Article
Cross-border share sale – Eligibility for Tax Treaty benefit
By Harshit Khurana and Sonali Bansal
The article in this issue of Direct Tax Amicus seeks to examine the question as to whether treaty benefits should at all be provided if the non-resident seller of shares does not have much commercial substance. It in this regard observes that both as per General Anti Avoidance Rules (‘GAAR’) and the Principal Purpose Test introduced via MLI, treaty benefit should not be denied if the transaction has sound commercial rationale and providing such a benefit is in accordance with the object and purpose of the tax treaty. However, analysing how Courts in different countries have applied GAAR in tax treaty issues and what Courts in India have held applying judicial anti-avoidance test existing prior to the introduction of statutory GAAR, the authors opine that there is a lot of uncertainty surrounding the applicability of anti-abuse rules to cross border share acquisitions. According to them, while the fact of a SPV (with no other business) investing in an Indian company is not sufficient to hold that treaty benefit should be denied, it is also important to understand the object and purpose of the tax treaty. They suggest that the multi-national enterprises must ensure that there exists backup documentation to justify the commercial rationale for an arrangement.
Notifications & Circulars
- • Valuation of perquisites – Income Tax Rules amended • Life Insurance Policy – Exemption in respect of sums received – Clarificatory guidelines issued in respect of Section 10(10D) • Life Insurance Policy – Rule notified for computation of income chargeable to tax for amount received under life insurance policy • No TDS under Section 194-I on payment of lease rent for lease of ship to an IFSC unit • Exchange rate for TDS on income payable in foreign currency to include payments to and from IFSC units • Search and seizure – Procedure for requisition services under Section 132(2) and for making a reference under Section 132(9D) for valuation, prescribed • Procedure for application under Section 155(20) prescribed • Applicability of Safe Harbour rules extended to AY 2023-24
Ratio decidendi
- • High Courts must formulate ‘substantial question of law’ before admitting appeal under Section 260A – Supreme Court • Provisional attachment of property under Benami Transactions Act during judicial custody of directors is valid – Madras High Court • Compensation for premature termination of contract is revenue expenditure – Bombay High Court • Non-compete fees is capital expenditure akin to intangible asset and is eligible for depreciation under Section 32(1)(ii) – Bombay High Court • Deemed dividend – Only registered shareholders of company as per Companies Act can be considered as shareholders of a company – Bombay High Court • Tax Authorities cannot go behind Tax Residency Certificate – ITAT Delhi • Compulsorily convertible preference shares are covered within the ambit of ‘shares’ in terms of Article 13(4) of the India-Mauritius DTAA – ITAT Delhi
