Evolving Indian tax landscape Evolving Indian tax landscape Evolving Indian tax landscape

Effective 1 April 2020, Dividend Distribution Tax (DDT) has been abolished and replaced with the classical withholding tax (WHT) on dividends. Non-resident shareholders can now explore the benefit of lower withholding tax rates (WHT) under the Double Taxation Avoidance Agreement (DTAA) with India. The WHT rate under the India-Belgium DTAA is 15%, while the rate under the domestic law is 20% (plus applicable surcharge and cess).

Furthermore, it is important to assess eligibility of the beneficial treaty rate such as via the satisfaction of beneficial ownership test, Principal Purpose Test, and/or Indian General anti-avoidance rules, among others.

The Honorable Supreme Court of India has recently announced a landmark favorable decision, holding payments to non-residents for use of software (under end-user licensing agreements and distribution agreements) as non-taxable as royalties in India.

In light of this development, taxpayers would need to evaluate the applicability of the ruling on existing business arrangements and assess the interplay with equalisation levy provisions.

The Indian Government introduced the ‘Faceless Assessment Scheme’ in an attempt to promote a transparent and accountable tax environment based on increased digitization. The new scheme focuses on elimination of human interface through a dynamic jurisdiction and team-based approach with functional specialisation. On similar lines, the ‘Faceless Appeals Scheme’ has also been introduced for faceless conduct of appellate proceedings.

The Covid pandemic has severely impacted the global supply chains of various businesses and they are faced with questions of which entities in transfer pricing supply chain should bear the resultant losses / costs and whether there is a need and a possibility to revisit the set transfer pricing policies.

Any change to set transfer pricing policy needs to be carefully planned and supported by real-time, company-specific documentation and computation of the economic adjustments sought while undertaking the benchmarking.

Also, any change to intra-group pricing policy accepted by tax authorities is likely to be scrutinized in detail and litigation cannot be ruled out. Thus, filing an Advance Pricing Agreement (APA) can be considered to avoid uncertainty. A positive indication is that an instance has already been witnessed in India whereby APA authorities have agreed to reduce the margin already agreed in an APA, considering the Covid impact.  

There have been a couple of developments on the judicial front, which would be relevant for non-resident taxpayers to take a note of for better managing their affairs in India.

Maintenance of independent transfer pricing documentation required

In one of the cases, the Tax Tribunal has upheld the penalty levied by the tax officer on a non-resident taxpayer for failure to maintain independent transfer pricing documentation and simply relying on transfer pricing documentation prepared by its Indian related party. This underscores the importance for non-resident taxpayers to re-visit their tax and transfer pricing compliance requirements in India. 

Corresponding adjustment allowed to non-resident taxpayer based on unilateral APA entered into by group entity

In one of the cases, the Tax Court allowed a reduction of royalty income received by a non-resident taxpayer, to the extent it was subsequently paid back by it to its Indian-related party, pursuant to Unilateral APA entered into by such party.  Based on the same, non-resident taxpayers can evaluate the possibility of claiming a tax refund on the amount actually repatriated back to the Indian-related party due to transfer pricing adjustments in certain cases. 

Of late, with the advent of technology, there has been increased flow of information between various wings of the government, necessitating consistency of disclosure made before the indirect tax (Customs and goods and services tax (GST)) and transfer pricing authorities.

Price adjustment by way of true-up / true-down in case of Indian taxpayers functioning as low risk service providers or limited risk distributor is often undertaken with a view to maintain the targeted margin for such entities. Periodic monitoring and planning of such inter-company pricing would be necessary to avoid leakage of Custom duties or additional tax liability under the GST law.

Also, in many cases, Indian entities receive free-of-charge support services/assets from overseas related entities. The same can attract GST under the reverse charge mechanism. Also, transfer pricing authorities can consider such notional cost in the cost base for mark-up computation for entities operating on a cost-plus basis. Such instances should therefore be identified and analyzed. 

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