International Tax Updates

Switzerland has clarified its legal position on the application of the beneficial withholding tax rate under the Double Taxation Avoidance Agreement between India-Switzerland (DTAA IND-SWISS) .

The DTAA IND-SWISS contains the “Most Favoured clause” (‘MFN’) for application of lower  withholding tax rates in respect of dividends, interest, royalties and fees for technical services, than the rate provided for in the respective clauses of the DTAA IND-SWISS. This is subject to the usual condition found in Indian Protocols, that the lower rate shall apply to these income streams, if India has entered into a Convention, Agreement or Protocol with a third State which is a member of the Organization for Economic Commerce and Development (‘OECD’) after the DTAA IND-SWISS is signed.

The Amending Protocol to the DTAA IND-SWISS was entered into on 30 August 2010. The Swiss Tax authorities (Federal Department of Finance) have issued a Press Release on 13 August 2021 reconfirming application of lower rates for taxation of dividends, interest, royalties and fees for technical services, based on the DTAA between India and Lithuania and Columbia. Both Lithuania and Columbia were acceded as OECD Member countries on 5 July 2018 and 28 April 2020 respectively and provide for a lower rate of taxation of dividends of 5 per cent (subject to conditions of participation, etc.). Following points emanate from the Press Release:

• The Swiss tax authorities have clarified that Indian tax residents receiving dividends from a Swiss source as of 5 July 2018 or 28 April 2020 can claim, subject to the conditions laid down in DTAA IND-SWISS, a refund of the (additional) withholding tax in accordance with the established procedures. Consequentially, Swiss tax residents receiving dividends from Indian sources, the foreign tax credit shall be restricted to 5 per cent instead of 10 per cent for dividends accrued as of 1 January 2021.  
• The Swiss Tax Authorities also expect reciprocity from India, i.e., India should also tax Swiss tax residents receiving dividends from an Indian source at 5 per cent instead of 10 per cent. It is further clarified that if the application of lower rates under the MFN is not guaranteed by the Indian competent authority, the Swiss competent authority reserves the right to reverse this interpretation.

Justified delay in furnishing Tax residency certificate (‘TRC’) accepted for granting DTAA benefit 

Section 90(2) of the Act provides an option to taxpayer to be taxed under the provisions of the Act or DTAA, whichever are more beneficial. One of the conditions for claiming the benefits of  DTAA is that the taxpayer should obtain a TRC (and also file information in Form 10F, if TRC does not contain prescribed particulars).

Rule 21AB(2A) of the Income-tax Rules, 1962 casts an obligation on the taxpayer to maintain such documents and furnish the same to the tax officer during the assessment proceedings.

In the recent case of Haresh C Sheth (ITA Nos.1380/Mum/2020), the lower authorities had denied the beneficial rate as per IND- USA DTAA in respect of interest income. Mumbai ITAT accepted the delay in furnishing such documents and granted the beneficial rate of taxation of interest income considering the following aspects:

• there were justifiable reasons for not filing the TRC in the course of the assessment proceedings.
• the assessee had filed the TRC with the Assessing Officer, though after the conclusion of the assessment, coupled with the reasons that had led to delay in obtaining of the same alongwith the Form 10F.

Although the ruling reiterates the importance of collating TRC and other documents for availing beneficial tax rate as per DTAA at the time of return filing itself, this ruling indicates a liberal approach adopted by the appellate authority in case of valid and acceptable reasons for delay in collating such documents.