International Tax Updates

published on 28 April 2023 I reading time approx. 3 minutes

French Apex Court holds Beneficial Owner entitled to DTAA benefits in tri party arrangement

Applicability of DTAA in a triangular (three country situation) is a complex international tax matter with limited guidance or jurisprudence available in the Indian context. In the case of Planet SARL, the French Apex Court recently analysed this situation.

In this case, the French Company had a license agreement with New Zealand ("NZ") entity entitling French Company to distribute sports programmes to the fitness clubs. Subsequently, two parallel entities were interposed, in different jurisdictions, Belgian Entity and a Malta Entity between the taxpayer and NZ entity. French company applied Nil withholding tax ("WHT") rate qua Belgian Entity as per DTAA, replacing the 10 per cent rate applied in past qua NZ entity.

French Tax Authorities challenged such reduction in WHT rate on royalties paid to the Belgian Entity on the ground that the immediate recipient is not the beneficial owner but is a mere intermediate/ conduit for NZ entity. Accordingly, it was claimed that 10 per cent WHT should apply on royalty payments as per DTAA between France and New Zealand.

The Supreme Administrative Court of France held that the DTAA between France (Source State) and the beneficial owner's State should apply, even in triangular situations, i.e. where the immediate recipient is not the beneficial owner of the income. The Court applied broad and economic interpretation of the DTAA terms. The Court eventually held that the lower Administrative Court should have examined whether the NZ Entity was indeed the beneficial owner and therefore, referred the case back to the lower Appellate Court.

Delhi HC affirms that TRC is enough evidence to be eligible for DTAA benefits

In case where right to tax the capital gains is with the residence country of taxpayer, India as a source country where capital gains arise, always questions whether TRC is sufficient to claim DTAA benefits.

The taxpayer (a Singapore entity) sold the shares of an Indian company and earned short term capital gains ('STCG'). In the India tax return, the taxpayer claimed that such STCG is not taxable in India as per India-Singapore DTAA. TRC was obtained from Singapore tax authorities to claim eligibility for DTAA benefits. The tax return was processed with no demand. Thereafter, the tax officer initiated re-assessment proceedings to verify the nature and genuineness of the transaction, as he had reasons to believe that taxpayer is being managed and controlled by USA. And hence, treaty benefit of India-Singapore DTAA should not be provided. Such reasons to believe were on the basis of the information from a third party online source, which was provided by the TDS officer.

On writ petition by taxpayer challenging the action of the tax officer, the Delhi HC quashed the reassessment proceedings initiated and provided, inter-alia, following observations: 

• The reason for reopening the assessment for verifying the nature and genuineness of the transaction is untenable in law. Also, reliance placed by the tax officer on the third party data without independent application of his mind is not permissible
  
• The claim for taxation of capital gain under India-Singapore DTAA merely allocates the taxing rights to Singapore. It shall not qualify as deduction, relief or exemption, excessive claim of which empowers the tax officer to initiate the reassessment proceedings
  
• The taxpayer was not a shell or conduit company as conditions under limitation of benefit clause in India-Singapore DTAA stood satisfied
  
• TRC is sufficient evidence to claim treaty eligibility, residence status and legal ownership
  

Delhi Tax Tribunal holds German Co. Krones' Indian subsidiary does not qualify as its Dependent Agent Permanent Establishment ("PE") in India

Marketing subsidiaries in India are subjected to risk of litigation on account of constitution of Agency PE in India. In this case, taxpayer is a German company, engaged in selling their products and providing services to customers in India. The tax officer observed that its Indian subsidiary was engaged in procuring and trading in machinery spares and marketing the products of the German company in India.  Based on the factual profile, the tax officer observed and concluded that it habitually secures orders for the taxpayer, is economically dependent on the taxpayer and therefore, qualifies as a Dependent Agent PE.

The Tax Court explained that for an enterprise to be considered as habitually securing orders, it is essential that:

• the agent frequently accepts orders; or 
• represents to persons offering to buy goods or merchandise that acceptance of an order by such agent constitutes the agreement of the other enterprise to supply goods or merchandise under the terms and conditions specified in the order; and
• further the agent takes actions that give purchasers the basis for a reasonable belief that such person has authority to bind the other enterprise. On application of these principles, the Tribunal held that the Indian company is only undertaking limited marketing activities and contracts are finalised and signed outside India
  

Therefore, it was held that Indian subsidiary cannot be said to be habitually securing and concluding order on behalf of the German company.