We are happy to present the latest issue of Tax Trends, SKP’s Direct Tax Newsletter. This issue

covers the period from April 2016 to June 2016.

The most striking development for this quarter was the amendment in the India Mauritius Tax

Treaty. The Mauritius Tax Treaty was subject to intense scrutiny in recent years for the double

non-taxation of capital gains earned by a Mauritian Tax Resident in India. The ’Mauritius Route’

became the entry point in India, often with merely a titular presence in Mauritius. The challenge

to the Mauritius Treaty was however struck down by the Courts and required a renegotiation with

Mauritius. The Prime Minister, Narendra Modi, in a recent television interview highlighted the

Mauritius Treaty renegotiation as one of the significant steps taken by his government to curb

Black Money. The India Singapore and India Cyprus Tax Treaty may also see similar revisions.

Spotlight discusses the finer aspects of the amendment to the Mauritius Treaty.

The Finance Bill, 2016 was passed in this quarter with certain modifications to the original draft.

The Equalisation Levy, which is a tax on the Digital Economy, became effective from 1 June 2016

and marks one of the first measures implemented by India under the BEPS Action Plan 1.

Similarly, the requirement of Tax Collection at Source (TCS) at the rate of 1% on cash sales also

became effective from 1 June 2016.

To ease doing business, the government has proposed to defer the applicability of Income

Computation and Disclosure Standards (ICDS) by one year. ICDS will now apply from 1 April 2016

and not 1 April 2015 as was originally proposed. The government is in the process of issuing

certain clarifications on the ICDS provisions and making modifications to the format of Tax Audit

Report for FY 2016-17. There are indications that small taxpayers may be kept outside the

purview of ICDS provisions.

Certain clarifications are also expected on the Place of Effective Management (POEM) regulations.

While the government is taking a fairly long time to issue the final guidelines on how POEM rules

will apply, there are possibilities that control exercised over overseas subsidiaries in the capacity

of a shareholder (Stewardship activities) may be kept outside the purview of POEM. If that

happens, it would be a great relief to most of the Indian Holding companies.

As per the existing law, the General Anti-Avoidance Rules (GAAR) would become effective from 1

April 2017. The law, as it was originally drafted, provided for grandfathering of investments made

up to 30 August 2010. The government has now amended the regulations to provide for

grandfathering of investments made before 1 April 2017 so that it is in line with the effective date

of GAAR. While certain additional clarifications on GAAR provisions would be necessary, it appears

that GAAR provisions would apply from 1 April 2017 and there may not be any further extension

of the effective date.

The government has been actively pursuing the Income Declaration Scheme (IDS) which provides

immunity from prosecution for taxpayers having undisclosed income if the income is voluntarily

disclosed and effective tax at the rate of 45% has been paid.

We hope you find this newsletter useful and we look forward to your feedback. You can write to

us at skptax@skpgroup.com.

Warm regards,

The SKP Direct Tax Team

In this issue

Spotlight 2

Legal Updates 4

Tax Talk 6

Compliance Calendar 7

Corporate Tax Myth 7

Contact Us 8

TAX TRENDS

Volume 2 Issue 1 | Apr–Jun 2016

2

India-Mauritius Tax Treaty Amended - Advantage India

Over the last 15 years, Mauritius has

contributed to about 35% of the

Foreign Direct Investments (FDI) in

India on account of a favourable Tax

Treaty with India.

One of the main highlights of the tax

treaty is the treatment of capital

gains earned in India by a Mauritian

Tax Resident. The Tax Treaty

provides rights only to Mauritius to

capital gains arising from the sale of

shares of Indian companies. This is a

departure from most of the other tax

treaties entered into by India (barring

a few exceptions).

Due the favourable tax laws of

Mauritius, the Mauritius route was

resulting in double non-taxation of

income (i.e. in India and Mauritius)

instead of eliminating it.

The Mauritius Tax Treaty therefore

has been subject to a lot of

controversy in India. The Tax

Authorities and certain sections of

Civil Society have argued that the

Treaty was being abused by round-

tripping funds and by tax avoidance

in India. However, the Supreme

Court of India has categorically held

that unless the Treaty is amended,

the Mauritian resident would be able

to take advantage of the same.

On 10 May 2016, India and Mauritius

signed a protocol amending the tax

treaty to plug the Treaty abuse. The

major amendments to the tax treaty

and its impact on investments in

India are discussed in this article.

Major amendments

Source-based taxation in India of

capital gains arising on the sale of

shares of an Indian Company

With effect from 1 April 2017, India

gets the right to tax capital gains

arising to a Mauritian Tax Resident

from the sale of shares of an Indian

company acquired on or after 1 April

2017.

As a result, shares acquired by

Mauritian residents in India up to 31

March 2017 have been protected

from taxation and no capital gains tax

will be payable in India even if such

investments are sold on or after 1

April 2017. This is a major relief for

existing Mauritian residents which

has resulted in a desirable

prospective on taxation of investors.

However, clarity is required on

whether gains from shares obtained

on or after 1 April 2017 on the

conversion of debentures/preference

shares obtained before 31 March

2017 or as bonus or right shares or

from corporate restructuring of

existing shares as on 31 March 2017

would be eligible for protection from

taxation in India. The government

has set up a committee to look into

the issues arising from the

amendment in the protocol.

Interestingly, to probably soften the

immediate impact of taxation of

capital gains in the short-term, the

protocol provides that gains realised

during the period of 1 April 2017 to

31 March 2019 from the sale of

shares of an Indian company

acquired on or after 1 April 2017, will

be subject to tax at only 50% of the

domestic tax rate of India. This

benefit of reduced tax rate is

however, subject to the satisfaction

of the newly inserted limitation of

benefits clause (LOB). The LOB clause

provides that the benefit of reduced

tax rate for two years will not be

available to a shell or conduit

company (the affairs of which are

primarily arranged only to obtain

benefits of the tax treaty). A company

shall be deemed to be a shell/conduit

company if its total expenditure on

operations in Mauritius is less than

INR 2.7 million (approximately USD

40,000) in the immediately preceding

12 months. It however, appears that

inspite of incurring requisite

expenditure, the company still needs

to satisfy the substance of its

existence and that it is not a conduit

or shell company.

From 1 April 2019 onwards, the

capital gains from the sale of shares

of an Indian company will be taxed at

the full tax rate set in the Indian tax

law.

SPOTLIGHT

3

Source-based taxation of interest

income of Mauritian Banks

As per the original Tax Treaty,

interest earned by Mauritius resident

banks from Indian taxpayers was

exempt from tax in India. As per the

amended Treaty, the interest earned

by Mauritian resident banks from

debt-claims or loans made on or after

1 April 2017 will be liable to

withholding tax at the rate of 7.5% in

India. Interest income arising from

debt-claims existing on or before 31

March 2017 shall continue to be

exempt from tax in India.

Interestingly, while the original tax

treaty did not provide any

withholding tax rate (taxation

followed the Indian tax law), the

withholding tax rate of 7.5% has now

been introduced for all interest

income earned by Mauritius

residents from India (banks and

others).

Source-based taxation of service

income from India

The original tax treaty did not provide

for source-based taxation of service

income of Mauritian residents from

India. However, as per the protocol,

service income in nature of Fees for

Technical Services (FTS) will be liable

for 10% withholding tax in India on

gross basis (if not attributable to a

Permanent Establishment (PE)) in

India. Service income attributable to

a Service PE in India (on account of

presence of 90 days in India in any 12

-month period), will be taxable at

40% (plus applicable surcharge and

cess) on net-income basis.

Impact of amendments on India-

Singapore tax treaty

After Mauritius, Singapore is the

second most preferred jurisdiction

for investments into India. Over the

last 15 years, Singapore has

contributed to about 15% of the FDI

in India. The India-Singapore Tax

Treaty provides rights only to

Singapore for the taxation of capital

gains arising from the sale of shares

of Indian companies till a similar

benefit is available under the India-

Mauritius tax treaty.

Accordingly, with the amendment to

the India-Mauritius tax treaty, the

exemption from capital gains tax in

India for Singaporean tax residents

will no longer be available. However,

it is unclear whether this change

occours automatically or whether

there will be a formal negotiation

between India and Singapore in this

regard. It is also expected that the

government would clarify the

position for existing investments of

Singapore residents in India and the

applicability of a lower tax rate for

two years for Singaporean residents

(similar to Mauritius).

Sector impact analysis

Once the protocol is notified, the

amended tax treaty is expected to

impact the following sectors

operating in India through Mauritius

(and Singapore from a capital gains

perspective in India):

1. Private Equity investors/Venture

Capital Investors investing in

unlisted shares of Indian

companies through the FDI route:

Gains from investment in debt

instruments should still be exempt

from tax in India as the protocol

applies only to shares of an Indian

company.

2. Foreign portfolio investors (FPIs)

investing in shares (listed and

unlisted) of Indian companies:

Gains from derivatives and bonds

should continue to be exempt from

tax in India as the protocol applies

only to shares of an Indian

company.

3. Mauritian banks providing loans to

Indian residents after 1 April 2017

4. Mauritius service companies

rendering services in India with or

without PE in India.

The amendment to the India

Mauritius Treaty underlines the focus

of the Indian government in

implementing the BEPS project to

deal with prevention of double non-

taxation and treaty abuse.

There is now an urgent need for

investors to re-look at their existing

structures to maintain the tax

efficiency obtained in India.

The withholding tax rate of 7.5% is

probably one of the lowest agreed by

India under other popular tax

treaties (Netherlands, Singapore, etc.)

and coupled with the low corporate

tax rate in Mauritius, could result in

Mauritius becoming a preferred

jurisdiction for routing debt

investments into India.

4

LEGAL UPDATES

Rates provided in section

206AA of the Income Tax Act,

1961 (ITA) do not override Tax

Treaty rate

DCIT versus M/s Pricol Ltd (ITA No.

880 & 1141/Mds./2014)

The taxpayer, an Indian company

made certain payments to non-

residents and had withheld taxes at

the rate of 10% as per the relevant

tax treaty. The penal rate of

withholding tax at the rate of 20% for

cases where the receiver does not

have a PAN, was not applied by the

taxpayer.

The Tax Authorities contended that

the penal rate of withholding tax

(section 206AA) overrides all other

provisions of the law and taxes were

required to be withheld at the rate of

20% since the receiver did not have a

PAN in India.

The Tax Tribunal held that the

withholding tax provisions deal with

the collection and recovery of taxes.

These provisions are procedural and

cannot override the charging

provisions. Hence, the penal rate of

withholding tax at the rate of 20%

cannot be applied where the Tax

Treaty provided for a lower rate of

tax.

If the Individual was resident

of USA, under the tie-breaker

rule of the India-USA tax

treaty, salary earned by him

for rendering services in USA

would be exempt from tax in

India.

Raman Chopra versus DCIT, Circle

48(1) (ITANo. 6619/Delhi/2015)

Taxpayer (an individual) derived

income from salary and income from

other sources. During the first three

months of the fiscal year, the

taxpayer was working in USA and he

was a tax resident of USA as per local

laws of USA.

The taxpayer was in India for more

than 183 days during the fiscal year.

Based on his stay details, he was

considered as a resident and ordinary

resident in India for the concerned

fiscal year under the Indian tax laws.

Taxpayer claimed that the salary

earned in USA while he was a tax

resident of USA cannot be taxed in

India under the India-USA Tax Treaty

as those services were rendered

outside India.

The Tax Authorities contended that

since the taxpayer was resident and

ordinary resident in India for the

fiscal year, his global income is

taxable in India and hence, salary

earned in USA is taxable in India as

per the ITA.

The Tax Tribunal observed that during

first three months of the fiscal year,

the taxpayer was a resident of both

India and the USA. Therefore, as per

Article 4(2) of India-USA tax treaty,

the tie-breaker rule should be applied

for this period. According to the tie-

breaker rule, the taxpayer becomes

resident of USA. Therefore, it was

held that as per Article 16(1) of India-

USA tax treaty, services rendered in

USA would not be taxable in India.

Services forming part of the

supply of goods cannot be

treated as fees for technical

services. Engineering services

provided to review

predetermined design and

construction cannot be

treated as royalty or fees for

included services

Gujarat Pipavav Port Ltd versus

ITO (International Taxation) (ITA

No. 7878/MUM/2010)

The taxpayer was an Indian company

engaged in the business of

developing, constructing, operating

and maintaining a port. Taxpayer

entered into two contracts with Z Co,

a company incorporated in China –

one for the purchase of cranes and

another for rendering installation and

commissioning services for the

cranes. Furthermore, the taxpayer

also engaged L Co, a company

incorporated in USA for providing

engineering services in connection

with the review of pre-determined

design and construction audit of the

cranes purchased from Z Co.

5

The taxpayer withheld taxes on pay-

ments made for installation and com-

missioning services. However, the

taxpayer did not withhold any tax on

the payment made to Z Co for the

purchase of crane and payments

made to L Co.

The tax authorities contended that the

sale of cranes involved certain ser-

vices like fabrication, etc. which was

the responsibility of the seller. Accord-

ingly, some portion of the sale consid-

eration involved services in the nature

of managerial, technical or consultan-

cy services and hence are taxable in

India. Accordingly, taxes on the same

had to be withheld.

Furthermore, in respect of services

provided by L Co, the tax authorities

contended that it had developed and

transferred a technical plan and tech-

nical design and therefore services

were taxable as per Article 12(4)(b) of

India-USA tax treaty. The tax authori-

ties also contended that L Co provided

report with respect to the review of

design of cranes and therefore would

be taxable as royalty under Article 12

(3)(a). Accordingly, taxes on such pay-

ments had to be withheld.

The Tax Tribunal observed that there

were different contracts for the pur-

chase of cranes and installation and

commissioning such cranes. Services

mentioned in the purchase contract

are inextricably linked to the sale of

goods and it is a settled principle that

same cannot be treated as fees for

technical services. Accordingly, it was

held that such business income would

not be taxable in India in the absence

of a Permanent Establishment (PE) in

India.

In connection with payments made to

L Co, the Tax Tribunal observed that L

Co has only reviewed the design and

not provided any know-how to the

taxpayer. Furthermore, it was also

observed that reviewing the design

would not result in the transfer of any

skill or knowledge; also the payment

was not for use or right to use any

industrial, commercial or scientific

experience. L Co had provided the

commercial services pertaining to the

review of pre-determined designs

while it was manufactured and hence,

there was no transfer of any technical

plan or design. Furthermore, such

commercial services of reviewing de-

signs does not make available any

technical knowledge, experience, skill,

etc. to the taxpayer. Accordingly, it

was held that there was no require-

ment of withholding of taxes.

Interest payment by PE to its

head office is a payment

made by foreign company’s

Indian PE to foreign company

itself and not an income in

the hands of foreign company.

BNP Paribas SA versus ADIT (ITA No.

3422 (MUM) 2009)

The taxpayer is a company incorpo-

rated in France. It carries on the busi-

ness of banking in India through its

branch offices (PE). During the year,

the Indian PE had paid interest to the

taxpayer.

The tax authorities contended that the

interest paid by the PE to taxpayer

was tax deductible in India. For the

purpose of the tax assessment, the

taxpayer and the Indian PE must be

considered as one unit, however, for

the purpose of computation of income

they are two separate entities. There-

fore, since this interest payment is tax

deductible for the PE in India, the

interest received by the taxpayer

would be taxable under Article 12 of

Indo-French tax treaty.

The Tax Tribunal observed that the

hypothetical independence of a PE

and Foreign Head Office is only for the

computation of profits attributable to

the PE and is not applicable for com-

puting the income of the Head Office.

According to Article 12(5) of the Indo-

French tax treaty, where the head

office has PE in India and debt claim

in respect of which the interest paid is

effectively connected with the PE, it

would be taxable as business profits

and not as interest income.

In the present case, the Indian PE has

already paid taxes for income attribut-

able to it in India. Accordingly, it was

held that the interest paid by the PE to

the taxpayer is a payment made by

the taxpayer to itself and therefore it

would not be considered as income in

the hands of taxpayer.

Note: Since 1 April 2015, the law

has been amended and the interest

income would now be taxable in India.

6

Special Investigation Team

recommends ban on cash

transactions and cash

holdings above certain limits

[Excerpts from The Times of India, 14

July 2016]

The Times of India has reported that

the Special Investigation Team (SIT)

on Black Money has submitted its

fifth Report to the Supreme Court of

India. The SIT has recommended that

cash transactions in excess of INR

300,000 and cash holding with

individuals in excess of INR 1,500,000

should be banned. It has also

recommended framing a law to make

such cases punishable by law.

TDS (Withholding tax) is the

main source of revenue, says

top Tax Official

[Information published by Business

Standard on 12 July 2016]

The Press Trust of India has reported

that the Chief Commissioner of

Income Tax – TDS, Delhi region stated

that, “Everyone knows from top to

bottom that TDS is our main source

of collection. It is main source of our

revenue not only in direct taxes, but

in the overall collection of the

government." The report also

mentions that the TDS collection for

FY 2016-17 for Delhi region alone is

expected to be INR 467 billion, which

is nearly 40% of the overall income-

tax collection of the Delhi region.

India pursuing tax evaders

named in Panama Papers,

writes to a dozen foreign

countries for information

[Excerpts from The DNA, 10 July

2016 ]

The DNA has reported that the

Indian Tax Authorities have written

to tax officials of about a dozen

countries, including Switzerland,

British Virgin Islands and the UK,

asking for information about

persons named in the Panama

Papers. This action comes in the

backdrop of resistance from the

persons named, to provide

information to the Tax Authorities.

Government forms

committee to examine

adopting calendar year as

financial year

[Excerpts from The Economic Times,

7 July 2016]

The Government of India has

constituted a committee to examine

the possibility of adopting the

calendar year as the financial year as

against the existing financial year of

April to March. The Committee will

submit its report by 31 December

2016.

India slips to 75th place on list

of money held by its citizens

in Swiss Banks

[Information published by The

Economic Times on 3 July 2016]

The Press Trust of India has reported

that in terms of money held by its

citizens in Swiss Banks, India has

slipped from 61st place to 75th place

in one year and is the lowest ranked

country amongst the BRICS nations.

TAX TALK

7

Corporate Tax Myth It is not possible to reorganise an existing business into a Limited Liability Partnership if the turnover of the business

exceeds INR 6 million (INR 6,000,000)

To understand the implications of this myth, please write to skptax@skpgroup.com.

Compliance Calendar (July to September 2016)

Month Due Date Compliances

July 7 TDS payment for TDS deducted in June 2016

July 15 Filing of TCS statements for the quarter of April to June 2016

July 31 Filing of TDS statements for the quarter of April to June 2016

July 31

Filing of tax return by all taxpayers other than

companies,

taxpayers whose accounts are required to be audited,

working partner of a firm whose accounts are required to be audited,

August 7 TDS payment for TDS deducted in July 2016

August 15 Issuance of TDS certificates for the quarter of April to June 2016

September 7 TDS payment for TDS deducted in August 2016

September 15 Payment of second instalment of advance tax for all taxpayers for assessment year 2017-18 (45%

of estimated tax liability to be deposited on cumulative basis)

September 30 Furnishing Tax Audit Report

September 30 Due date for filing tax return by taxpayers subject to tax audit and to whom Indian transfer

pricing regulations do not apply

8

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with assurance, domestic and international tax, transfer pricing, corporate services, and finance and accounting outsourcing

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