India: Foreign bank’s taxable interest income; employee stock option discount as business expenditure

India: Foreign bank’s taxable interest income

The KPMG member firm in India has prepared reports about the following tax developments (read more at the hyperlinks provided below).

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  • Interest and fees earned by foreign bank providing loans to Indian clients taxable as interest income under India-Germany income tax treaty: The Mumbai Bench of the Income-tax Appellate Tribunal held that interest income, commitment charges, and agency fees earned by the taxpayer from Indian clients are taxable as interest under Article 11 of the India-Germany income tax treaty. The interest could be taxable as income only when two conditions are satisfied: (1) the foreign enterprise conducted business in the source jurisdiction; and (2) the debt claim was effectively connected with the permanent establishment. However, because these two conditions were not satisfied, the entire interest income was taxable under Article 11 of the tax treaty. The case is: DZ Bank AG. Read a December 2020 report [PDF 324 KB]

  • Discount on issuance of shares under an employee stock option plans scheme allowed as a business expenditure: The Karnataka High Court held that the taxpayer was entitled to claim a discount on a share issue under an employee stock option plans as business expenditures under the provisions of section 37 of the Income-tax Act, 1961. The case dealt with employee stock option plans as a business expenditure. The high court observed that the term “expenditure” also includes a loss, and therefore, the issuance of shares at a discount when the taxpayer absorbs the difference between the price at which shares were issued and the market value of the share would also be treated as an expenditure incurred for the purpose of section 37(1). The case is: Biocon Ltd. Read a December 2020 report [PDF 284 KB]

  • FAQs on direct tax: The Central Board of Direct Taxes (CBDT) issued a circular clarifying various issues relating to the Direct Tax Vivad Se Vishwas Act, 2020 as enacted in March 2020. The circular provides guidance in the form of 34 “frequently asked questions” (FAQs) clarifying scope/eligibility, computation, consequences, and procedure of the law. This guidance follows a previous circular that provided 55 other FAQs. Read a December 2020 report [PDF 230 KB]

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