility for inter company transfer

of funds and for setting up operations in other

overseas jurisdictions
j i di ti

c Future restructuring easy

 IDEAL HOLDING COMPANY 
JURISDICTION
c Has a wide Tax Treaty network, thereby minimising withholding

taxes on dividend income

c Has tax relief on foreign dividend income

c Does not charge capital gains tax on the disposal of subsidiaries

c Does not impose withholding taxes on distributions from the

holding company to its parent or shareholders.

 IDEAL HOLDING COMPANY 
JURISDICTION
c Does not impose capital gains tax on profits arising from the sale

of shares in the holding company by non‐resident shareholders

c Does not impose capital duties on share capital

c Does not have a minimum paid up share capital requirement.

ROUTING OF FOREIGN INVESTMENTS 
IN INDIA
IN INDIA

Foreign Investor
Foreign Investor
Mauritius/Singapore/Cyprus

India
India
 Foreign Investor
Transfer Shares
of Indian
Company
Mauritius/Singapore/Cyprus
Company Transferee

Indian Company Taxable in

Mauritius/Singapore/Cyprus
as per DTAA between India
& these jurisdictions.

No Capital Gain Tax in

Mauritius/Singapore/Cyprus

Transfer of Shares not

taxable either in India or
Transferor’s jurisdiction
AZADI BACHAO ANDOLAN 
AZADI BACHAO ANDOLAN
(MAURITIUS)
TRANSACTION

Third Country Investment Fund

Mauritius Registered SPV

India

Indian Company
 AZAADI BACHAO ANDOLAN

c Circular No. 789 of 2000 issued by the CBDT clarified that the
certificate of residence issued by the Mauritian Authorities shall
b treated
be t t d as an evidence
id off residence
id as well
ll as off beneficial
b fi i l
ownership (as will establish that control & management lies in
Mauritius)

c Consequently capital gains from sale of shares in India became

non‐taxable in India

c The Delhi High court quashed the above circular on the ground
that the it was ultra‐vires the Income Tax Act as it curtails powers
of the AO to examine control & management in the foreign tax
jurisdiction. It further held that this amounts to treaty shopping,
which is illegal and therefore is forbidden.
 ISSUES INVOLVED

A Special Leave Petition was filed in the Supreme Court against

the above order of the High Court on the following Grounds

c Whether the circular issued by the CBDT was ultra vires the
Income Tax Act

c Since income from sale of shares is exempt in Mauritius

whether such entities are eligible for benefits under the DTAA

c Treaty shopping – Whether it is illegal

 DECISION

1. Circular No. 789 is valid in Law 

c The circular in question in no way curtails the

jurisdiction of the AO and therefore is not ultra‐vires
the Income Tax Act.
 DECISION

2. Liability to Pay tax Vs Payment of Tax

c The court held that merely because exemption has been

granted in respect of taxability of a particular source of
Income, it cannot be said that the entity is not liable to tax
therein.

c The Court held that the law cannot be interpreted to mean

that avoidance of double taxation can only arise when tax is
actually paid in one country.
 DECISION
3. Treaty Shopping

c In the absence of any contrary provisions, there is nothing to

prevent nationals of third States to claim the benefits of the
treaty.

c The transaction which is otherwise valid in law cannot be

treated as void because of some underlying y g motive
supposedly resulting in economic determinant to the nation.
VODAFONE INTERNATIONAL 
VODAFONE INTERNATIONAL
(CAYMAN)
BACKGROUND

c B.V. Vodafone International Holdings (Vodafone) bought

100% shares of CGP Investments (Holdings) Ltd.
Ltd (CGP) from
Hutchinson group, Hongkong (HTIL)

c CGP held 67% stake in Hutch Essar (India) Ltd. (Hutch).

c While making payment to HTIL, Vodafone did not deducted

tax at source.
TRANSACTION

VODAFONE HTIL
TRANSFER OF STAKE
IN CGP
100% SHAREHOLDING
(DIRECT & INDIRECT)

CGP
OUTSIDE INDIA

67% SHAREHOLDING

INDIA

HUTCH
 ISSUES INVOLVED
c Contentions of Revenue Authorities

¾ Such transfer
Suc a se o of sshares
a es represents
ep ese s transfer
a se o of business
usi ess
assets in India and therefore was liable to tax in India

f Vodafone should have deducted tax at source while

making payment

f A show cause notice was served on Vodafone asking

g as
to why it should not be treated as assessee in default
for failure to deduct tax on source.
 ISSUES INVOLVED

c Writ petition was filed by Vodafone on the following

grounds

¾ That the transaction was not taxable in India

¾ Show‐cause notice is without jurisdiction and Vodafone

shall not be treated as assessee in default.
 DECISION

The High Court held that “shares in themselves which

may be
b an assett but
b t in
i some cases like
lik the
th presentt one,
shares may be merely a mode or a vehicle to transfer some
other asset(s).
asset(s) In the instant case,
case the subject matter of
transfer as contracted between the parties is not actually
the shares of a Cayman Island company, but the assets
situated in India”
 DECISION

Hence, the transaction is Prima Facie Taxable in India

c Transfer
T f off shares
h i merely
is l a mode
d off transfer
f off assets
in India

c Vodafone
V d f b signing
by i i theth agreement,
t acquired
i d nexus to
t a
source of income in India.

c Vodafone
V d f h
has also
l acquired
i d interest
i t t in
i the
th license
li
granted by the Department of Telecommunication in
India.

c Income accrued to HTIL as a result of divestment of it’s

Indian interest which could be liable for capital gains.
THANK YOU