APAC Tax Matters: 12th edition

India

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At a glance

  • India publishes rules for implementing APAs
  • Format of application and procedures for obtaining a TRC
  • Ruling on income classification and permanent establishment issues in respect of e-commerce transactions

India publishes rules for implementing Advanced Pricing Agreements (APAs)  

The Finance Act, 2012 (FA 2012), introduced provisions to enable Advance Pricing Agreements (APAs) in the Indian Tax Laws (ITL) with effect from 1 July 2012.  On 31 August 2012, the Central Board of Direct Taxes (CBDT) issued a notification introducing new Rules for implementing APAs. The key provisions of these Rules are summarized below.

Key provisions

An APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for determining the transfer price for those transactions over a fixed period of time. FA 2012 introduced a plan for APAs by empowering the CBDT to enter into an APA with any person undertaking an international transaction and also authorized the CBDT to formulate rules with respect to the APA mechanism.

As a first step for initiating the APA process, a taxpayer is required to undertake a pre-filing consultation.  This may be requested on an anonymous basis, before a formal APA application is submitted.

After the pre-filing consultation, an eligible taxpayer may submit an application for an APA in the prescribed form, together with the requisite fee. The requisite fee will vary in accordance with the value of the international transaction entered into, or the proposed transaction to be undertaken.

The application can be withdrawn at any time before the finalization of the terms of the agreement, or may be amended with the approval of the Tax Authority. The taxpayers’ Associated Enterprise is expected to initiate an APA process with the competent authority (CA) in the other country in case a bilateral or multilateral APA is envisaged. 

On being satisfied that the application for an APA can be accepted, the Tax Authority will process the application in consultation with the applicant.

Upon completion of the process, the APA Authority and the applicant shall prepare a proposed mutually agreed draft agreement enumerating the result of the APA process. The agreement shall be entered into by the APA Authority only after seeking approval from the Central Government of India. 

Thereafter, the taxpayer is required to furnish the APA Authority with an Annual Compliance Report in the prescribed form for each year covered in the APA. The Transfer Pricing Officer having the jurisdiction over the taxpayer shall carry out a Compliance Audit of the APA for each of the years covered in the APA.

An APA may be revised or cancelled by the CBDT, either suo moto, after providing an opportunity of being heard by the taxpayer, or on request by the taxpayer. A request for renewal of an APA may be made by the taxpayer.

Taxpayers may need to give due consideration to APAs as part of their transfer pricing controversy management strategy as regards India. The introduction of APAs is expected to provide an alternative channel for resolving transfer pricing questions in advance of a dispute.

The CBDT notifies format of application and procedure for obtaining a Tax Residency Certificate (TRC) 

Background

The Finance Act 2012, introduced provisions to the ITL requiring a non-resident (NR) to furnish a Tax Residency Certificate (TRC) in order to avail itself of  benefits under a Double Taxation Avoidance Agreement (DTAA). Possession of a TRC is a necessary, but not sufficient condition, for a person to avail himself/itself of a DTAA benefit.

The requirement to produce a TRC is introduced to ensure that DTAA benefits are available only to residents of a particular country and prevent residents of a third state from claiming DTAA benefits.

The CBDT has issued a Notification introducing the Rules prescribing the format of an application for obtaining a TRC and related procedures.

 

Rules relevant for NR

A NR is required to obtain a TRC, duly verified by the Government of the country of which the NR claims to be resident for the purposes of tax. The Rules do not specify any standard format in which a TRC needs to be obtained by a NR, but prescribes that a TRC should contain the following information with regard to the taxpayer:

  • Name and status
  • Nationality or country of incorporation/registration
  • Tax identification number (TIN) or a unique number issued by the Government of the country to identify the taxpayer
  • Residential status
  • Period for which the TRC applies and the taxpayer’s address during the relevant period

The Rules apply for tax year commencing from 1 April 2012 and subsequent tax years.

Rules relevant for resident

Although there is no requirement under the ITL for a resident of India to obtain a TRC, the Rules prescribe the Form in which a resident can make application to the Indian Tax Authority (ITA) for a TRC and the Form in which the ITA can grant a TRC.

In order for a resident taxpayer to obtain a TRC, in addition to the information stated above in case of a NR, a resident is required to submit the following details in the application form:

  • The basis on which the status of being tax resident in India is claimed
  • The purpose of obtaining the TRC
  • The taxpayer’s permanent account number (PAN) or tax deduction account number

The resident taxpayer also needs to attach documents supporting its claim to be a tax resident of India. The application form prescribed for residents confirms that a TRC could be requested for a given period and, thus, there appears to be a flexibility that a TRC may be obtained in advance for a given period.

Mumbai Tribunal rules on income classification and permanent establishment issues in respect of e-commerce transactions [TS-734-ITAT-2012(Mum)]

Background and facts

The Taxpayer, a Swiss tax resident, operated websites from outside India providing an online platform for facilitating the purchase and sale of goods and services to users based in India. On facilitating a successful sale, the Taxpayer earned its revenue by charging a user fee to third-party sellers in India registered on its websites.

For availing certain support services in connection with the websites, the Taxpayer entered into a Marketing Support Agreement with its Indian affiliates (I Cos) and reimbursed the costs incurred by them with a mark-up. The services provided by the I Cos were:

  • Providing suggestions for business related legal requirements
  •  Providing marketing and promotional services
  •  Collecting and remitting the user fees to the Taxpayer
  •  Furnishing reports and information for budget/administration and support activities as per the Taxpayer’s requirement
  • Performing local customer support activities

For the tax year 2005-06, the Taxpayer filed a NIL return of income, claiming that because it did not have a permanent establishment (PE) in India, its income, which was in the nature of business profits, was not taxable in India. The ITA however was of the view that the Taxpayer’s income was in the nature of fees for technical services (FTS) and that the Taxpayer had a dependent agent permanent establishment (DAPE) in India on account of the I Cos.

On appeal before the Tribunal, the issues were whether the user fee was in the nature of FTS and whether the I Cos constituted a PE of the Taxpayer under the India-Switzerland Double Taxation Avoidance Agreement (DTAA).

Tribunal's ruling

On characterization as FTS under the ITL

The ITL generally defines FTS to mean consideration for rendering any managerial, technical or consultancy services. The Tribunal ruled that apart from making its websites available in India, the Taxpayer had no role in affecting the sales. The websites were analogous to a “market place” where buyers and sellers assemble to transact.

The Taxpayer only provided a platform for doing business and it cannot be regarded as rendering managerial or technical services. The Taxpayer was not consulted as regards the product to be purchased by a buyer. Neither was the Taxpayer responsible for resolving any dispute with respect to a sale.

The users were making use of a standard facility. Although the websites came into existence through necessary technical input and the provider received some consideration in lieu of allowing its use, the users cannot be said to have availed themselves of any technical services from the provider by the mere act of using such facilities. 

Accordingly, the fees received from the sellers on successful sales could not be designated as consideration for services covered under the FTS definition of the ITL and, therefore, the income was in the nature of business profits.

Whether the I Cos constituted a PE under the DTAA

Under the DTAA, a tax resident of Switzerland can have a DAPE in India if a person, other than an agent of independent status, has, and habitually exercises, an authority to conclude contracts on behalf of the Swiss resident. Although the I Cos created awareness of products through advertisements, they had no role in introducing users to the Taxpayer.

The agreements between the sellers and the Taxpayer, and the finalization of transactions between the sellers and the buyers, were done through websites situated and controlled from abroad. The I Cos were dependent agents since they were providing services exclusively to the Taxpayer and their only source of income was from the Taxpayer.

However, to constitute a PE, the three conditions specified under Article 5(5) of the DTAA need to be satisfied. In the present case, the three conditions were not applicable because:

  • The provision of the relevant services by the I Cos did not extend to entering into contracts on behalf of the Taxpayer.
  • There was no requirement for the I Cos to stock the goods for delivery for or on behalf of the Taxpayer.
  • There was no requirement for the I Cos to manufacture or process the goods for or on behalf of the Taxpayer.

The Tribunal held that whilst the I Cos were dependent agents of the Taxpayer, they did not result in a PE for the Taxpayer, nor did the Taxpayer have a place of management in India at the premises of the I Cos because all the business decisions were settled through the websites where the I Cos played no role either in the maintenance or operation of the websites. 

This ruling provides useful guidance in the context of e-commerce transactions and also reiterates the principle that the absence of independent status, by itself, is insufficient to trigger a PE if the entity does not satisfy the other conditions for a PE as specified in a DTAA.