Introduction: This article delves into the contemporary landscape of international taxation, unraveling recent developments and their profound impact. From significant judicial precedents to regulatory shifts, the analysis covers key cases, form updates, and the intricate implications of the Most Favored Nation (MFN) clause.
The judicial precedents are also being covered so as to convey to the readers as to how the law is changing. How the year 2012 saw a Vodafone case for which Supreme court gave a favorable decision and the same was overruled in Finance Act 2012 where by the scope of Section 9 of Income tax Act (‘’The Act’’) was expanded. Drawing the same parallel incident, the year 2023 saw a dramatic turnaround in most favored nation clause(‘’MFN’’) where by a major apex court decision had overruled the CBDT notification, Key high court verdict and Income tax Appellate tribunal (‘’ITAT”) ruling. This has created as to how certain issues are litigative, complex and dynamic.
1) Evolution of Authority for Advance Ruling: The nomenclature of Authority for advance ruling has been changed to board for advance rulings(‘’BFAR’’). There was an earlier judgment that the decision given by board for advance ruling is binding on the applicant, Income tax Authorities and to the respective transaction undertaken. Now this ruling has been overruled by a CBDT circular which now cancel the ruling even more litigative.
2) Form 15CE and Compliance Challenges: A new form has been introduced name form 15CD where any payment made to non resident from a unit located in International financial service based on Rule 37bb need to be furnished by a accountant. The term accountant means Chartered Accountant(‘’CA’’). Instead of form 15CB which is certified by CA now From 15CE need to be certified if payment is made from IFSC to nonresident or foreign company not being resident. The same has to be verified digitally within 15 days from end of quarter. This provision is now done on one way to ease compliance but on the other hand there can be issue raised by department where provisions of DTAA are triggered to the favor of assessee or Tax residency certificate related issues.
3) ITAT Ruling on Equalization Levy: Equalization levy was introduced in Finance Act 2016 where by any payment made to nonresident having no Permanent establishment in India for a business purpose and the value exceed Rs 1 lakh per annum then equalization levy needs to be levied at 6% on the value of transaction. But a case law is described which is unique on the ground that it is from ITAT (fact finding body) and from Jaipur (pink city of country also due to faceless assessment transparency has significantly improved).
DCIT vs Mr Prakash Chandra Mishra  ITA NO.305/JPR/2022 (Jaipur ITAT)
The assessee was engaged in support services to the online advertisement, the role of the assessee was to act as a conduit between the entity carrying out the advertisement and Google. Further, Assessee contended that the target audience of the advertisement and the person carrying out the advertisement are both outside India, resultantly Tax Authorities in India do not have the jurisdiction to tax such transactions. The contention of the assessee was rejected by Assessing officer and CIT. However, ITAT held that the Equalisation levy is not attracted where the service receiver as well as the target audience are outside India and no disallowance can be invoked due to the fact assessee is a conduit (more like agent).
4) PE Controversy and Delhi ITAT Decision: The issue of Permanent establishment(‘’PE’’) is still a hot topic in the area of international taxation. Let me analyze a key judgment which took place in December 2023
ESL service.com INC vs DIT (ITA no 4989/del/2014-AY 2005-06) Delhi ITAT
Provision: To constitute a PE there must be conditions satisfied so as to constitute either a construction PE , fixed PE, service PE, agency PE. Only if PE is constituted then business connection is established and income is deemed to accrue or arise in India.
Facts: Assessee-Company ‘EXL Services Inc.’ is incorporated in Delaware, USA and is engaged in the business of developing and deploying business process outsourcing solutions for its clients located in the UK and the USA. Assessee’s subsidiary, EXL India, entered into services agreement with the Assessee as per which it provided the internet voice-based customer care services and backroom operation services to the customers of the Assessee. For such services, the Indian subsidiary raised invoices on the Assessee at a pre-determined hourly rate and the Assessee raised invoices on the end customers.
Issue: Revenue alleged that Assessee had a PE in India under Article 5 of India-US DTAA and business connection as per the Act for AYs 2003-04 to 2006-07. Whether the contention is correct?
Conclusion: There is no PE constituted whether fixed PE , service PE , dependent PE in India. Mere because of 100% ownership of Indian subsidiary share capital does not result in subsidiary becoming PE in India. Assessee just entered into work contract with its Indian subsidiary and the core activities such as key management functions i.e. development of strategy, identifying new business areas, sales and marketing, contract negotiation and conclusion, and customer relationship management are managed by the Assessee from outside India. The fact that no part of premises of Indian subsidiary was used by the Assessee; Hence, there is no fixed place PE in India. There is no PE in India at the end.
5) Most Favored Nation (MFN) Clause Drama: International taxation will not come to an end without MFN clause. MFN is termed as most favored nation clause but the term can be called as Most feared nation clause. This is because revenue can invoke the MFN clause prejudicial to interest of the assessee. Any payment while making payment to non resident or foreign company not being resident Act or DTAA which is beneficial can be taken for the assessee. Sometimes there is most favored nation clause which give a further benefit for the assessee but subject to dramatic litigation at various forums. MFN is used while giving advisory for dividend royalty fee for technical services(‘’FTS’’) and interest. New terminology in brief are explained
Tax treaties – The agreement signed between countries
Protocol- Integral part of tax treaty.
CBDT had issued a notification way back in 2022 with respect to MFN clause when all conditions are satisfied then MFN can be used for dividend Royalty FTS . Here are conditions
A) The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State;
B) The second treaty is entered into between India and a State which is a member of the OECD at the time of signing the treaty with it
C) India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and
D) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of sub-section (1) of Section 90 of the act.
It was clarified by CBDT that if a favourable decision is there the same rationale can be applied for MFN .
Pune ITAT in case of GRI Renewable Industries S.L vs ACIT held that that notification issued by CBDT has been considered and applicability is prospective in nature. Delhi High court in case of 9 Concentrix Services Netherlands B.V. and Optum Global Solutions International BV gave a benefit of 5% withholding tax rate on dividend income by virtue of MFN clause of I-NL DTAA and directed that the withholding certificates providing for 10% rate should be quashed and a fresh certificate indicating lower rate of 5% should be issued. The notification issued by CBDT was considered.
Despite of CBDT notification, High court ruling and ITAT ruling a shock has come from apex court. This is similar to thrilling world cup 2019 final match ended in tie but England won due to super over) and 1999 cricket world cup semifinal (Aus vs Southafrica) which ended in tie but Australia qualified due to high net run rate.
A batch of appeals were filed in Supreme court and above all verdict given by CIT vs Neste SA is now like law of land. Despite review petition a famous lawyer has argued in favour of revenue. The judgment draws three conclusions
1. A notification under Act is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a tax treaty, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law.
2. A stipulation in a tax treaty or a Protocol with one nation, requiring same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organization such as OECD), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the tax treaty of the first nation, which entered into with India. In such event, the terms of the earlier tax treaty require to be amended through a separate notification as laid under the Act.
3. The term ‘’is’’ has to be interpreted in a different way. For a party to claim benefit of a ‘same treatment’ clause , based on entry of tax treaty between India and another state which is member of OECD, the relevant date is entering into treaty with India, and not a later date, when, after entering into tax treaty with India, such country becomes an OECD member, in terms of India’s practice
Conclusion: International taxation remains a dynamic field, rife with litigative challenges. The evolving nature of MFN clauses, issues surrounding Permanent Establishment, and the ever-changing landscape of tax treaties demand careful consideration. This article provides an insightful journey through recent developments, offering a nuanced understanding of the intricate world of international taxation. Stay informed and navigate the complexities with clarity.