Corporate tax updates

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Important recent Supreme Court Rulings

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Software taxability

Software can be in various forms/models, like single/multiple licenses, distribution model, shrink wrap software, customised software, software embedded in hardware etc. There have been various conflicting decisions on the subject matter wherein the key issue is centred around the interpretation of the term ‘copyright’.

The Supreme Court of India¹ has ruled that the 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 End User Licensing Agreement (EULAs)/distribution agreements, is not in the nature of royalty for the use of copyright in the computer software under various relevant tax treaties. Accordingly, the same is not liable for deduction of tax at source under Section 195 of the Indian Income-tax Act, 1961.

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Secondment of Employees

Cross-border movement of personnel within a multinational group's affiliated entities is a business reality. Such movement, especially medium to long-term, is referred to as ‘Secondment’. Recharge of secondment charges to an Indian counterpart by its foreign group company has been a matter of litigation in India under the direct and indirect tax laws. The Supreme Court of India² has pronounced a judgment wherein it was held that service tax is payable on secondment of employees from overseas group companies.

Refer the link for our flash news - Assessee liable to pay service tax on secondment of employee from overseas group companies

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Most Favoured Nation (MFN) clause in tax treaty

Indian tax treaties with some of the countries like Netherlands, France, Sweden, Switzerland, Hungary, etc. have an MFN clause. The MFN clause in these treaties extends benefit of a lower rate or restricted scope with respect to certain specified income such as interest, dividend, fees for technical services, royalty, if after the signature or entry into force of the treaty containing MFN clause, India enters a treaty with an Organisation for Economic Cooperation and Development (OECD) member state and provides therein a lower tax rate or restricted scope.

The Supreme Court³ has ruled that:

a) A separate government notification is mandatory for claiming benefit of MFN clause in a tax treaty; and

b) MFN benefit cannot be claimed vis-à-vis a third country if it was not an OECD member when its treaty with India was concluded.

The Supreme Court decision would now impact the practice of claims made by taxpayers under MFN clauses in tax treaties that India has signed with other countries. In particular, foreign companies would need to ensure that the benefit from the MFN clauses have been specifically notified by India before seeking to avail them. Also, from this decision, it is clear that MFN benefit can only be availed of by taxpayers in respect of subsequent treaties entered into by India with an existing OECD member country (and not vis-à-vis a country that become OECD members subsequent to signing their tax treaty with India). This would significantly restrict the scope of benefits claimed by foreign companies under MFN clauses, for example, relating to taxation of dividend income received from India. Following this Supreme Court's decision, it would also be of interest to taxpayers to see if the Indian Government would issue notifications for taxpayers to take benefit of MFN clauses (preferably with retrospective effect) for tax treaties that have been signed by India previously, for example, with France where the restricted scope for "fees for technical services" clause has not been specifically notified, even though there exists no legal dispute around its eligibility under the relevant MFN clause.

Refer the link for our flash news - The benefit of MFN clause under the Indian tax treaties can be availed only after the Indian government issues a notification for the same – the Supreme Court

Key Budget 2025 amendments (CIT)

India Union Budget 2025-26

Building resilience, accelerating progress

International Taxation - Base erosion and profit shifting (BEPS) and Multilateral Instrument (MLI)

The Organisation for Economic Co-operation and Development (OECD) launched 15 Action Plans on Base Erosion and Profit Shifting (BEPS) in July 2013 with an objective of an international collaboration to end tax avoidance. This initiative was developed in response to growing concerns about multinational companies exploiting gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

The action plans developed by the OECD recognise the importance of a borderless digital economy and proposed to develop a new set of standards to prevent BEPS and to equip governments with domestic and international instruments to prevent corporations from paying little or no taxes.

With an objective to expedite and streamline the implementation of the measures developed to address BEPS and amend bilateral tax treaties, many negotiations on the multilateral convention have been concluded to implement tax treaty related measures to prevent BEPS.

To address the tax challenges arising from the digitalisation of the economy, the OECD is currently working on a two-pillar solution, primarily focusing on reallocation of profits to market jurisdiction (Pillar One) and providing a coordinated system of taxation by implementing a global minimum tax (Pillar Two).

India is actively involved in the BEPS project in alliance with the OECD and G20 member countries and has been a frontrunner in adopting certain unilateral measures, such as Equalisation Levy on online advertisements abolished now and Significant Economic Presence (SEP) provisions, in its domestic law to ensure parity with BEPS recommendations. India also supports the two-pillar solution and has been involved in discussions to ensure that the interests of developing countries are considered. While India has not formally introduced the two-pillar solution in the domestic law, it has shown its intent to introduce such rules in future.

Significant Economic Presence (SEP)

India adopted the concept of SEP through the Finance Act, 2018. SEP has expanded the scope of the term ‘Business Connection’ under domestic law (a concept parallel to Permanent Establishment under tax treaties). This is a significant change, whereby non-residents selling goods/services may be liable to tax under Indian domestic law. Considering that SEP has a very wide connotation, accessibility to tax treaty becomes very important.

Though SEP provisions were notified in the Finance Act 2018, the same remained inoperative in the absence of the thresholds. The same have been prescribed and is applicable from the Financial Year 2021-22.

While non-residents would be eligible to tax treaty benefits (considering the scope of PE is narrower), it would be imperative to analyse the tax implications in case of transactions with those countries where tax treaty is not present; or treaty eligibility is a challenge. Thus, ‘treaty access’ itself would be the key attribute to analyse the impact of SEP provisions.

You may refer to this link for latest KPMG in India Tax Flashnews - CBDT notifies thresholds for the provisions of SEP

GAAR (‘General Anti-Avoidance Rule’)

Introduction of GAAR is a significant development in India’s tax policy, impacting decisions relating to structuring of a transaction or entering into an arrangement. GAAR empowers the revenue authorities to declare a transaction/arrangement as an ‘impermissible avoidance arrangement’, thereby determining and levying taxes as may be deemed appropriate, thereon denying benefits originally claimed (including those under the tax treaty). More and more countries are adopting GAAR to check aggressive tax planning and reduce incidence of tax avoidance. In India, GAAR came into effect from 1 April 2017.

Faceless assessment and appeals

Government introduced the faceless assessment and appeal scheme to provide greater transparency, efficiency, and accountability in Income Tax assessment/appeals and to eliminate the interface between the officers and the assessee during the course of proceedings. While it is a step-in right direction, new scheme brings new challenges as well such as stringent compliance dates, no in-person hearing, limited adjournments etc.

You may refer to this link for latest KPMG in India Tax Flash news - CBDT notifies new Faceless Appeal Scheme 2021

Not-for-profit Organisations/Charitable Institutions

Taxability of charitable institutions has been an ever-evolving subject marred by continuous changes in tax regulations, conflicting judicial precedents coupled with entry of new age not-for-profit operating models.

What constitutes ‘Charitable purpose’ and which activities entitle an entity to claim exemptions has also been subject matter of extensive dispute with the tax authorities.

The impact of these developments and rulings may require a change in the operating model of charitable institutions. It is important for charitable institutions to understand the nuances of these developments/rulings and the impact of the same.

You may refer to this link for latest KPMG in India Tax Flash news

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