India: Intersection of claims for foreign tax credit and tax treaties

India: Claims for foreign tax credit and tax treaties

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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  • Eligibility of foreign tax credit: The Bangalore Bench of the Income-tax Appellate Tribunal in addressing whether the taxpayer was entitled to a foreign tax credit on the taxes paid in various foreign countries held that the taxpayer was eligible for a full credit of foreign tax credit for taxes paid in the United States, Japan, and Germany pursuant to the applicable income tax treaties. However, the tribunal held that concerning taxes paid in Korea, the foreign tax credit was limited to the lesser of the amount of taxes paid in Korea or in India. Further, the tribunal explained that because India does not have a tax treaty with Taiwan, the foreign tax credit regarding taxes paid in Taiwan was to be computed based on the rate of tax applicable in India or Taiwan, whichever was less.  The case is: ITTIAM Systems Pvt Ltd. Read a January 2021 report [PDF 267 KB]

  • Employee stock option plan exercised by non-resident not eligible for treaty benefits: Under Indian tax law, the value of any specified security or “sweat equity” shares transferred by an employer, directly or indirectly, free of cost or at a concessional rate would be taxable as a perquisite. For a non-resident taxpayer in India, income that is received, deemed to be received or accrued, that is deemed to be accrued, arising or deemed to be arising in India would be subject to tax in India. In this regard, the Mumbai Bench of Income-tax Appellate Tribunal held that for a non-resident taxpayer, a claim for treaty benefits under the income tax treaty between India and the UAE regarding the employment stock option plan (as exercised regarding employment in India) was not available. Read a January 2021 report [PDF 329 KB]

  • Training fees not taxable as fees for technical services; “most favoured nation” clause and tax treaty with Sweden: The Pune Bench of the Income-tax Appellate Tribunal held that because of the “most favoured nation” clause in India’s income tax treaty with Sweden, the restricted scope (i.e., a make available clause) provided under the India-Portugal income tax treaty applies to the India-Sweden tax treaty. Therefore, consideration for training services provided by the taxpayer to its associate company was not subject to treatment as “fees for technical services.” With respect to the taxability of training fees under the “business profits” article of the tax treaty with Sweden, the tribunal held that the taxpayer did not have any permanent establishment in India, and thus, the fees could not be taxed as business profits.  The case is: Sandvik AB. Read a January 2021 report [PDF 322 KB]

  • “Faceless penalty” proceedings: The Central Board of Direct Taxes (CBDT) issued guidance or notifications prescribing a scheme to provide mechanisms to facilitate the conduct of “faceless penalty” proceedings. Read a January 2021 report [PDF 320 KB]

  • Tax withheld at source, “provisions for expenditure” not available: The Mumbai Bench of the Income-tax Appellate Tribunal addressed the applicability of tax withheld at source on the “provisions for expenditure” created in the books of account. The tribunal held that tax withheld at source provisions did not apply regarding the provisions for expenditure, since the taxpayer had not credited the amount under any specific account. The taxpayer did not know the payee and the liability was not ascertained. Rather, the taxpayer would be expected to identify the payee in the subsequent assessment year and then withhold the tax at source. The case is: Sonata Information Technology Ltd. Read a January 2021 report [PDF 312 KB]

  • “Notice pay” recovery subject to GST at 18%: The Authority for Advance Ruling, Gujarat ruled that a “notice pay” (a sum mutually agreed upon by an employer and employee for breach of contract) could not be regarded as a consideration to the employer for “tolerating the act” of the employee not completing the agreed upon contractual obligation. The ruling provides that the applicant was liable to pay goods and services tax (GST) at a rate of 18% under the category entry “services not elsewhere classified,” on the recovery of notice pay from employees who were leaving their positions. Read a January 2021 report [PDF 311 KB]

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