15 Key International Tax and Transfer Pricing Case Laws of the Year 2021
- Blog|International Tax|Top Rulings 2021|Transfer Pricing|
- 12 Min Read
- By Taxmann
- Last Updated on 5 January, 2022
Despite the COVID-19 pandemic, the Year 2020 has been busy for the Courts and Tribunals. Several significant rulings were delivered on International Taxation and Transfer Pricing matters, including the Supreme Court’s landmark ruling on the treatment of sum received on the sale of software. In this article, we have shortlisted key 15 rulings related to International Taxation, and Transfer Pricing reported at Taxmann.com during the year 2021.
1. Sum received by a non-resident for sale of computer software through EULAs not taxable as royalty: SC
Case Details: Engineering Analysis Centre of Excellence (P.) Ltd . v. CIT
Citation:  125 taxmann.com 42 (SC)
The Supreme Court of India held that as per the definition of royalties contained in Article 12 of the DTAAs, it is clear that there is no obligation under section 195 to deduct tax at source on payments towards software purchase. This is because the distribution agreements or EULAs of such software do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright.
The provisions of section 9(1)(vi), along with Explanations 2 and 4 thereof, which deal with royalty, couldn’t also be applied as the same is not more beneficial to the assessees in comparison to the provision contained in DTAAs.
Accordingly, amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, was not the payment of royalty for the use of copyright in the computer software.
2. Indian tax authorities cannot grant a refund of taxes paid in foreign jurisdictions: Mumbai ITAT
The Mumbai Tribunal held that the tax credit schemes, as evident from the international tax literature and model convention commentaries, do not envisage any situation in which the excess foreign tax credit can result in a tax refund to the taxpayers from the exchequer of residence jurisdictions.
All the methods of eliminating double taxation, i.e., exemption method, credit method or hybrid method, restrict the liability to tax in the source jurisdiction. The relief sought in the instant case goes well beyond that and would result in a refund of taxes by India, and what is being termed as a refund is not even paid to the Indian exchequer.
Wherever tax credits exceed the tax liability, at best a carry forward or back of excess tax credit can be given when permitted by the domestic law, or at best when not restricted by the domestic law.
3. A non-resident is liable to tax in all years in which its project exceeding threshold limit for the creation of PE falls: AAR
Applicant executed a project between 06-01-2011 to 30-01-2012 comprising nearly 13 months. The project was continued for a period of 85 days in the previous year 2010-11 and 306 days in the previous year 2011-12.
Before the Authority for Advance Ruling (AAR), the applicant took the view that no taxable income accrues or arises in India from its activities of execution of ‘installation project’ in the previous year 2010-11 since the duration of the project was only 85 days. The taxable income arises in the previous year 2011-12, where the duration of the project was 306 days resulting in the creation of permanent establishment (PE) in India in terms of Article 5 of DTAA between India and Singapore.
The revenue argued that Article 5 clearly states that an installation project constitutes a PE if it continues for a period of 183 days in any fiscal year. That article refers to any fiscal year and not every or relevant fiscal year.
Attention is also invited to Article 15 of the DTAA, which deals with dependent personal services. The article mandates that the recipient should be present in the other State for a period or periods not exceeding in aggregate 183 days in the relevant fiscal year to escape taxation. Thus, it is emphasized that the phrase ‘any fiscal year’ in Article 5 indicates that a PE is constituted if the whole duration of the project, which may be spread over more than one fiscal year, includes 183 days or above in any fiscal year.
Thus, it was held that the applicant’s income is taxable in India as business profit in both the previous year’s 2010-11 and 2011-12.
4. Benefit of MFN clause available from the date when a country becomes a member of OECD; HC allows lower withholding tax on dividend
Case Details: Concentrix Services Netherlands B.V. v. Income Tax Officer (TDS)
Citation:  127 taxmann.com 43 (Delhi)
Revenue contended that the protocol appended to the subject DTAA showed that the benefit of the lower rate of withholding tax would be available only if the country with which India entered into a DTAA were a member of the OECD at the time of the execution of the subject DTAA. None of the aforesaid countries, i.e., Slovenia, Lithuania, and Columbia, were members of the OECD on the date DTAAs was signed with India. Thus, Clause IV(2) of the protocol appended to the subject DTAA would have no applicability.
On writ, Delhi High Court held that a bare perusal of Clause IV(2) of the protocol appended to the subject DTAA shows that it incorporates the principle of parity between the subject DTAA and the DTAAs executed thereafter. Such parity is available qua the rate of withholding tax or the scope of the conventions in respect of items of income concerning dividends, interest, royalties, fees for technical services, or payments for the use of equipment.
However, the principle of parity kicks-in, only if the third State with whom India enters into a DTAA is a member of the OECD. Further, India should have, in its DTAA, executed with the third State, limited its withholding tax rate, on subject remittances, at a rate lower or a scope more restricted, than the rate or scope provided in the subject DTAA.
Once the aforementioned conditions are fulfilled, then, from the date on which the DTAA between India and a third State comes into force, the same rate of withholding tax or scope as provided in the DTAA executed between India and the third State would necessarily have to apply to the subject DTAA.
Therefore, the beneficial withholding tax rate of 5% in India-Slovenia DTAA will apply from the date when Slovenia became an OECD member, i.e., from August 2010. However, India – Slovenia DTAA came into force in February 2005.
5. Income from cloud hosting and its ancillary services neither royalty nor FTS: ITAT
The assessee was a tax resident of the USA. Assessee earned income from cloud services, including cloud hosting and other supporting and ancillary services provided to Indian Customers. The assessee filed the return of income and the notes stating that the cloud hosting services were not taxable as ‘royalties’ under Article 12 of the India-US tax treaty.
The Mumbai ITAT held that the agreement between the assessee and its customer was for providing hosting and other ancillary services to the customer and not for the use of or leasing of any equipment.
The Data Centre and the Infrastructure therein were used to provide these services belonging to the assessee. The customers do not have physical control or possession over the servers, and right to operate and manage this infrastructure or servers vested solely with the assessee. The agreement was to provide simpliciter hosting services and not give the underlying equipment on hire or lease. The customer did not know any server location in the data centre, webmail, websites, etc.
Thus, the income from cloud hosting services had erroneously been held as royalty within the meaning of Explanation 2 to Section 9(1)(vi) as well as Article 12(3)(b) of the India-USA DTAA by AO and DRP.
6. No TP adjustment if the amount received in advance has far outweighed the amount received late from AE: HC
The Delhi High Court held that under no transfer pricing norm, principle, or evaluation of any “benefit” could there be a one-sided adjustment taking into account delayed invoices while at the same time ignoring invoices/payment received in advance. Consequently, factually there can be no notional computation of ‘delayed receivables’ only ignoring the receivables received in advance.
A perusal of the paper book has revealed that most of the invoices/receivables had been paid significantly in advance. When the period for which the amounts of receivables received in advance enjoyed by the assessee were seen vis-a-vis the amount receivable beyond sixty days, it was apparent that the assessee had received significantly more advance rather than outstanding receivable beyond sixty days.
Accordingly, the notional interest relating to alleged delayed payments in collecting receivables from the AEs was uncalled for as, in fact, there were no outstanding receivables as the amount received in advance far outweighed the amount received late.
7. Different projects are inter-connected for PE creation if there was unified agreement and consolidated billing pattern
The assessee raised bills on a quarterly basis, and consolidated invoices were raised irrespective of the SOFs under which the services were rendered. The common billing and the common payments give rise to the conclusion that there was a single contract.
Further, following the sequence of activities, the Delhi Tribunal held that the activities consist of the same and interconnected projects. The activities of the assessee cannot be said that were unrelated to each other as none of the activities could stand in isolation from the other activity. No single activity can give rise to performance and achieve the recipient’s purpose.
The activities start with preparation, execution, and negotiation of the Global System for Mobile Communication (GSM) to devising the strategy development, preparation of IT solutions architect, benchmarking the same, recruiting the manpower for implementation, and training them for various activities in relation to GSM.
It was an apparent commercial coherence between the activities as no single activity mentioned above doesn’t serve any purpose individually when segregated. All these activities were a different facet of one seamless function. As defined in Article 5(2)(1), the project consists of a bundle of inter-connected and interrelated services with the underlying theme of completion of projects. In the instant case, the implementation of one SOF leads to the other, and it can be observed that they were well integrated. The outcome of one SOF becomes the inputs for the other SOF.
Thus, based on the unified agreement, consolidated billing pattern, the activities were found to be interrelated. Accordingly, the existence of the PE of the assessee was undeniable.
8. PBDIT to be taken as profit level indicator for ALP instead of PBIT if there was a huge difference on account of dep.: ITAT
The Tribunal rules that the purpose of transfer pricing provisions is to ensure that the companies connected with each other and operating internationally should not divert their income to another country. Thus, to determine the ALP with respect to the transactions carried out between two AEs, the price or the margin of one company (tested party), depending upon facts and circumstances, should be compared with the companies which are comparable in terms of functions, capital employed, debt-equity ratio, turnover, risk, contractual terms, assets employed etc. If any of the items such as capital employed, turnover is not comparable to the tested party for any reason, then the necessary adjustments are required to be made.
In the instant case, the depreciation claimed by the assessee is greater than the depreciation of the comparable companies. Thus it is inferred that the adjustments in the depreciation are required to be made. However, there are no guidelines or provisions of law providing the mechanism for making the adjustments with respect to the depreciation.
Therefore, AO should have taken the PBDIT as the profit level indicator while working out ALP with respect to the international transactions carried out by the assessee with its AE.
9. ITAT grants relief to ‘Times Group’; no ALP adjustment on interest-free debt funding to overseas-SPV
The core issue before the Mumbai Tribunal was:
‘Whether an interest-free debt funding of an overseas company in the nature of a special purpose vehicle (SPV), with a corresponding obligation to use it for the purpose of acquisition of a target company abroad, can be compared with a loan simpliciter, and be, subjected to an arm’s length price adjustment?’
The Mumbai Tribunal held that its difficult to visualize an SPV in isolation with the owner of that structure. These SPVs carry no financial and other risks, and the owner of that structure assumes such risks. There is a dichotomy in the SPV structure business model in the sense that while risks of SPV investments are assumed by the owner of the SPV, all the rewards, in whatever form, go to the SPV itself.
Rule 8(1) of the Nigerian Income Tax (Transfer Pricing) Regulations 2018 throws important light on this aspect. What this rule holds is that an SPV, which does not control the financial risks associated with its funding activities, shall not be allocated the profits associated with those risks. The profits or losses associated with such risks would be allocated to the owner(s) of the SPV.
Thus, interest-free debt funding of an overseas company in the nature of a SPV, with a corresponding obligation to use it to acquire a target company abroad, can not be compared with a loan simpliciter. Thus same cannot be subject to arm’s length price adjustment based on the Comparable Uncontrolled Price (CUP) method.
10. TP adjustment is not required for ‘performance guarantee’ as contractual revenue would belong to the guarantor if the guarantee was invoked
It was noted that as per terms of the agreement, in the event of AE failing in execution of the contract, performance guarantee issued by the assessee would get invoked, and thereupon, the assessee would be obligated to execute the contract on its own by using its own infrastructure.
This would, in turn, result in the assessee deriving entire contractual revenue and huge profits from there. Thus, there was absolutely no risk involved for the assessee in issuing a performance guarantee on behalf of its AE, warranting charging of any commission to mitigate that risk. Therefore, the Mumbai Tribunal deleted the addition made by TPO.
11. A non-resident can’t be taxed under Section 69 unless it is proved that investments are made out of income generated in India: ITAT
In the given case, the assessee was an Indian national but a resident of the UAE. The taxing rights under Article 12 belong to the residence jurisdiction. Even if the rights can at best go to the source jurisdiction, by no stretch of logic, an unexplained investment could be taxed in India, which is neither residence nor source jurisdiction but is an investment jurisdiction.
Thus, unexplained investments could be taxed in India under section 69 only if it can be proved that the assessee made the unexplained investments out of his incomes earned in India.
The treaty does not cover the taxation of income of the nature, such as ‘unexplained investment’, and that is the end of the road. Since the said income is not even taxable under the residuary Article 22, there cannot be any taxation of this income in the hands of the assessee under the Indo UAE tax treaty.
12. Sum received by Honda-Japan for the off-shore supply of CR-V cars and components not taxable in India: AAR
Authority for Advance Ruling (AAR) held that the title to the parts supplied by Honda Motors would be transferred outside the territory of India upon loading of the Parts on the mode of transport to be used to convey the same from the country of origin and upon endorsement of despatch document in favour of the purchaser. These facts establish that the supply of parts would be made outside India. Thus, the transfer of title on the parts will also take place while the goods are outside the territory of India. The payment for the off-shore supply of parts is to be made outside the country in foreign currency as per the terms of the contract.
As the seller did not retain control over the goods as per the terms of the Memorandum, the title to and property in the parts shipped by the applicant at the foreign port would get transferred at the port of shipment itself. As this event takes place outside the territory of India, the income arising out of such a sale transaction cannot be said to be accruing or arising in India. The applicant does not reserve the right to the disposal of goods during transit or otherwise.
The principle of apportionment of income based on territorial nexus is now well accepted. Explanation 1(a) to section 9(1)(i) of the Act stipulates that where all the operations are not carried out in India, only that part of income that can be reasonably attributed to the operations in India would be deemed to accrue or arise in India. Thus, no income arising in the hands of the applicant from the off-shore supply of parts can be held to be chargeable to tax in India as the sale would be completed outside India, and there would be no accrual or deemed accrual in India.
13. Evidence in the form of e-mails, reports, etc. establishes rendering of services by AE; TP adjustment to be deleted
The Mumbai Tribunal held that the regional management services received by the assessee from its AE are intangible in nature. Thus, evidence supporting such services and the benefit received therefrom can only be demonstrated by narrations, descriptions and documentary evidence.
To support its claim of having received such services, the assessee had placed on record documentary evidence in the form of e-mails, correspondences, reports, etc., which clearly established rendering of the said services by the AE to the assessee.
Considering that the aforesaid services rendered by the AE to the assessee were intangible in nature, the Tribunal agreed with the assessee’s claim that it would be difficult to place on record concrete evidence which would irrefutably prove to the hilt rendering of such services.
14. Being a party to tax avoidance arrangement is not enough to invoke GAAR, ‘participation’ is a pre-requisite: South Africa HC
The High Court of South Africa observed that a taxpayer has to be, not merely present, but participating in the arrangement. The fact that it might be the unwitting recipient of a benefit from a share of the revenue derived from an impermissible arrangement cannot constitute “taking part” in such an arrangement.
15. No TP adjustment if the assessee was availing more credit period vis-a-vis credit period it granted to its AEs: ITAT
The assessee did not charge any interest receivable by them from the AEs, and it was their policy not to charge so in respect of interest both payable and receivable. Further, the interest payable by the assessee was more than the interest receivable, and such interest on receivables was ingrained in the sales itself.
The Delhi Tribunal held that the AO considered only the interest chargeable but did not consider the interest payable. If both the interest chargeable and interest payable were taken into consideration, and set-off was allowed, that would lead to no adjustment at all. Therefore, adjustment on account of interest receivable was to be deleted.
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