In today&rsquo;s global economy, Indian companies frequently leverage international expertise to scale. When it comes to compensating these foreign consultants, many businesses explore the possibility of issuing equity shares in lieu of cash.
While this is a strategic way to manage cash flow and align interests, the regulatory landscape in India makes a clear distinction between different types of services.
<h3 data-path-to-node="5">Can we issue shares to a foreign consultant instead of a fee?</h3>
Generally, yes, but with specific conditions. Under Indian regulatory control guidelines, a company can issue shares against "funds payable" to a non-resident. Essentially, if you have a legal obligation to pay a consultant for services, you may be able to "capitalize" that debt into equity. However, this is primarily reserved for specific high-value contributions like technology transfers.
<h3 data-path-to-node="7">Does the nature of the service matter?</h3>
Absolutely. This is the most critical factor in determining if the transaction is allowed under the "Automatic Route" (without prior regulatory approval).
<ul data-path-to-node="9">
<li>
Lump-sum Technical Know-how &amp; Royalties: If the consultant is providing technical blueprints, specialized technology, or intellectual property, the law generally allows for the issuance of shares against these dues.
</li>
<li>
General Consultancy &amp; Legal Services: If the services are purely advisory, such as marketing strategy, general management, or legal counsel, the direct issuance of shares is typically not allowed without prior permission from the authorities.
</li>
</ul>
<h3 data-path-to-node="10">What are the key tax considerations?</h3>
One cannot simply convert the total invoice value into shares. The transaction must be analyzed net of applicable taxes.
<ul data-path-to-node="12">
<li>
TDS Obligations: The Indian company must satisfy Tax Deducted at Source (TDS) requirements in cash before the equity is allotted.
</li>
<li>
DTAA Analysis: It is vital to review the Double Taxation Avoidance Agreement (DTAA) between India and the consultant's home country. This analysis ensures the correct tax rate is applied and prevents the consultant from being taxed twice on the same income.
</li>
</ul>
<h3 data-path-to-node="13">Is a valuation report mandatory?</h3>
Yes. You cannot decide the share price arbitrarily. To ensure the shares are issued at a fair value, a formal valuation certification from a registered professional (such as a Chartered Accountant or a Merchant Banker) is required. This protects the company from future scrutiny regarding "undervalued" share issuances to non-residents.
<h3 data-path-to-node="15">What about reporting?</h3>
Even though no actual money enters a bank account, the issuance of shares is considered a "deemed" inflow. Therefore, the company must complete formal reporting with the RBI within 30 days of the allotment. This filing must be supported by the underlying service agreements and the valuation certificate.
<h3 data-path-to-node="18">How We Can Assist</h3>
Navigating cross-border equity issuance requires a blend of corporate law expertise and tax precision. We look forward to providing services relating to the above matter, including:
<ul data-path-to-node="20">
<li>
Classifying service agreements to meet "Technical Know-how" standards.
</li>
<li>
Conducting detailed DTAA and tax withholding analysis.
</li>
<li>
Facilitating the valuation and regulatory reporting process.
</li>
</ul>
Please let us know if you would like to schedule a consultation to discuss your specific requirements.

Shares for Services: A Guide to Non-Cash Allotment for Foreign Consultants

Shares for Services: A Guide to Non-Cash Allotment for Foreign Consult

How to Issue Shares for Services to Foreign Consultants in India: FEMA Rules

FDI in India: Guide to Non-Cash Allotments & Shares for Services-2025

FEMA Mode of Payment Rules 2025: Complete Guide to FDI Payment & Remittance Compliance

FEMA Mode of Payment Rules 2025: Complete Guide to FDI Payment & Remit

Foreign Direct Investment (FDI) in India is governed by the Foreign Exchange Management Act (FEMA), and entities receiving FDI must adhere to strict reporting and compliance requirements. Non-compliance can result in penalties, making it crucial for businesses to be aware of their obligations. Below is a detailed breakdown of the reporting requirements under FEMA.
<h2>1. Form Foreign Currency-Gross Provisional Return (FC-GPR)</h2>
Indian companies issuing equity instruments to non-resident investors must report such transactions in Form FC-GPR within 30 days from the date of issue. This also applies to participating interest/rights in oil fields.
<h2>2. Annual Return on Foreign Liabilities and Assets (FLA)</h2>
Entities that have received FDI, including Limited Liability Partnerships (LLPs) receiving capital contributions, must submit Form FLA to the Reserve Bank of India (RBI) on or before July 15 each year. The financial year for this reporting runs from April to March.
<h2>3. Form Foreign Currency-Transfer of Shares (FC-TRS)</h2>
This form is required for the transfer of equity instruments under the following conditions:
<ul data-spread="false">
<li>
Between a non-resident on a repatriable basis and another non-resident on a non-repatriable basis.
</li>
<li>
Between a non-resident on a repatriable basis and a resident Indian.
</li>
<li>
Transfers on recognized stock exchanges.
</li>
<li>
Transfers related to participating interest/rights in oil fields.
</li>
</ul>
Deadline: Form FC-TRS must be filed within 60 days from the date of transfer or receipt/remittance of funds, whichever is earlier.
<h2>4. Form Employees' Stock Option (ESOP)</h2>
If an Indian company issues stock options to non-resident employees/directors, including those of its holding, joint venture, or wholly owned subsidiary, it must file Form ESOP within 30 days from the date of issue.
<h2>5. Form Depository Receipt Return (DRR)</h2>
Domestic custodians must report the issue or transfer of depository receipts under the Depository Receipt Scheme, 2014 in Form DRR within 30 days from the closure of the issue.
<h2>6. Form LLP (I) and Form LLP (II)</h2>
<ul data-spread="false">
<li>
Form LLP (I): Filed within 30 days of receiving FDI in the form of capital contribution.
</li>
<li>
Form LLP (II): Required for the transfer of capital contribution/profit shares between a resident and a non-resident within 60 days from receipt of funds.
</li>
</ul>
<h2>7. LEC (FII) and LEC (NRI)</h2>
<ul data-spread="false">
<li>
LEC (FII): Authorized Dealer Category I banks must report Foreign Portfolio Investment (FPI) transactions.
</li>
<li>
LEC (NRI): Reports the purchase/transfer of equity instruments by Non-Resident Indians (NRIs) or Overseas Citizens of India (OCIs).
</li>
</ul>
<h2>8. Form InVI</h2>
Investment vehicles issuing units to non-residents must file Form InVI within 30 days from the date of issue.
<h2>9. Downstream Investment Reporting</h2>
<ul data-spread="false">
<li>
DPIIT Notification: Entities making downstream investments must notify the Secretariat for Industrial Assistance (DPIIT) within 30 days.
</li>
<li>
Form DI: Required when downstream investment results in indirect foreign investment, to be filed within 30 days from allotment of equity instruments.
</li>
</ul>
<h2>10. Form Convertible Notes (CN)</h2>
<ul data-spread="false">
<li>
Startups issuing Convertible Notes to non-residents must file Form CN within 30 days.
</li>
<li>
Transfers of Convertible Notes between residents and non-residents must also be reported within 30 days.
</li>
</ul>
<h2>11. Late Submission Fee (LSF) for Delayed Reporting</h2>
Entities failing to comply with these reporting requirements may be subject Late Submission Fee (LSF) determined by the RBI in consultation with the Central Government from time to time.
<h2>Final Thoughts</h2>
Ensuring timely compliance with FEMA reporting obligations is critical for businesses receiving FDI in India. Engaging with an experienced legal or financial advisor can help avoid regulatory penalties and streamline compliance processes.

Reporting and Compliance under FEMA for Entities Receiving FDI

Revised Master Direction on Risk Management and Inter-Bank Dealings: Key Updates, FAQs, and Compliance Guide
The Reserve Bank of India (RBI) has issued the Revised Master Direction on Risk Management and Inter-Bank Dealings through A.P. (DIR Series) Circular No. 13, dated January 5, 2024. This revised direction, effective April 5, 2024, aims to streamline foreign exchange risk management practices by consolidating various regulations and incorporating stakeholder feedback.
<h2>Key Highlights of the Revised Directions</h2>
<h3>1. Consolidation of Regulatory Framework</h3>
The revised framework consolidates the regulations from the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000, and various amendments made since then. It integrates provisions from the Currency Futures and Exchange Traded Currency Options Directions, ensuring a comprehensive approach to risk management.
<h3>2. Expansion of Hedging Facilities</h3>
The updated guidelines provide enhanced hedging options for foreign exchange risks. Key changes include:
<ul data-spread="false">
<li>
Inclusion of Non-Deliverable Foreign Exchange Derivative Contracts (NDDCs) in hedging instruments.
</li>
<li>
Classification of users into retail and non-retail categories based on financial exposure and net worth.
</li>
<li>
Introduction of specific eligibility criteria for different market participants, including NBFCs, mutual funds, pension funds, and foreign investors.
</li>
</ul>
<h3>3. Eligibility and User Classification</h3>
Under the new classification:
<ul data-spread="false">
<li>
Non-retail users include entities such as banks, financial institutions, and large corporations with a minimum net worth of ₹500 crore or turnover of ₹1000 crore.
</li>
<li>
Retail users encompass smaller market participants who do not meet the above criteria but are still eligible to access risk management tools.
</li>
</ul>
<h3>4. Permitted Foreign Exchange Contracts</h3>
The revised Master Direction allows various foreign exchange and interest rate derivative contracts, including:
<ul data-spread="false">
<li>
Foreign exchange forward, swap, and currency swaps.
</li>
<li>
Foreign exchange options (European), including call and put options.
</li>
<li>
Interest rate derivatives, such as forward rate agreements and interest rate swaps.
</li>
</ul>
<h3>5. Free Cancellation and Rebooking of Contracts</h3>
A major relief for businesses, the RBI now permits free cancellation and rebooking of derivative contracts. Additionally:
<ul data-spread="false">
<li>
Net gains from anticipated exposure hedging contracts will be passed on only at the time of cash flow realization.
</li>
<li>
In exceptional cases where the underlying cash flow does not materialize, RBI allows gains to be passed on, subject to bank approval.
</li>
</ul>
<h3>6. Compliance and Reporting Requirements</h3>
To ensure regulatory compliance:
<ul data-spread="false">
<li>
Authorized Dealers (AD Category-I Banks) must report foreign exchange transactions and ensure transparency in derivative pricing.
</li>
<li>
Recognized stock exchanges must monitor user exposure and compliance with underlying exposure limits.
</li>
<li>
Financial Benchmark India Pvt. Ltd. (FBIL) Reference Rates will be used for settlement of INR-denominated contracts.
</li>
</ul>
<h2>Frequently Asked Questions (FAQs) on Forex Transactions by Residents</h2>
<h3>1. Can a resident person undertake forex transactions?</h3>
Yes, residents are permitted to undertake forex transactions only with authorized persons and for permitted purposes as defined under FEMA. Engaging in transactions with unauthorized persons or for unauthorized purposes can lead to penal action.
<h3>2. Who are authorized persons?</h3>
Authorized persons are entities authorized by the RBI to deal in forex. This includes authorized dealers, money changers, offshore banking units, or any other entities authorized under Section 10(1) of FEMA.
<h3>3. Can a resident person undertake forex transactions on internet/electronic trading portals?</h3>
Permitted forex transactions executed electronically should be conducted only on Electronic Trading Platforms (ETPs) authorized by the RBI or on recognized stock exchanges such as NSE, BSE, and MSE. Engaging on unauthorized ETPs is prohibited and may result in penal action.
<h3>4. What is an Electronic Trading Platform (ETP)? Do they require authorization from RBI to operate in India?</h3>
An ETP is any electronic system where transactions in securities, forex instruments, derivatives, etc., are conducted. Operating an ETP in India requires prior authorization from the RBI under the Electronic Trading Platforms (Reserve Bank) Directions, 2018.
<h3>5. Is there information available about entities not authorized to deal in forex?</h3>
Yes, the RBI has published an Alert List containing names of entities neither authorized to deal in forex under FEMA nor authorized to operate ETPs.
<h3>6. Can a resident individual remit margin overseas under the Liberalised Remittance Scheme (LRS) for online forex trading?</h3>
No, remittances under LRS can only be made for permissible current and capital account transactions. Remitting funds for margins or margin calls to overseas exchanges is not allowed under the scheme.
<h2>Can Residents Trade in Foreign Currency Derivatives Through Overseas Entities?</h2>
As per RBI regulations, Indian residents are not permitted to trade in foreign currency derivatives through overseas entities in which they have invested via Overseas Direct Investment (ODI). This would be considered a violation of FEMA guidelines.
<h2>Implications for Businesses and Investors</h2>
<h3>1. Enhanced Risk Management Tools</h3>
Corporates and financial institutions can now access a wider range of hedging instruments, allowing better risk mitigation strategies against foreign exchange volatility.
<h3>2. Increased Market Liquidity</h3>
The inclusion of NDDCs and the consolidation of exchange-traded currency derivatives into the Master Direction are expected to boost market liquidity and efficiency.
<h3>3. Greater Flexibility in FX Transactions</h3>
With relaxed rebooking norms and higher exposure limits without prior approvals, businesses have greater flexibility in managing their foreign exchange exposure.
<h2>Conclusion</h2>
The Revised Master Direction on Risk Management and Inter-Bank Dealings marks a significant step in enhancing India&rsquo;s foreign exchange market regulations. Businesses, financial institutions, and investors must familiarize themselves with these updates to effectively leverage new opportunities and mitigate risks in the evolving global financial landscape.
<h3>Stay Updated!</h3>
For more insights into RBI regulations and their impact on businesses, subscribe to our newsletter or follow us for the latest updates on foreign exchange management.
For further information, visit the official RBI FAQs on Foreign Exchange Transactions <a href="https://www.rbi.org.in/commonman/english/scripts/FAQs.aspx?Id=3347">here</a>.
&nbsp;

RBI’s Revised Master Direction on Risk Management & Forex Trading: Key Updates & FAQs

RBI’s Revised Master Direction on Risk Management & Forex Trading

The RBI has rationalised the FIRMS portal in order auto acknowledge the Forms and to process the same for determining any violation involved therein.
Following are the salient features of the changes made on the FIRMS portal:
- All forms submitted with the requisite documents will be auto-acknowledged on the FIRMS portal with a time stamp and an auto-generated e-mail will be sent to the applicant.
- The forms submitted within prescribed timelines, will be verified by the AD banks based on the uploaded mandatory documents and ensure that the same are in compliance with the extant guidelines.
- The system would identify the delay in reporting, if any.
- For forms filed with a delay less than or equal to three years, the AD banks will approve the same, subject to payment of LSF.
- The LSF will be computed by the system and an e-mail will be sent to the applicant and the concerned Regional Office (RO) of RBI specifying the amount and the timeline within which it is to be paid to the concerned RO of RBI.
- Once the LSF amount is realised, the concerned RO will update the status in the FIRMS portal and the updated status will be communicated to the applicant through a system generated e-mail, which can also be viewed in the FIRMS portal.
- The AD bank will approve the forms filed with a delay greater than three years, subject to compounding of contravention. The applicant may thereafter approach RBI with their application for compounding.
- The remarks of the AD Bank for rejection of forms, if any, will be communicated to the applicant through a system generated e-mail and the same can also be viewed in the FIRMS portal.
Conclusions:
These changes are welcomed steps which are intended to improve transparency and better implementation of the reporting requirements. Earlier, the AD Banks had to process these forms within three working days, however, now they have to process these forms within five working days. It is also important here to state that the relevant date for the compliance is date of reporting to the RBI by the AD Bank and not the date of uploading. So, it is advisable to the user to file the relevant forms much before the due date to avoid any delay which may result in Late Submission Fees or Compounding Fees.

Foreign Direct Investment in India - Update on Reporting and Compliances

FDI Foreign Direct Investment Reporting Compliances Update

<h2>Introduction of the One Person Company</h2>
One Person Company (OPC) in India is a new concept that has been introduced with the Companies Act 2013. This form of company is mainly designed for an individual who are not willing to enter in partnership with others but want a corporate structure. OPC can be termed as Organized / Corporate Structure of the Proprietorship along-with a feature of limited liability.
Section 2(62) of the Act provides that the &ldquo;One Person Company means a company which has only one person as a member.&rdquo; That means the 100% of shareholding being held by the single individual.
However, it is important to note that no individual shall be eligible to incorporate more than one OPC or become a nominee in more than one such company. However, if an individual, being a member in OPC becomes a member in another OPC by virtue of his being a nominee in that OPC within a period of 180 days then he shall withdraw his membership from either of the OPCs within 180 days.
<h2>Whether FDI in OPC is allowed?</h2>
In OPC, the whole shares are held by single individual i.e. a natural person and not by any legal entity. Therefore, FDI by the Foreign Company in the OPC will not be permissible as per the provisions of Companies Act however, FDI by non-resident Indian who is citizen of India may form an OPC.
NRIs can invest in OPC on non-repatriation basis as well as repatriation basis in OPC.
<h2>Investment on Non-Repatriation basis</h2>
Investment on Non-Repatriation basis is treated at par with domestic investment. Therefore, FEMA pricing guidelines and reporting compliances are not applicable at the time of investment. &nbsp;The disinvestment / sales proceeds shall be credited only to the NRO account of the person concerned, irrespective of the type of account from which the consideration was paid.
There are certain businesses in which investment is prohibited under this route such as a Nidhi company or a company engaged in agricultural or plantation activities or real estate business or construction of farm houses or dealing in transfer of development rights.
The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in NRE/FCNR(B)/NRO account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
<h2>Investment on Repatriation basis</h2>
Investment on Repatriation basis will require compliance with sectoral caps and conditions, FEMA pricing guidelines and reporting compliance such as FCGPR, FCTRS, FLA etc. The Sales proceed can either be credit to the NRE account or can be transfer to the foreign bank account (subject to deduction of applicable taxes)
In this route, the prohibited sectors are: (a) Lottery business including Government or private lottery, online lotteries, etc. (b) Gambling and betting including casinos, etc. (c) Chit funds (d) Nidhi company (e) Trading in Transferable Development Rights (f) Real estate business or construction of farm houses (g) Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. (h) Activities or sectors not open to private sector investment e.g. (I) Atomic energy and (II) Railway operations (other than permitted activities mentioned in paragraph (3) of Schedule I) (i) Foreign technology collaborations in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for lottery business and gambling and betting activities.
The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in NRE/FCNR(B)/Escrow account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
Disclaimer
The information contained in this article is for general informational purposes only and is not intended as legal advice or to create an professional-client relationship. The contents of this article should not be relied upon as a substitute for obtaining legal advice from a qualified attorney. No professional-client relationship is formed by the use of this information, and no reader should act on this information without seeking professional / legal counsel. Hence, we recommend that professional advice is sought before taking any action on specific issues before entering into any investment or financial obligation based on this Content

Foreign Direct Investment (FDI) in One Person Company (OPC)

What is late submission fees (LSF) under FEMA as provided by the RBI?
LSF is simple process of paying a prescribed late fee to regularise reporting delays of various complianes applicable under the FEMA such as delay in reporting of Form ODI Part-II/ APR, FCGPR (B), FLA Returns, Form OPI, FC-GPR, FCTRS, Form ESOP, Form LLP(I), Form LLP(II), Form CN, Form DI, Form InVi, Form ODI-Part I, Form ODI-Part III, Form FC, Form ECB, Form ECB-2, Revised Form ECB or any other return which captures flows or returns which capture reporting of non-fund transactions or any other transactional reporting.
LSF payment is an additional facility for regularizing reporting delays without undergoing the lenghthy compounding procedure. LSF is voluntary and advisable. However, reporting party may still opt for compounding by not paying LSF.
&nbsp;
What is the process to LSF?
Belated reporting or cmpliances received by the AD Bank are forwarded to the RBI. The RBI shall then condone the delay and issue a conditional acknowledgment subject to payment of LSF within a stipulated timeframe.
LSF is levied as per the computation matrix. Final acknowledgment of reporting shall be issued only upon payment of LSF by the reporting party.
LSF is not refundable.
LSF Matrix
<table>
<tbody>
<tr>
<td width="312">
Type of Reporting delays
</td>
<td width="312">
LSF in Rs
</td>
</tr>
<tr>
<td width="312">
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form ODI Part-II
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; APR
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; FCGPR (B)
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; FLA Returns
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form OPI,
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; evidence of investment or any other return which does not capture flows or any other periodical reporting
</td>
<td width="312">
Rs. 7,500/-
</td>
</tr>
<tr>
<td width="312">
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; FC-GPR
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; FCTRS
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form ESOP
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form LLP(I)
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form LLP(II)
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form CN
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form DI
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form InVi
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form ODI-Part I,
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form ODI-Part III,
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form FC,
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form ECB,
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Form ECB-2,
&middot;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Revised Form ECB or any other return which captures flows or returns which capture reporting of non-fund transactions or any other transactional reporting
</td>
<td width="312">
[ Rs. 7,500/- + (0.025% &times; A &times; n) ]
&nbsp;
&nbsp;
&nbsp;
</td>
</tr>
</tbody>
</table>
&nbsp;
Notes:
<ul>
<li>&ldquo;A&rdquo; is the amount involved in the delayed reporting.</li>
</ul>
&nbsp;
<ul>
<li>&ldquo;n&rdquo; is the number of years of delay in submission rounded-upwards to the nearest month and expressed up to 2 decimal points.</li>
</ul>
&nbsp;
<ul>
<li>LSF amount is per return. However, for any number of Form ECB-2 returns, delayed submission for each LRN will be treated as one instance for the fixed component. Further, &lsquo;A&rsquo; for any ECB-2 return will be the gross inflow or outflow (including interest and other charges), whichever is more.</li>
</ul>
&nbsp;
<ul>
<li>Maximum LSF amount will be limited to 100 per cent of &lsquo;A&rsquo; and will be rounded upwards to the nearest hundred.</li>
</ul>
&nbsp;
<ul>
<li>Where an advice has been issued for payment of LSF and such LSF is not paid within 30 days, such advice shall be considered as null and void and any LSF received beyond this period shall not be accepted. If the applicant subsequently approaches for payment of LSF for the same delayed reporting, the date of receipt of such application shall be treated as the reference date for the purpose of calculation of &ldquo;n&rdquo;.</li>
</ul>
&nbsp;
<ul>
<li>The facility for opting for LSF shall be available up to three years from the due date of reporting/ submission. The option of LSF shall also be available for delayed reporting/submissions under the Notification No. FEMA 120/2004-RB and earlier corresponding regulations, up to three years from the date of notification of Foreign Exchange Management (Overseas Investment) Regulations, 2022.</li>
</ul>
&nbsp;
<ul>
<li>In case a person responsible for any submission or filing under the provisions of FEMA, neither makes such submission/filing within the specified time nor makes such submission/filing along with LSF, such person shall be liable for penal action under the provisions of FEMA, 1999.</li>
</ul>
&nbsp;
Concluding Remarks:
LSF is business friendly approach which bypass the lenghthy process of compounding under the FEMA. This initiative can be viewed from the perspective of ease of doing business.&nbsp;

RBI Revised a matrix of late submission fees / penalty under FEMA vide RBI/2022-23/122 A.P. (DIR Series) Circular No. 16 dated September 30, 2022 

Late filing penalty under FEMA

New Overseas Direct Investment (ODI) / Overseas Investment (OI) Regime under the FEMA

FEMA ODI New Rules, Regulations Overseas Investment OI ODI new rules

<h2>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Introduction</h2>
 
<ol type="1">
<li>This article provides the complete insight of the Acquisition and transfer of immovable property in India by-</li>
<li>Non-Resident Indian (NRI),</li>
<li>Overseas Citizen of India Card Holders (OCI) and</li>
</ol>
 
as per the provisions of the Foreign Exchange Management Act, 1999 (FEMA) and rules / regulations made thereunder.
 
<ol type="1">
<li>The acquisition and transfer of immovable property in India by PROI (Person Resident of India) and by some other specified persons (such as Long Term Visa (LTV) Holders, Foreign Embassies or Diplomats or Consulate Generals etc.) is not discussed in this article and the same will be discussed in upcoming article. Further, the conceptual clarity and difference between NRI, OCI, PROI, PRI, Citizen etc. is separate topic. This requires in depth understanding, therefore, the same will be discussed in separate article. The link of upcoming relevant articles will be shared in comment section for ease of reference.</li>
</ol>
 
<h2>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Historical Background</h2>
 
<ul>
<li>[Before the enactment of FEMA] As we know, before the enactment of FEMA, there was Foreign Exchange Regulation Act, 1973 (Repealed by FEMA) and section 31(1) of said Act provided that &ldquo;No person who is not a citizen of India and no company (other than a banking company) which is not incorporated under any law in force in India shall, except with the previous general or special permission of the Reserve Bank, acquire or hold or transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise an immovable property situate in India.&rdquo;</li>
<li>[After the enactment of FEMA] The FEMA classifies each foreign transaction in two categories viz: Current Account Transaction and Capital Account Transaction. The Current account transactions are generally permitted unless prohibited and capital account transactions are generally prohibited unless specifically permitted. The Central Government has an exclusive jurisdiction to regulate current account transactions and Reserve Bank of India (RBI) had exclusive jurisdiction to regulate capital account transactions. Accordingly, as per the provisions of section 6(3)(i) (now omitted), the RBI had exclusive jurisdiction to prohibit, restrict or regulate the acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India</li>
<li>[Amendment by Finance Act 2015 in FEMA] Later on,the Finance Act, 2015 amended the section 6 of the FEMA and classifies the capital account transactions in two categories: viz capital account transactions, involving debt instruments and capital account transactions, not involving debt instruments. Further, it has been provided that the term &ldquo;debt instruments&rdquo; shall mean, such instruments as may be determined by the Central Government in consultation with the Reserve Bank.</li>
<li>[Current Position] As discussed above, by the Finance Act 2015, the capital account transactions were further classified in two categories: viz capital account transactions, involving debt instruments and capital account transactions, not involving debt instruments. The power to regulate the capital account transactions, involving debt instruments is with the RBI and the power to regulate the capital account transactions, not involving debt instruments is with Central Government.</li>
<li>Summary of Above Discussion: The above discussion is summarized as under:</li>
</ul>
 
<figure class="wp-block-image size-large"><img class="wp-image-362" src="https://harchandanica.files.wordpress.com/2021/06/fema-1.png?w=625" alt="" /></figure>
 
<h2>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Important Terms</h2>
 
<ul>
<li>[Immovable Property]The term Immovable Property neither has been defined in the FEMA nor in rules / regulations. Therefore, the meaning of same can be borrowed from the General Clause Act, 1897. Section 3(26) of the said Act provides that &ldquo;immovable property&rdquo; shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;Apart from the above, the Transfer of Property Act, 1882, Registration Act, 1908 and Real Estate (Regulation and Development) Act, 2016 also contain the definition of immovable property. However, in substance, all these enacts highlight similar view while defining &ldquo;immovable property&rdquo;.</li>
</ul>
 
<ul>
<li>[Acquire]The term acquire is not defined in the Rules or Act. Generally, it means &ldquo;to gain possession or control of; to get or obtain.&rdquo;</li>
</ul>
 
<ul>
<li>[Transfer]Transfer is Defined in FEMA. Section 2(ze) define [&ldquo;transfer&rdquo; includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.]</li>
</ul>
 
<h2>4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; FEMA Provisions &amp; Relevant Rules</h2>
 
<ul>
<li>Section 6(2A) and 46(2)(ab) empower the Central Government to notify or make rules with respect to the permissible classes of capital account transactions (not involving debt instrument), the limits of admissibility of foreign exchange, and the prohibition, restriction or regulation of such transactions.</li>
</ul>
 
<ul>
<li>Therefore, in Oct. 2019, the Central Government notifies <a>Foreign Exchange Management (Non-debt Instruments) Rules, 2019</a> by suppressing the previous regulations made by RBI viz: Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.</li>
</ul>
 
<ul>
<li>Chapter IX of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (&ldquo;Rules&rdquo;) contain the provisions regarding acquisition and transfer of immovable property in India.</li>
</ul>
 
<h2>5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; General (Rules applicable in all cases)</h2>
 
<ul>
<li>[All transactions should be done only through banking channel in India and subject to payment of applicable tax]
<ul>
<li>Any transaction involving acquisition or transfer of immovable property shall be undertaken through banking channels in India and subject to payment of applicable taxes and other duties or levies in India (e.g. Stamp Duty, Registration Fees, Applicable Income Tax etc.)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Prior approval of RBI required by citizens of certain countries]
<ul>
<li>Prior permission of the RBI required to acquire or transfer of immovable property in India (other than lease not exceeding five years) by the person who is citizen or legal person (company, LLP, Firm, Trust etc.) of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau or Democratic People&rsquo;s Republic of Korea (DPRK).</li>
<li>Please note that this rule links the condition of prior approval of the RBI with the citizenship (including legal person incorporated in those countries), therefore, even if such citizens become Person Resident in India by virtue of provisions of Section 2(v), then still, they must obtain the prior approval of the RBI.</li>
<li>Now suppose, there are two persons being husband and wife and any of them is citizen of above country and another is citizen of India and both desires to purchase the property in joint name, then, in the opinion of author, still prior approval of RBI is must.</li>
<li>However, this prohibition is not applicable to OCI card holder (i.e. a person who is holding OCI card and is citizen of any of above mentioned country)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Prior approval of RBI is must in case of any deviation or non fulfilment of any condition]
<ul>
<li>Any transaction, which is not specified in Chapter IX of Rules or in case of any deviation or non fulfilment of any conditions, requires prior approval of RBI before the execution of such transaction.</li>
</ul>
<ul>
<li>In case if person fails to obtain prior approval, wherever required, and execute the transaction, then this may attract the adjudication or person have to file compounding application for compounding of offence before the RBI.</li>
</ul>
</li>
</ul>
 
<h2>6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Rules for NRI and OCI</h2>
 
<ul>
<li>[Acquisition other than gift or inheritance]
<ul>
<li>NRI and OCI can acquire any immovable property other than an agricultural land or farm house or plantation property</li>
</ul>
<ul>
<li>Permitted mode of payment: (i) funds received in India through banking channels by way of inward remittance from any place outside India or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act, rules or regulations framed thereunder (such as NRE / FCNR / NRO account). However, property acquired by utilizing funds of NRO account cannot be repatriate outside India (see para 7 of this article).</li>
</ul>
<ul>
<li>Prohibited mode of payment: payment made through traveller&rsquo;s cheque or by foreign currency notes or by any other mode other than those specifically permitted.</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Acquisition by way of gift]
<ul>
<li>NRI and OCI can acquire any immovable property in India (other than agricultural land or farm house or plantation property) by way of gift from a person who is either person resident in India or NRI or OCI.</li>
</ul>
<ul>
<li>Further, such donor (who is giving gift of immovable property) should be relative of such NRI / OCI with the meaning of section 2(77) of the Companies Act, 2013.</li>
</ul>
<ul>
<li>Section 2(77) of Companies Act, 2013 define relative as under;</li>
</ul>
</li>
</ul>
 
<blockquote class="wp-block-quote">
(77) "relative", with reference to any person, means any one who is related to another, if&mdash;
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed (following relations are prescribed)
(1) Father (includes step-father)
(2) Mother (includes the step-mother)
(3) Son (includes step son)
(4) Son&rsquo;s wife.
(5) Daughter.
(6) Daughter&rsquo;s husband.
(7) Brother (includes step brother)
(8) Sister (includes the step-sister)
</blockquote>
 
<ul>
<li>[Acquisition by way of inheritance]
<ul>
<li>Sub-section (5) of section 6 of FEMA provides that</li>
<li>A person resident outside India</li>
<li>may hold, own, transfer or invest</li>
<li>in Indian currency, security or any immovable property situated in India</li>
<li>if such currency, security or property was acquired, held or owned by such person</li>
<li>when he was resident in India or inherited from a person who was resident in India.</li>
</ul>
</li>
<li>Section 6(5) of FEMA allows the PROI to hold any immovable property situated in India property if such property was acquired by such person when he was resident in India or inherited from a person who was resident in India. However, this section does not allow to acquire new property by PROI out of fund accumulated during the period when he was resident or funds received in inheritance and this can be appreciated from the reading of the part of the provision (may hold, own, transfer or invest) which does not contain acquire.</li>
<li>NRI and OCI can acquire any property (including agricultural land or farm house or plantation property) by way of inheritance from a person resident outside India who has</li>
</ul>
 
(a.) acquired such immovable property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these rules; or
 
(b.) from a person resident in India.
 
<ul>
<li>[Transfer of any property by NRI and OCI]
<ul>
<li>NRI and OCI can transfer any property (including agricultural land or farm house or plantation property) to a person resident in India.</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Joint acquisition by the spouse of a NRI / OCI]
<ul>
<li>PROI, not being an NRI / OCI, who is a spouse of an NRI or OCI may acquire ONE immovable property (other than agricultural land or farm house or plantation property), jointly with his or her NRI or OCI spouse subject to following conditions:</li>
<li>Consideration for transfer, shall be made out of (i) funds received in India through banking channels by way of inward remittance from any place outside India; or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the RBI</li>
<li>No payment for any transfer of immovable property shall be made either by traveller&rsquo;s cheque or by foreign currency notes or by any other mode other than those specifically permitted as above</li>
<li>The marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the acquisition of such property</li>
<li>Such non-resident spouse is not otherwise prohibited from such acquisition (e.g. suppose if the Spouse is Citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau or Democratic People&rsquo;s Republic of Korea (DPRK), then prior approval of RBI is mandatory)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Summary]
<ul>
<li>The above discussion is summarized as under:</li>
</ul>
</li>
</ul>
 
<figure class="wp-block-image size-large"><img class="wp-image-363" src="https://harchandanica.files.wordpress.com/2021/06/fema-2.png?w=626" alt="" /></figure>
 
<ul>
<li>Repatriation of sale proceed
<ul>
<li>[Repatriation by person referred in Section 6(5)] PROI or his successor (who acquired immovable property when he was resident in India or inherited from a person who was resident in India) shall not, except with the general or specific permission of the RBI, repatriate outside India the sale proceeds of any immovable property referred to in that sub-section.</li>
</ul>
<ul>
<li>[Repatriation by NRI / OCI] Subject to fulfilment of following conditions NRI / OCI may repatriate the sale proceed outside:</li>
<li>Sale proceed does not relates to agricultural land or farm house or plantation property in India</li>
<li>Such immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition or the provisions of these rules</li>
<li>In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties</li>
<li>The amount for acquisition of the immovable property was paid in foreign exchange received through banking channels or out of funds held in Foreign Currency Non-Resident Account or out of funds held in Non-Resident External Account. (it is apparent that, while acquiring, if funds were utilized from NRO account, then such proceed cannot be repatriate outside India. If funds were utilized partially from the NRO and partially from NRE account? In such case, in the opinion of the author, the prior permission of RBI is must.)</li>
</ul>
</li>
</ul>
 
<ul>
<li>Disclaimer</li>
</ul>
 
The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor the publisher or its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
 
<ul>
<li>About Author</li>
</ul>
 
The author, Manish Harchandani (founder of Harchandani &amp; Associates, Chartered Accountants) is practicing Chartered Accountant and he can be reached at <a href="mailto:harchandanimanish@gmail.com">harchandanimanish@gmail.com</a> and at M. +91 9909880111

Acquisition and transfer of immovable property in India by NRI and OCI

<h2>The Foreign Assets of Small Taxpayers (FAST) Disclosure Scheme, 2026: A Lifeline for Legacy Non-Compliance</h2>
The Finance Bill, 2026 has introduced a specialized compliance framework titled "The Foreign Assets of Small Taxpayers Disclosure Scheme, 2026". This initiative targets a specific demographic of resident taxpayers&mdash;small taxpayers, employees with foreign ESOPs, and former students&mdash;who may have inadvertently failed to report foreign assets.
Stemming from the rigorous provisions of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA), non-disclosure of foreign assets usually invites severe financial penalties and criminal prosecution. Recognizing that many small taxpayers face disproportionate punitive consequences for legacy or inadvertent non-disclosures, this Scheme offers a one-time avenue for regularization.
Open and Close Date for the Declaration: Both dates will be notified by the Central Government in the Official Gazette.
The Scheme categorizes non-compliance into two distinct situations&mdash;Situation A (Undisclosed Assets) and Situation B (Reporting Failures)&mdash;offering tailored resolutions for each.
Situation A: Undisclosed Foreign Assets or Income
This category covers cases where the asset or income was chargeable to tax but was never disclosed or offered to tax.
<ol>
<li> Scope and Eligibility</li>
</ol>
<ul>
<li>Coverage: (a) Undisclosed asset located outside India; or (b) Undisclosed foreign income.</li>
<li>Condition: The Scheme is available only if the aggregate value of the undisclosed asset and the undisclosed foreign income does not exceed ₹1 crore (one crore rupees).</li>
</ul>
<ol start="2">
<li> Financial Liability (The Cost of Compliance)</li>
</ol>
To regularize these assets, the declarant must pay an aggregate amount calculated as follows:
<ol>
<li>Tax: 30% of the value of the undisclosed asset (as on 31st March 2026) or the foreign income.</li>
<li>Penalty: 100% of the tax determined above (i.e., another 30% of the value).</li>
<li>Total Cost: 60% of the value of the asset or income.</li>
</ol>
<ol start="3">
<li>Analysis for Situation A</li>
</ol>
<table>
<tbody>
<tr>
<td>
Feature
</td>
<td>
Without Scheme
</td>
<td>
With Scheme
</td>
</tr>
<tr>
<td>
Legal Basis
</td>
<td>
Assessments under BMA, 2015
</td>
<td>
Voluntary Declaration under Scheme 2026
</td>
</tr>
<tr>
<td>
Tax Rate
</td>
<td>
30% of asset value.
</td>
<td>
30% of asset value.
</td>
</tr>
<tr>
<td>
Penalty
</td>
<td>
90% of asset value (300% of tax) under Section 41 of BMA.
</td>
<td>
30% of asset value (100% of tax).
</td>
</tr>
<tr>
<td>
Total Liability
</td>
<td>
120% of the asset value.
</td>
<td>
60% of the asset value.
</td>
</tr>
<tr>
<td>
Prosecution
</td>
<td>
Risk of imprisonment (3 to 10 years) under Section 51 of BMA.
</td>
<td>
Full Immunity from prosecution granted under Section 123.
</td>
</tr>
</tbody>
</table>
&nbsp;
Situation B: Technical Reporting Failures (Legitimate Source)
This category targets "technical" non-compliance where the source of the asset was legitimate (either acquired when the person was a non-resident or acquired from tax-paid income), but the asset was simply not reported in the Income Tax Return (Schedule FA).
<ol>
<li> Scope and Eligibility</li>
</ol>
The declaration can be filed for:
<ul>
<li>(a) Legacy Assets from Non-Resident Period: An asset located outside India acquired from foreign income while the assessee was a non-resident, but not declared in the relevant Schedule (Schedule FA) upon becoming a resident.</li>
<li>(b) Assets from Taxed Income: An asset located outside India acquired from income which has already been offered to tax under the Income-tax Act, 1961, but not declared in the relevant Schedule (Schedule FA).</li>
<li>Condition: The Scheme is available if the value of the asset located outside India does not exceed ₹5 crores (five crore rupees).</li>
</ul>
<ol start="2">
<li> Financial Liability (The Cost of Compliance)</li>
</ol>
<ul>
<li>Fee: A fixed fee of ₹1,00,000 (One Lakh Rupees).</li>
<li>Tax/Penalty: No additional tax or penalty on the value of the asset, as the source is presumably explained or tax-paid.</li>
</ul>
<ol start="3">
<li>Analysis for Situation B</li>
</ol>
<table>
<tbody>
<tr>
<td>
Feature
</td>
<td>
Without Scheme
</td>
<td>
With Scheme
</td>
</tr>
<tr>
<td>
Violation
</td>
<td>
Non-disclosure in Schedule FA of ITR.
</td>
<td>
Declaration of omission under Scheme.
</td>
</tr>
<tr>
<td>
Penalty
</td>
<td>
₹10 Lakhs per year under Section 43 of BMA for failure to furnish information.
</td>
<td>
Flat Fee of ₹1 Lakh.
</td>
</tr>
<tr>
<td>
Recurring Risk
</td>
<td>
The ₹10 lakh penalty can be levied for each assessment year the default continued.
</td>
<td>
One-time settlement fee covers the default.
</td>
</tr>
<tr>
<td>
Prosecution
</td>
<td>
Risk of prosecution under Section 50 for non-disclosure.
</td>
<td>
Full Immunity from prosecution under Section 123.
</td>
</tr>
</tbody>
</table>
&nbsp;
General Benefits and Immunities (Applicable to Both A and B)
<ol>
<li>Immunity from BMA: Notwithstanding the provisions of the Black Money Act, 2015, a valid declarant is granted immunity from the levy of any further tax, penalty, or prosecution under the BMA for the declared assets/income.</li>
<li>Exclusion from Total Income: The income or asset declared will not be included in the total income of the declarant for any assessment year under the Income-tax Act, 1961, provided the payment is made.</li>
<li>Finality: The declaration implies closure. The declarant cannot claim rectification, revision, or set-off in appeal regarding the declared amount.</li>
</ol>
Summary Comparison
<table>
<tbody>
<tr>
<td>
Scenario
</td>
<td>
Nature of Default
</td>
<td>
Threshold
</td>
<td>
Payment Required
</td>
</tr>
<tr>
<td>
Situation A
</td>
<td>
Evasion: Undisclosed asset/income (Tax not paid).
</td>
<td>
Up to ₹1 Crore
</td>
<td>
60% of value (30% Tax + 30% Penalty).
</td>
</tr>
<tr>
<td>
Situation B
</td>
<td>
Omission: Source is legal/tax-paid, but reporting failed.
</td>
<td>
Up to ₹5 Crores
</td>
<td>
₹1 Lakh flat fee.
</td>
</tr>
</tbody>
</table>
&nbsp;
Important Note: The Scheme does not apply to assets representing proceeds of crime where proceedings are pending under the Prevention of Money-laundering Act, 2002, or where BMA assessment proceedings have already been completed. So, even in cases where, BMA proceedings are pending, the assessee can opt for the Scheme. 
Further, the Govt. will notify the rules of valuation of assets, forms, payment process etc in due course. Conclusion - A Final Opportunity for Compliance: The Foreign Assets of Small Taxpayers (FAST) Disclosure Scheme, 2026, represents a pivotal shift from a purely punitive approach to a more empathetic, compliance-oriented framework. For many resident Indians, the complexities of the Black Money Act have long been a source of anxiety, often due to technical errors in Schedule FA or forgotten accounts from time spent abroad. &nbsp;By providing a clear roadmap&mdash;distinguishing between intentional evasion and technical omissions&mdash;the Government has offered a genuine "exit gate." With the 60% total liability for undisclosed assets and a mere ₹1 Lakh flat fee for reporting failures, the financial cost of the Scheme is a small price to pay for total legal peace of mind and immunity from prosecution. &nbsp;As the notification for the declaration window approaches, eligible taxpayers should review their foreign holdings, including ESOPs, bank accounts, and properties, to ensure they don't miss this one-time regularization window. In the era of global tax transparency and automated information exchange, remaining non-compliant is no longer a viable option.

The Foreign Assets of Small Taxpayers (FAST) Disclosure Scheme, 2026: A Lifeline for Legacy Non-Compliance

The Foreign Assets of Small Taxpayers (FAST) Disclosure Scheme, 2026

Sovereign Jurisdictions and the Architecture of Anti-Avoidance: A Comprehensive Analysis of the Evolution of International Tax Law

Sovereign Jurisdictions and the Architecture of Anti-Avoidance: A Comp

<h2>DECLARATION BY NON-RESIDENT FOR AVAILING DTAA BENEFITS</h2>
(To be issued on the Letterhead of the Non-Resident Entity)
Date: [Date]
To: [Name of Indian Payer/Deductor]
Address: [Address of Indian Entity]
Re: Declaration regarding Tax Residency, Beneficial Ownership, and Eligibility for Tax Treaty Benefits for the Financial Year [Year]
Dear Sir/Madam,
With reference to the payments receivable by us from [Name of Indian Entity], we, [Name of Non-Resident Entity], hereby declare and confirm the following information to facilitate the determination of the appropriate withholding tax rate under the Income-tax Act, 1961/2025 read with the Double Taxation Avoidance Agreement (DTAA) between India and [Country of Residence]:
<ol>
<li> General Information and Tax Residency
<ol>
<li>Legal Status: We are a [Company/Partnership/Trust/Individual] legally incorporated/constituted under the laws of [Country].</li>
<li>Tax Residency: We are a tax resident of [Country] as per Article 4 of the India-[Country] DTAA and are liable to tax therein by reason of our domicile, residence, place of management, or other similar criteria.</li>
<li>Tax Residency Certificate (TRC): We hold a valid Tax Residency Certificate (TRC) issued by the revenue authorities of [Country] for the relevant period, a copy of which is enclosed. We confirm that the details provided in Form 10F (as prescribed under Indian Income Tax Rules) are accurate.</li>
<li>Place of Effective Management (POEM): Our Place of Effective Management is situated in [Country] and not in India. We do not have a dual residency status that would require a tie-breaker analysis by Competent Authorities under Article 4(3) of the MLI/DTAA.</li>
</ol>
</li>
<li> No Permanent Establishment (PE) in India
<ol>
<li>Fixed Place PE: We do not have a fixed place of business in India (such as a branch, office, factory, or workshop) through which our business is wholly or partly carried on.</li>
<li>Service PE: We do not uphold a Service PE in India; our employees or personnel have not furnished services in India for a period exceeding the threshold specified in the DTAA.</li>
<li>Agency PE: We do not have a person in India acting on our behalf who habitually exercises an authority to conclude contracts or plays the principal role leading to the conclusion of contracts.</li>
<li>Significant Economic Presence (SEP): We confirm that our aggregate payments arising from transactions with persons in India or our systematic soliciting of business/interaction with users in India does not constitute a "Significant Economic Presence" or "Business Connection" as defined under Section 9(1)(i) of the Indian Income-tax Act, 1961.</li>
</ol>
</li>
<li> Beneficial Ownership
<ol>
<li>Sole Beneficiary: We are the ultimate beneficial owner of the income (Dividend/Interest/Royalty/FTS) receivable from you. We have the full right to use and enjoy the income unconstrained by a contractual or legal obligation to pass on the payment to another person.</li>
<li>Not a Conduit: We are not acting as an agent, nominee, or conduit company for any other person. We are not a flow-through entity where the income is contractually required to be transferred to a third party resident in a different jurisdiction.</li>
</ol>
</li>
<li> Principal Purpose Test (PPT) and GAAR
<ol>
<li>Commercial Rationale: The arrangement or transaction resulting in this payment has valid commercial reasons and reflects economic reality.</li>
<li>No Abuse of Treaty: Obtaining the tax benefit under the DTAA is not one of the principal purposes of the arrangement or transaction. The granting of the tax benefit is in accordance with the object and purpose of the DTAA.</li>
<li>GAAR Compliance: The transaction is not an "impermissible avoidance arrangement" under the General Anti-Avoidance Rules (GAAR) of the Indian Income-tax Act. It does not lack commercial substance and was not entered into with the main purpose of obtaining a tax benefit.</li>
</ol>
</li>
<li> Limitation on Benefits (LOB) (Applicable if the specific DTAA or MLI contains an LOB clause) We confirm that we satisfy the Limitation on Benefits provisions under Article [Number] of the DTAA/MLI. Specifically, we qualify as a "Qualified Person" because:</li>
</ol>
[ ] We are a publicly traded company listed on a recognized stock exchange; OR
[ ] We meet the ownership and base erosion test (more than 50% owned by qualified persons and less than 50% of gross income is paid as deductible payments to non-residents) ; OR
[ ] We are engaged in the active conduct of a trade or business in our residence state, and the income derived from India is connected to that business.
<ol start="6">
<li> Indemnity</li>
</ol>
We hereby certify that the information provided above is true, correct, and complete. We undertake to indemnify and hold [Name of Indian Payer] harmless from any tax, interest, or penalty levied by the Indian Income Tax Authorities due to any misrepresentation or change in the facts stated above. We undertake to immediately notify you of any change in our residential status or the details provided herein.
For [Name of Non-Resident Entity]
&nbsp;
-------------------------------------
Authorized Signatory Name:
Designation:
Tax Identification Number (Country of Residence):
&nbsp;

DTAA Declaration Format for Non-Residents: Tax Residency & Beneficial Ownership (2025-26)

DTAA Declaration Format for Non-Residents: Tax Residency & Beneficial 

<h2>Beyond Consultancy: The Supreme Court of India Reaffirms the &lsquo;Fixed Place&rsquo; PE Threshold in Hyatt International</h2>
The concept of a Permanent Establishment (PE) serves as the cornerstone of international taxation, determining a source country&rsquo;s right to tax the business profits of a foreign enterprise. In a significant judgment delivered in 2025, the Supreme Court of India, in Hyatt International Southwest Asia Ltd. v. Additional Director of Income-tax, reinforced the principles of operational control and physical presence. The Court held that a foreign entity exercising "pervasive control" over a hotel's operations in India constituted a fixed place PE, moving well beyond the realm of mere advisory services.
This article provides a detailed analysis of the ruling, contextualizing it within the established frameworks of Article 5 of the Model Tax Conventions and prior judicial precedents.
<h2>1. The Factual Matrix: Operational Control vs. Advisory Services</h2>
The core dispute centered on whether the activities of Hyatt International Southwest Asia Ltd. (the Assessee) in India amounted to a PE. The Assessee operated under a Strategic Oversight Services Agreement (SOSA) with Indian hotel owners. The Assessee argued that its role was consultative. However, the Supreme Court scrutinized the substance of the agreement and the actual conduct of the Assessee.
Key factual findings by the Court included:
<ul>
<li>Pervasive Control: The Assessee had the authority to appoint and supervise the General Manager and other key personnel, manage operational bank accounts, and implement human resource and procurement policies.</li>
<li>Strategic Autonomy: The Assessee controlled pricing, branding, and marketing strategies.</li>
<li>Unilateral Authority: The Assessee could assign personnel to the hotel without requiring the consent of the hotel owner.</li>
</ul>
<h2>2. Legal Analysis: The &lsquo;Fixed Place&rsquo; PE Threshold</h2>
Under Article 5(1) of the OECD and UN Model Conventions, a PE is defined as a "fixed place of business through which the business of an enterprise is wholly or partly carried on",. For a fixed place PE to exist, three essential characteristics must typically be met: the existence of a place of business, the fixed nature of that place (stability), and the carrying on of the business through that place.
In Hyatt, the Supreme Court applied the tests of stability, productivity, and dependence to affirm the existence of a PE.
<ol>
<li> The &lsquo;At the Disposal&rsquo; Test and Control</li>
</ol>
A critical element in PE jurisprudence is whether the premises are "at the disposal" of the foreign enterprise. As established in the landmark Formula One World Championship Ltd. case, ownership of the premises is not required; rather, the enterprise must have access to and control over the location to carry out its business.
In Hyatt, the Court found that the Assessee&rsquo;s staff operated from the hotel premises to perform their functions. By exercising control over day-to-day operations&mdash;ranging from bank accounts to personnel management&mdash;the hotel premises were effectively placed at the disposal of the foreign enterprise to carry out its core business, satisfying the criteria for a "fixed place of business".
<ol>
<li> The Stability and Duration Test</li>
</ol>
The "fixed" requirement implies a degree of permanence. The OECD Commentary suggests that a place of business usually must exist for a certain period (often six months) to be considered fixed. In Hyatt, the Court noted the 20-year duration of the SOSA. This long-term arrangement, coupled with the Assessee&rsquo;s "continuous and functional presence," decisively satisfied the stability test required for a fixed place PE.
<h2>3. Core vs. Preparatory or Auxiliary Activities</h2>
Article 5(4) of the Model Conventions provides a "negative list" of activities that do not constitute a PE, typically those that are preparatory or auxiliary in character. A foreign enterprise often argues that its presence is merely supportive.
The Supreme Court explicitly rejected the argument that Hyatt's functions were merely "auxiliary" or consultancy-based. The Court observed:
<ul>
<li>The functions were not limited to setting up a pattern of activities.</li>
<li>The Assessee was an "active participant in the hotel's core operational activities".</li>
<li>The rights exercised extended "well beyond mere consultancy".</li>
</ul>
This distinction is vital. When an entity assumes responsibility for core revenue-generating functions&mdash;such as pricing, marketing, and key staffing&mdash;it crosses the line from being a passive advisor to an active business operator.
<h2>4. Judicial Precedents and the Evolution of PE in India</h2>
The Hyatt ruling aligns with the assertive approach regarding source-based taxation often seen in Indian jurisprudence.
<ul>
<li>Comparison with Morgan Stanley: In DIT v. Morgan Stanley, the Supreme Court held that stewardship activities (monitoring and protecting the interest of the foreign parent) do not constitute a PE. However, in Hyatt, the Court found the Assessee&rsquo;s role was "not just advisory" but involved administrative roles and active participation, distinguishing it from mere stewardship.</li>
<li>Comparison with Formula One: In Formula One, the Supreme Court held that control over the circuit for a limited period (three days) created a PE because of the exclusivity and nature of control. In Hyatt, the control was not only pervasive but also spanned two decades, making the PE determination even more robust.</li>
</ul>
<h2>5. Conclusion: Implications for Multinational Enterprises</h2>
The Hyatt decision serves as a caution to multinational enterprises entering into management or oversight agreements in India. The label given to an agreement (e.g., "consultancy" or "oversight") will yield to the substance of the functions performed.
If a foreign entity retains the power to manage key operational aspects&mdash;staffing, pricing, and bank accounts&mdash;from a fixed location in India over a sustained period, it will likely be treated as having a fixed place PE. This ruling reinforces the principle that where core business functions are carried out through a physical location in the source state, the source state retains the right to tax the attributable profits.
Disclaimer: This write-up is a brief analytical overview and does not capture all aspects of the judgment. Readers are advised to refer to and read the judgment in its entirety for a complete and detailed understanding of the facts and legal reasoning.

Beyond Consultancy: The Supreme Court of India Reaffirms the ‘Fixed Place’ PE Threshold in Hyatt International

Beyond Consultancy: The Supreme Court of India Reaffirms the ‘Fixed Pl

<h2>The Chameleon Concept: A Comprehensive Analysis of Beneficial Ownership in International Taxation</h2>
In the complex world of international taxation, few concepts are as ubiquitous yet elusive as "beneficial ownership". It is a term that acts as a gatekeeper to tax treaty benefits, determining who gets reduced withholding tax rates on dividends, interest, and royalties. Yet, despite its centrality, it remains a concept plagued by uncertainty.
A famous statement by a former Bank of England official in 1987 captured this ambiguity perfectly: beneficial owners "are like elephants; you know them when you see them". This reliance on intuition rather than precise definition highlights the difficulty legal systems have in pinning down exactly what it means to "own" something beneficially rather than legally.
<h3>A Simple Explanation: The Split Between Title and Enjoyment</h3>
To understand beneficial ownership, one must understand the separation of rights. In many legal systems, particularly those rooted in English Common Law, it is possible for one person to hold the legal title to an asset (their name is on the deed or the share register) while another person enjoys the actual benefits of that asset (income, use, or control).
Imagine a coconut tree. One person might have the legal paper saying they own the tree. However, another person has the exclusive ability and privilege to climb the tree, pick the coconuts, and eat them. While the first person is the legal owner, the second person&mdash;sustaining the close physical and economic relation to the resource&mdash;is the beneficial owner.
In international taxation, this distinction is critical. If a company in Country A pays dividends to a company in Country B, Country B is usually the "legal" recipient. However, if that company in Country B is merely an agent, nominee, or a "conduit" obliged to pass that money directly to a third party in Country C, it is not the beneficial owner. International tax rules generally insist that tax treaty benefits (like lower tax rates) are reserved for the beneficial owner, not just the entity holding the pen.
<h3>The Philosophical Aspect: A Privilege, Not a Right</h3>
From a philosophical and jurisprudential perspective, defining beneficial ownership requires looking beyond standard property definitions. The concept creates a tension between the rigid "strict law," which looks at forms and titles, and "equity," which looks at conscience and the reality of the situation.
Legal theorist Wesley Newcomb Hohfeld provided a framework for understanding such legal relations. Under a Hohfeldian analysis, beneficial ownership is best categorised not as a "right" (a claim enforceable against another), but as a privilege or liberty.
<ul>
<li>Not a Right: The beneficial owner often has no direct claim against third parties to stop them from interfering with the property in a strict legal sense.</li>
<li>A Privilege: It is the liberty to use and enjoy the proceeds of the property. The beneficial owner has no duty to abstain from enjoying the benefits.</li>
<li>The "No-Right" Correlative: The existence of this privilege means that third parties have "no-right" to interfere with the beneficial owner&rsquo;s enjoyment.</li>
</ul>
This philosophical distinction matters because it places beneficial ownership in the realm of "non-law" or factual economic reality, rather than strict legal formalism. It represents a "mythological beast"; like a seahorse, which some describe as a fish with a horse's head and others a horse with a tail, beneficial ownership is described differently depending on whether one looks through the lens of equity, tax law, or international treaties.
<h3>The Role in International Taxation: Allocation vs. Anti-Abuse</h3>
In the context of international taxation, the concept serves two competing functions, leading to what some scholars call a "vicious circle" of interpretation.
<ol>
<li> The Rule of Income Allocation</li>
</ol>
Originally, specifically in the 1940s and through the 1977 OECD Model Tax Convention, the concept was introduced to clarify who the taxpayer is. It was a technical fix for a specific problem: ensuring that agents, nominees, and trustees&mdash;who hold title but do not pay tax on the income&mdash;did not claim treaty benefits meant for the actual taxpayer. In this narrow, legalistic view, beneficial ownership is simply a rule of attribution: identifying the person to whom income is allocated for tax purposes. If a recipient is not an agent or nominee bound to pass the money on, they are the beneficial owner.
<ol start="2">
<li> The Anti-Abuse Device</li>
</ol>
Over time, tax authorities began using the concept as a weapon against tax avoidance, specifically "treaty shopping". This occurs when investors establish "conduit companies" in favourable jurisdictions solely to access tax treaties. Authorities argued that even if a company is not strictly an agent, if it has very narrow powers and functions as a funnel for money, it should not be considered the beneficial owner.
This broader, "economic" interpretation treats beneficial ownership as a "substance-over-form" test. It asks not just "who receives this legally?", but "who has the full privilege to directly benefit from the income?". This view suggests that beneficial ownership is an anti-abuse rule designed to pierce the corporate veil when a transaction lacks economic substance.
<h3>The "Chameleon" in the Courts</h3>
Because the definition is loose ("you know it when you see it"), courts around the world have applied it inconsistently, creating a "definitional chameleon" that changes colour based on the specific facts and the desires of the tax authorities applying it.
<ul>
<li>The Legal/Narrow Approach: Courts in Canada (e.g., Pr&eacute;vost Car and Velcro) and the Netherlands generally adopt a narrow view. They hold that a recipient is the beneficial owner unless they are legally or contractually constrained from using the funds. The fact that a company might pay the money out to a parent company does not disqualify it, provided there is no automatic, pre-determined obligation to do so.</li>
<li>The Economic/Broad Approach: Conversely, the Court of Justice of the European Union (CJEU) (in the Danish BO cases) and courts in Switzerland and Spain have moved toward an economic, substance-based interpretation. Here, the concept is entangled with the prohibition of abuse of rights. If a company is a "wholly artificial arrangement" lacking the power to freely determine the use of funds, it is denied beneficial owner status.</li>
</ul>
<h3>A Concept in Crisis?</h3>
The concept of beneficial ownership remains "redundant, paradoxical and harmful" in the eyes of some critics.
<ul>
<li>Redundant: Because specific anti-abuse rules (like the Principal Purpose Test or Limitation on Benefits clauses) now exist to stop treaty shopping, making a vague concept less necessary.</li>
<li>Paradoxical: It requires finding a "factual" obligation to pass on money where no legal contract exists.</li>
<li>Harmful: Its vagueness leads to massive disputes and unpredictability for taxpayers and nations alike.</li>
</ul>
Ultimately, the search for the beneficial owner is like the fable of the "Blind Men and the Elephant." Different jurisdictions touch different parts of the concept&mdash;some feeling a legal obligation, others an economic reality&mdash;and describe entirely different beasts. Until a unified definition is accepted, it remains a ghostly concept; a method of dispelling evil spirits (tax evaders) by trying to guess their true names.
<h3>The Undefined Chameleon: Why Tax Treaties Refuse to Define "Beneficial Ownership"</h3>
In the realm of international taxation, the concept of beneficial ownership acts as a gatekeeper. It determines who is entitled to reduced withholding tax rates on dividends, interest, and royalties under tax treaties. Yet, paradoxically, this crucial term is nowhere defined in the OECD Model Tax Convention, the UN Model Convention, or the vast majority of bilateral tax treaties.
This absence of a definition is not an accident of history, but the result of a complex clash between legal systems, divergent policy goals, and a desire for flexibility. The resulting ambiguity has turned the concept into a "definitional chameleon" that changes colour depending on the facts of the case and the desires of the tax authorities applying it.
<ol>
<li> The Historical Trap: "Implicit" Meanings and the UK Problem</li>
</ol>
The origin of the term lies in the specific domestic laws of Common Law countries (like the UK and the USA), which distinguish between "legal" ownership (title) and "equitable" ownership (benefit).
When the term first appeared in the 1942 Canada-US treaty and the 1945 UK-US treaty, negotiators did not define it because they believed its meaning was implicit. It was an "of course" test: of course, a nominee or agent is not the owner of the income. The US Treasury viewed the concept as inherent to the very logic of tax treaties&mdash;treaties are meant to benefit those who actually earn the income, not intermediaries.
The term was formally introduced into the OECD Model in 1977 largely to solve a specific technical problem for the United Kingdom. Under UK law, trustees were the legal owners of income. The UK was concerned that foreign residents could use UK nominees to access treaty benefits. The UK proposed the term "beneficial owner" to clarify that mere agents and nominees should be excluded.
However, the OECD working parties at the time (specifically Working Party No. 27) believed a definition was unnecessary because the requirement was already implied in the words "paid to a resident". Consequently, they settled for a negative definition in the Commentary: they listed who is not a beneficial owner (agents and nominees) rather than defining who is.
<ol start="2">
<li> The Clash of Legal Systems: "Lost in Translation"</li>
</ol>
A major reason for the lack of a definition is the extreme difficulty of translating a Common Law equity concept into Civil Law systems (like France, Germany, or Spain), which do not recognise the split between legal and equitable ownership.
<ul>
<li>Linguistic Confusion: The English term "beneficial owner" implies a legal right to enjoyment. However, the French translation adopted by the OECD, b&eacute;n&eacute;ficiaire effectif, connotes "actual" or "effective" benefit, shifting the meaning towards economic reality rather than legal title.</li>
<li>The "Nomen Generalissimum": Because the concept had to function across incompatible legal systems, it became a nomen generalissimum&mdash;a very general term intended to be interpreted based on context rather than a fixed legal definition.</li>
<li>Rejection of Domestic Definitions: To avoid chaos where every country applied its own domestic law (which would lead to double taxation), the OECD clarified that the term should have an "autonomous international meaning" independent of domestic laws. Defining it rigidly in the treaty text would have risked tethering it back to specific domestic legal concepts that do not exist in other countries.</li>
</ul>
<ol start="3">
<li> The Policy Dilemma: Allocation vs. Anti-Abuse</li>
</ol>
The refusal to define the term also stems from a fundamental disagreement about its purpose. Is beneficial ownership a technical rule about who the taxpayer is (income allocation), or is it a weapon against tax avoidance?
<ul>
<li>The Allocation View: In the 1970s, the concept was merely a rule of attribution. It was meant to ensure that income is allocated to the person who actually pays tax on it, rather than a formal intermediary</li>
</ul>
. If defined strictly as a legal attribute, it works well for this purpose.
<ul>
<li>The Anti-Abuse View: Over time, tax authorities began using the concept as a "handy tool" to combat "treaty shopping" (where investors set up "conduit companies" to access treaties). If the term were defined precisely, taxpayers could engineer structures to meet the definition (a "tick-the-box" exercise). By leaving it undefined and vague, tax authorities preserve a degree of flexibility to attack abusive structures using a "substance-over-form" approach. This tension created a "vicious circle." The OECD and tax authorities resisted a definition because a precise definition might restrict their ability to use the concept against new forms of tax avoidance.</li>
</ul>
<ol start="4">
<li> Recent Developments: The Refusal to Define</li>
</ol>
Even in modern times, attempts to codify a definition have been rejected.
<ul>
<li>The UN Rejection: In 2020, the UN Committee of Experts explicitly rejected including a definition of beneficial ownership in the UN Model Convention. They concluded that "the risks of including a definition... outweigh any potential benefit of addressing the perceived uncertainty". They feared a definition might inadvertently validate abusive structures or conflict with domestic laws.</li>
<li>The 2014 OECD Clarification: Instead of a definition, the OECD updated its Commentary in 2014 to provide a "clarification." It stated that a beneficial owner is one who has the right to use and enjoy income unconstrained by a contractual or legal obligation to pass it on to another person. This remains a test of facts and obligations rather than a dictionary definition.</li>
</ul>
<h3>Philosophical Aspect: Biosemantics and "Humpty Dumpty"</h3>
The persistent lack of definition invites a philosophical examination of how language functions in law.
<ol>
<li> The "Humpty Dumpty" Approach: As noted in the foreword to Beneficial Ownership in Tax Law and Tax Treaties, the concept is a perfect example of Humpty Dumpty&rsquo;s famous maxim in Through the Looking-Glass: "When I use a word it means just what I choose it to mean &ndash; neither more nor less"</li>
</ol>
. Because the text is empty, courts and tax authorities fill it with their own desired meaning&mdash;sometimes legal, sometimes economic&mdash;depending on whether they want to facilitate investment or stop tax avoidance.
<ol start="2">
<li> Biosemantics and the "Beaver" Analogy: Scholars have applied biosemantics (specifically the work of Ruth Millikan) to explain why tax authorities cling to this undefined concept. In nature, beavers slap their tails on water to signal danger. Even if the beaver is wrong (a false positive), the signal is useful because the cost of ignoring a real predator is death. Similarly, tax authorities use the "Beneficial Ownership" challenge like a beaver's tail slap&mdash;a signal of "Tax Avoidance!". Even if the application is legally technically incorrect (a false positive), it serves a survival function for the state: protecting the tax base. A precise definition would stop the beaver from slapping its tail whenever it felt threatened, thereby removing a flexible biological defense mechanism against the "predators" of tax avoidance.</li>
</ol>
<h3>Summary</h3>
There is no definition of beneficial ownership in tax treaties because:
<ol>
<li>History: It began as an "implicit" concept that didn't need definition.</li>
<li>Legal Systems: A precise definition is nearly impossible to translate between Common Law and Civil Law systems.</li>
<li>Flexibility: Tax authorities prefer ambiguity to maintain a flexible weapon against tax avoidance (the "anti-abuse" function).</li>
<li>Risk: International bodies (UN/OECD) fear that a codified definition would create loopholes rather than close them.</li>
</ol>
It remains a "mythological beast"; a concept that everyone claims to recognise ("like an elephant") but no one can describe with legal precision.
Disclaimer: This article is provided for informational purposes only and does not constitute legal, financial, or tax advice. Readers should consult with a professional before making any decisions based on the content of this article.

The Chameleon Concept: A Comprehensive Analysis of Beneficial Ownership in International Taxation

A Comprehensive Analysis of Beneficial Ownership in International Tax

<h2>Aircraft Lease Payments Under the India-UAE DTAA: Royalty or Business Income?</h2>
Classification of income is the cornerstone of international tax planning. For multinational enterprises engaged in the aviation sector, determining whether lease payments constitute "Royalties" or "Business Profits" creates a significant difference in tax liability. This distinction is particularly critical under the India-UAE Double Taxation Avoidance Agreement (DTAA), where specific treaty wording diverges from standard international models.
This article explores how aircraft lease payments are treated under the India-UAE DTAA, analyzing the conflict between source-based taxation (India) and residence-based taxation (UAE).
<h2>1. The Core Conflict: Business Profits vs. Royalties</h2>
The classification of income determines which country has the right to tax.
<ul>
<li>Business Profits (Article 7): Generally, business profits are taxable in the source state (India) only if the foreign enterprise has a Permanent Establishment (PE) there. If no PE exists, the income is taxable only in the state of residence (UAE).</li>
<li>Royalties (Article 12): Royalties allow the source state to levy a withholding tax on the gross amount of payment, regardless of whether a PE exists.</li>
</ul>
The critical issue for the aviation industry is whether an aircraft is considered "equipment." If leasing an aircraft is treated as the "use of commercial equipment," the payments shift from being tax-free Business Profits (assuming no PE) to taxable Royalties.
The OECD vs. UN Model Distinction
To understand the India-UAE position, one must look at the global models:
<ul>
<li>The OECD Model: In 1992, the OECD removed "industrial, commercial or scientific equipment" from the definition of royalties. Consequently, under OECD-based treaties, aircraft leasing income is generally treated as business profits (Article 7) or international traffic profits (Article 8), taxable only in the residence state.</li>
<li>The UN Model: The UN Model retains the "equipment" clause in the royalty definition. This allows source countries (like India) to tax payments for the lease of equipment as royalties.</li>
</ul>
<h2>2. Analyzing the India-UAE DTAA</h2>
The India-UAE DTAA deviates from the OECD Model and aligns with the UN Model regarding royalties.
The "Equipment Royalty" Clause
Article 12(3) of the India-UAE treaty defines royalties to include payments for the "use of, or the right to use, industrial, commercial or scientific equipment". The term "equipment" in this context is broad and, outside of a consumer context, includes ships, aircraft, cars, and containers.
Because the treaty explicitly includes the "use of equipment" in the royalty definition, payments made by Indian lessees to UAE lessors for the use of aircraft (a dry lease) are characterized as Royalties. This grants India the right to tax these payments at source.
The Exclusion of Aircraft from Article 8
Usually, profits from operating aircraft in international traffic are exempt from source taxation under Article 8 (Shipping and Air Transport). However, as established in the treaty text, Article 8 of the India-UAE DTAA is restricted specifically to "Shipping" and does not cover aircraft. This exclusion is significant. Without the protection of Article 8 (which allocates taxing rights solely to the residence state for international traffic), aircraft income falls into the general "Business Profits" or "Royalties" bucket. Since the "equipment royalty" definition applies, the income is captured under Article 12 rather than Article 7.
<h2>3. Operational Distinctions: Wet Lease vs. Dry Lease</h2>
The tax treatment often depends on the nature of the lease arrangement.
Dry Lease (Bareboat Charter)
A dry lease involves leasing the aircraft without crew, maintenance, or insurance. The lessor provides the asset, but the lessee operates it.
<ul>
<li>Tax Treatment: Under the India-UAE DTAA, this is a classic case of paying for the "use of commercial equipment." Consequently, dry lease payments are treated as Royalties subject to withholding tax in India.</li>
<li>India's Reservation: India has consistently reserved the right to apply Article 12 (Royalties) rather than Article 8 to profits from leasing ships or aircraft on a bareboat basis.</li>
</ul>
Wet Lease (Time/Voyage Charter)
A wet lease involves providing the aircraft with crew, fuel, and supplies. The lessor retains control over the navigation and management of the aircraft.
<ul>
<li>Tax Treatment: International commentary generally regards wet leases as the provision of a transportation service rather than a mere rental of assets. Profits from a wet lease are typically treated as profits from the operation of aircraft.</li>
<li>The Conflict: While wet leases are conceptually "business profits" or "shipping/air transport profits," the specific exclusion of aircraft from Article 8 in the India-UAE treaty complicates this. If the arrangement is viewed as a service, it might fall under Article 7 (Business Profits). However, if Indian authorities view the substantial element of the contract as the "use of equipment," they may still attempt to characterize portions of the payment as Royalty, particularly given their reservation to tax equipment leasing.</li>
</ul>
<h2>4. Key Takeaways for Lessors and Lessees</h2>
<ol>
<li>Withholding Tax Risk: UAE lessors entering into dry leases with Indian operators must anticipate Indian withholding tax. The "equipment royalty" clause in Article 12(3) acts as a catch-all for leasing income.</li>
<li>No Article 8 Protection: Unlike many other treaties, the India-UAE DTAA's Shipping Article does not cover aircraft. Lessors cannot claim the standard exemption for "operation of aircraft in international traffic" under this specific treaty article.</li>
<li>Permanent Establishment Exposure: If the lease is not classified as a royalty, it falls under Article 7. In this scenario, taxation depends on the existence of a PE. However, Indian domestic law (Section 9 of the Income Tax Act) and treaty practice have a broad concept of PE and "Business Connection".</li>
<li>Priority of Articles: Article 12 (Royalties) operates as lex specialis (specific law) to Article 7 (General Business Profits). If a payment fits the definition of Royalty, the Royalty article takes precedence over the Business Profits article.</li>
</ol>
Conclusion
Under the India-UAE DTAA, the leasing of aircraft&mdash;specifically dry leasing&mdash;is generally classified as Royalty income, not Business Income. This is due to the specific inclusion of "commercial equipment" in the treaty's royalty definition and the exclusion of aircraft from the Shipping article. This structure preserves India's right to tax lease payments at the source, a position consistent with India's broader tax treaty policy regarding equipment leasing.
<div class="col-md-12">
<div class="article_mainContent__VMVqz">
Disclaimer:&nbsp;This article is provided for informational purposes only and does not constitute legal, financial, or tax advice. Readers should consult with a professional before making any decisions based on the content of this article.
</div>
</div>

Aircraft Lease Payments Under the India-UAE DTAA: Royalty or Business Income?

Aircraft Lease Payments Under the India-UAE DTAA: Royalty or Business 

<h3>Navigating the Maze: A Complete Guide to Disclosing Foreign Assets in Your ITR</h3>
For the globally mobile Indian individual, holding foreign assets&mdash;be it a bank account in Dubai, a rental property in London, or stocks listed on the NYSE&mdash;is increasingly common. However, with this international financial footprint comes a significant compliance responsibility back home. The disclosure of foreign assets in the Indian Income Tax Return (ITR) is not a mere formality; it is a crucial legal obligation with far-reaching implications under a web of stringent laws.
This article demystifies the process, significance, and serious consequences of declaring foreign assets and income in your ITR.
<h4>The Significance: Why is Disclosure Mandatory?</h4>
The primary purpose of this disclosure is to combat tax evasion and the concealment of unaccounted wealth outside India's immediate jurisdictional reach. It brings transparency to an individual's global income, allowing the Indian tax authorities to:
<ul>
<li>
Ensure Comprehensive Taxation:&nbsp;India taxes its residents on their&nbsp;global income. Any income earned from a foreign asset must be offered to tax in India, regardless of whether it was repatriated.
</li>
<li>
Curb Black Money:&nbsp;The stringent rules are a direct outcome of the government's push to identify and penalize undisclosed foreign income and assets, famously enacted through the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
</li>
<li>
Facilitate Exchange of Information:&nbsp;India is a signatory to various international agreements like the Common Reporting Standard (CRS), which enables the automatic exchange of financial account information between countries. The ITR disclosure is cross-verified with the data received under CRS.
</li>
</ul>
<h4>Applicability: Who Needs to Disclose?</h4>
The requirement to disclose foreign assets applies to&nbsp;Resident Indians.
<ul>
<li>
Resident Ordinary (ROR):&nbsp;An individual who resides in India for 182 days or more in a financial year, or meets other specified conditions, is considered a Resident and Ordinarily Resident (ROR). An ROR is taxed on their worldwide income and&nbsp;must disclose all foreign assets&nbsp;in Schedule FA of the ITR form (ITR-2, ITR-3, etc.).
</li>
<li>
Resident Not Ordinarily Resident (RNOR) &amp; Non-Resident (NR):&nbsp;These individuals are generally not taxed on their foreign income (unless derived from an Indian business/profession) and typically do not need to fill Schedule FA.
</li>
</ul>
What Qualifies as a Foreign Asset? Schedule FA requires details of:
<ul>
<li>
Foreign bank accounts.
</li>
<li>
Financial interest in any entity outside India.
</li>
<li>
Immovable property located outside India.
</li>
<li>
Any other capital asset located outside India.
</li>
<li>
Signing authority in any account located outside India.
</li>
<li>
Any trust created under foreign law.
</li>
</ul>
<h4>The Web of Laws: Consequences of Non-Disclosure</h4>
Failure to accurately disclose foreign assets and income can trigger severe consequences under multiple statutes, creating a multi-layered legal nightmare.
1. The Income Tax Act, 1961:
<ul>
<li>
Penalty for Underreporting/Misreporting of Income:&nbsp;A penalty of 50% to 200% of the tax payable on the undisclosed income can be levied.
</li>
<li>
Reassessment of Past Years: The tax department can reopen assessments for up to 6 previous years if income from a foreign asset has escaped assessment.
</li>
<li>
Prosecution:&nbsp;In severe cases, it can lead to prosecution with punishment ranging from 6 months to 7 years.
</li>
</ul>
2. The Black Money (Undisclosed Foreign Income and Assets) Act, 2015: This is the most draconian law dealing specifically with undisclosed foreign assets. It applies to both residents and non-residents.
<ul>
<li>
Taxation:&nbsp;Undisclosed foreign income and assets are taxed at a flat rate of&nbsp;30%&nbsp;(plus cess and surcharge).
</li>
<li>
Penalty:&nbsp;A staggering penalty of&nbsp;300%&nbsp;of the tax payable.
</li>
<li>
Prosecution:&nbsp;Stringent punishment of&nbsp;rigorous imprisonment from 3 to 10 years. Failure to file the return disclosing foreign assets itself is punishable with imprisonment.
</li>
</ul>
3. The Benami Transactions (Prohibition) Act, 1988: If a foreign asset is held in the name of another person (a benamidar) while the payment for it has been made by someone else (the beneficial owner) using unaccounted money, it qualifies as a Benami Transaction.
<ul>
<li>
Consequence:&nbsp;The property is liable to be&nbsp;confiscated&nbsp;by the government without payment of any compensation.
</li>
<li>
Prosecution:&nbsp;The beneficial owner and the benamidar face rigorous imprisonment of up to 7 years and a fine.
</li>
</ul>
4. The Foreign Exchange Management Act (FEMA), 1999: FEMA regulates how Indians can acquire and hold foreign assets. Non-disclosure in ITR can reveal FEMA violations.
<ul>
<li>
Example:&nbsp;If you disclosed a UK property in your ITR but cannot prove it was purchased through the Liberalised Remittance Scheme (LRS) or other legal channels, it indicates a FEMA breach.
</li>
<li>
Consequence:&nbsp;The Enforcement Directorate (ED) can investigate and impose a&nbsp;penalty up to three times the sum involved&nbsp;for contraventions like holding assets outside India without approval or beyond LRS limits.
</li>
</ul>
5. The Prevention of Money Laundering Act (PMLA), 2002: The offense of money laundering is defined as projecting proceeds of crime as untainted.
<ul>
<li>
Connection:&nbsp;If the undisclosed foreign asset is purchased with funds generated from criminal activities (e.g., corruption, tax evasion, etc.), it falls under PMLA.
</li>
<li>
Consequence:&nbsp;The properties can be attached, and the individual faces rigorous imprisonment of at least 3 years which may extend to 7 years (or more, depending on the predicate offense).
</li>
</ul>
<h4>The Compliance Checklist: How to Stay Protected</h4>
<ol start="1">
<li>
Gather All Information:&nbsp;Maintain meticulous records of all foreign assets, their acquisition cost, source of funds, and income generated (interest, rent, dividends).
</li>
<li>
File the Correct ITR Form:&nbsp;Use ITR-2 or ITR-3 and diligently fill&nbsp;Schedule FA&nbsp;for each qualifying asset.
</li>
<li>
Offer Global Income to Tax:&nbsp;Report all income from these foreign assets under the appropriate head (e.g., 'Income from Other Sources', 'Capital Gains').
</li>
<li>
Claim Foreign Tax Credit (FTC):&nbsp;If you have already paid taxes on that income in a foreign country (e.g., withholding tax on dividends), you can claim a credit in India to avoid double taxation.
</li>
<li>
Ensure FEMA Compliance:&nbsp;Use only the legal routes like LRS for remittances to acquire foreign assets and maintain all supporting documents.
</li>
</ol>
<h4>Conclusion: Transparency is the Best Policy</h4>
The disclosure of foreign assets in an ITR is a critical pillar of India's legal framework against illicit financial flows. The government's interconnected approach using ITA, Black Money Act, FEMA, PMLA, and Benami Act creates a powerful deterrent. The potential financial penalties and criminal liabilities are too severe to ignore.
The mantra for any Indian resident holding global assets is simple:&nbsp;Disclose, Declare, and Comply.&nbsp;In this complex regulatory landscape, consulting a qualified chartered accountant or tax lawyer with expertise in international taxation is not just advisable; it is essential to navigate this maze safely and ensure peace of mind.
<hr />
Disclaimer:&nbsp;This article is for informational purposes only and does not constitute legal or professional advice. Readers are advised to consult with a qualified professional for advice on their specific circumstances.

Foreign Asset Disclosure in ITR: A Complete Guide for Non Residents & Residents

Foreign Asset Disclosure in ITR: A Complete Guide for NRIs & Residents

<h2>Introduction</h2>
The Most Favoured Nation (MFN) clause in Double Taxation Avoidance Agreements (DTAAs) plays a crucial role in ensuring equitable tax treatment among treaty partners. This clause grants a contracting state the benefit of more favorable tax provisions that a country may subsequently offer to a third state. By doing so, the MFN clause promotes fair competition, prevents treaty shopping, and fosters uniformity in international taxation. However, its interpretation and application have been the subject of extensive debate, particularly in the context of judicial rulings and unilateral administrative positions. Over the years, the interpretation of MFN clauses has evolved, particularly in response to disputes regarding whether their application is automatic or requires a separate notification or protocol between treaty partners. By this article, the author focuses on the issues relating to the interpretation of the MFN clause and judicial precedents (across the Globe) relating to the interpretation and application of the MFN clause.
<h2>Historical Background</h2>
The concept of MFN treatment originates from international trade law and was later adapted into tax treaties. It traces its roots back to early bilateral trade agreements, where nations sought assurances that their exporters would not be disadvantaged compared to competitors from other countries. In the tax domain, the MFN clause was first incorporated into DTAAs to address disparities in withholding tax rates and other treaty benefits.
<h2>Model tax conventions and MFN</h2>
Neither the UN Model Tax Convention nor the OECD Model Tax Convention explicitly includes a Most Favoured Nation clause in their standard treaty provisions. The primary reason is that both models aim to provide a uniform framework for tax treaties, whereas an MFN clause inherently introduces variability by linking one treaty&rsquo;s benefits to those granted in another. Additionally, MFN clauses can create interpretational challenges, such as whether they apply automatically or require formal amendments, and whether they operate retroactively or prospectively. Given these complexities, the OECD and UN models avoid including MFN provisions and instead leave it to bilateral negotiations between countries.
Despite their absence from the model conventions, MFN clauses are frequently found in bilateral tax treaties, particularly in protocols or side agreements. Countries often include them to preserve competitive tax advantages, particularly in withholding tax rates on dividends, interest, and royalties. These clauses are common in treaties involving European and South Asian countries, where tax authorities seek to ensure that treaty partners do not receive less favorable terms than those granted to third countries. While MFN clauses offer benefits in ensuring parity, their interpretation and enforcement remain contentious in various jurisdictions.
<h2>Example</h2>
Consider a DTAA between Country A and Country B, where a 15% withholding tax rate on dividends is agreed upon. The treaty includes an MFN clause, stating that if Country B subsequently signs a tax treaty with any third country (Country C) offering a lower withholding tax rate, then the same lower rate shall apply to Country A as well. Later, Country B signs a DTAA with Country C, granting a 10% withholding tax rate on dividends. The natural expectation is that Country A should now benefit from this reduced rate.
<h2>Issues Surrounding MFN Clause:</h2>
<ol>
<li> Automatic vs. Non-Automatic Application: Some countries argue that the MFN clause applies automatically when a more favorable provision is granted to another country, while others insist that a formal notification or separate agreement is required.</li>
<li> Requirement of Similarity in Treaty Partners: Many treaties specify that the MFN clause applies only if the third country has a similar level of economic development or if it belongs to a particular group (e.g., OECD membership).</li>
<li> Interpretation of "More Favorable Treatment&rdquo;: There is no uniform definition of what constitutes &ldquo;more favorable treatment&rdquo; under an MFN clause. Some jurisdictions interpret it strictly (limited to tax rates), while others include broader treaty provisions such as capital gains exemptions.</li>
<li> Domestic Law vs. Treaty Interpretation: Some countries apply domestic tax law principles (rather than international treaty interpretation standards) when assessing MFN clauses, leading to inconsistencies and unilateral positions.</li>
<li> Withholding Tax Reductions and Treaty Shopping Concerns: Some countries fear that the MFN clause may be exploited for treaty shopping, where investors structure transactions through jurisdictions with the most favorable tax rates.</li>
<li> Retroactive vs. Prospective Application: A key dispute is whether MFN benefits should apply retroactively (from the date the third-country treaty was signed) or only prospectively after formal recognition by the tax authorities.</li>
<li> Unilateral Denial of MFN Benefits: Some countries have unilaterally denied MFN benefits even when their treaties clearly provide for them, leading to tax litigation and arbitration cases. Example: In Pakistan, the tax authority has refused to grant lower withholding tax rates under MFN clauses, leading to multiple tax disputes.</li>
</ol>
<h2>Judicial Pronouncements on MFN Clause in DTAAs</h2>
<table>
<tbody>
<tr>
<td width="56">
Country
</td>
<td width="94">
Case Name, Year and Court/Tribunal
</td>
<td width="85">
Key Issue
</td>
<td width="76">
Applicability
</td>
<td width="57">
Scope (Narrow/Broad)
</td>
<td width="47">
Covers Tax Rate?
</td>
<td width="76">
Covers Substantive Provisions?
</td>
<td width="110">
Key Ruling
</td>
</tr>
<tr>
<td width="56">
India
</td>
<td width="94">
Nestle SA v. Assessing Officer&nbsp;(2023) Supreme Court of India
(review petition also dismissed by the Supreme Court)
</td>
<td width="85">
Whether MFN benefits require a separate notification under Indian law
</td>
<td width="76">
Requires government notification
</td>
<td width="57">
Narrow
</td>
<td width="47">
Yes
</td>
<td width="76">
No
</td>
<td width="110">
MFN benefits cannot be claimed unless officially notified by India.
</td>
</tr>
<tr>
<td width="56">
India
</td>
<td width="94">
Steria (India) Ltd. v. CIT&nbsp;(2018) Delhi High Court
</td>
<td width="85">
Applicability of MFN clause to non-discrimination provisions
</td>
<td width="76">
Notification required
</td>
<td width="57">
Narrow
</td>
<td width="47">
No
</td>
<td width="76">
No
</td>
<td width="110">
MFN clause does not extend to non-tax procedural aspects.
</td>
</tr>
<tr>
<td width="56">
Switzerland
</td>
<td width="94">
Swiss Federal Tribunal Ruling&nbsp;(2018) Swiss Federal Tribunal
</td>
<td width="85">
Application of MFN clause concerning OECD membership status
</td>
<td width="76">
Treaty-specific requirement
</td>
<td width="57">
Narrow
</td>
<td width="47">
Yes
</td>
<td width="76">
No
</td>
<td width="110">
MFN clause applies only if the third country was an OECD member at the time of treaty signing.
</td>
</tr>
<tr>
<td width="56">
France
</td>
<td width="94">
Conseil d'&Eacute;tat Ruling&nbsp;(2020) French Supreme Administrative Court
</td>
<td width="85">
Extension of MFN clause to capital gains exemptions
</td>
<td width="76">
Treaty interpretation-dependent
</td>
<td width="57">
Broad
</td>
<td width="47">
Yes
</td>
<td width="76">
Yes
</td>
<td width="110">
Capital gains exemption under MFN clause allowed.
</td>
</tr>
<tr>
<td width="56">
Argentina
</td>
<td width="94">
France v. Argentina&nbsp;(2013) Argentine Supreme Court
</td>
<td width="85">
Necessity of domestic legislative approval for MFN clauses
</td>
<td width="76">
Requires formal agreement
</td>
<td width="57">
Narrow
</td>
<td width="47">
Yes
</td>
<td width="76">
No
</td>
<td width="110">
MFN benefit denied due to lack of domestic approval.
</td>
</tr>
<tr>
<td width="56">
United Kingdom
</td>
<td width="94">
HMRC v. Anson&nbsp;(2015) UK Supreme Court
</td>
<td width="85">
Application of MFN benefits to entity classification
</td>
<td width="76">
Context-specific
</td>
<td width="57">
Narrow
</td>
<td width="47">
No
</td>
<td width="76">
No
</td>
<td width="110">
MFN clause does not override domestic entity classification rules.
</td>
</tr>
<tr>
<td width="56">
Spain
</td>
<td width="94">
Maffezini v. Spain&nbsp;(2000) ICSID
</td>
<td width="85">
Extension of MFN clause to procedural rights
</td>
<td width="76">
Broad MFN Interpretation
</td>
<td width="57">
Broad
</td>
<td width="47">
Yes
</td>
<td width="76">
Yes
</td>
<td width="110">
MFN clause applies to both tax rates and procedural rights.
</td>
</tr>
<tr>
<td width="56">
Germany
</td>
<td width="94">
Federal Court of Finance Ruling&nbsp;(2019) Federal Finance Court
</td>
<td width="85">
Requirement of explicit mention of tax type for MFN applicability
</td>
<td width="76">
Strict textual interpretation
</td>
<td width="57">
Narrow
</td>
<td width="47">
Yes
</td>
<td width="76">
No
</td>
<td width="110">
MFN clause applies only if explicitly mentioned in the treaty.
</td>
</tr>
<tr>
<td width="56">
Canada
</td>
<td width="94">
Prevost Car Inc. v. R.&nbsp;(2008) Federal Court of Appeal
</td>
<td width="85">
Applicability of MFN clause to non-taxation issues
</td>
<td width="76">
Notification required
</td>
<td width="57">
Narrow
</td>
<td width="47">
No
</td>
<td width="76">
No
</td>
<td width="110">
MFN clause does not apply to non-taxation issues.
</td>
</tr>
<tr>
<td width="56">
Australia
</td>
<td width="94">
Technical and Further Education Commission v. FC of T&nbsp;(2013) Federal Court of Australia
</td>
<td width="85">
Applicability of MFN clause to payroll tax
</td>
<td width="76">
Treaty-specific requirement
</td>
<td width="57">
Narrow
</td>
<td width="47">
Yes
</td>
<td width="76">
No
</td>
<td width="110">
MFN clause does not apply to payroll tax.
</td>
</tr>
<tr>
<td width="56">
Japan
</td>
<td width="94">
Tokyo High Court judgment&nbsp;(2011) Tokyo High Court
</td>
<td width="85">
Applicability of MFN clause to taxes on income
</td>
<td width="76">
Treaty interpretation-dependent
</td>
<td width="57">
Broad
</td>
<td width="47">
Yes
</td>
<td width="76">
Yes
</td>
<td width="110">
MFN clause applies to taxes on income.
</td>
</tr>
<tr>
<td width="56">
Sweden
</td>
<td width="94">
R&Aring; 2009 ref. 112&nbsp;(2009) Swedish Supreme Administrative Court
</td>
<td width="85">
Applicability of MFN clause to social security contributions
</td>
<td width="76">
Treaty-specific requirement
</td>
<td width="57">
Narrow
</td>
<td width="47">
Yes
</td>
<td width="76">
No
</td>
<td width="110">
MFN clause applies to social security contributions.
</td>
</tr>
<tr>
<td width="56">
New Zealand
</td>
<td width="94">
Ben Nevis Forestry Ventures Ltd v. C of IR&nbsp;(2013) New Zealand Court of Appeal
</td>
<td width="85">
Applicability of MFN clause to forest sink credits
</td>
<td width="76">
Notification required
</td>
<td width="57">
Narrow
</td>
<td width="47">
No
</td>
<td width="76">
No
</td>
<td width="110">
MFN clause does not apply to forest sink credits.
</td>
</tr>
</tbody>
</table>
&nbsp;
<h2>India&rsquo;s Stand on MFN</h2>
The Supreme Court of India made a landmark decision in the case of Nestle SA v. Assessing Officer Circle (International Taxation) on October 19, 2023. This decision significantly impacted the application of the Most-Favoured-Nation (MFN) clause in Double Taxation Avoidance Agreements (DTAAs). The court ruled that for the MFN clause to be operational, a specific notification under Section 90 of the Income-tax Act, 1961, is mandatory. This means that even if the MFN clause is present in the treaty, its benefits cannot be availed automatically without such a notification. The SC also dismiss the review petition vide Diary No. 54088 of 2023) IN CIVIL APPEAL NO. 1427 OF 2023.
Recently, India has invoked the &ldquo;Most Favoured Nation&rdquo; (MFN) clause in its income tax treaty with Spain, reducing the tax rate on royalties for technical services from the standard 20% under Article 13 of the treaty to 10%. This adjustment follows a protocol in the treaty, which stipulates that if India enters into an income tax treaty with another OECD member state after 1 January 1990, imposing a lower tax rate on such royalties, the same rate shall apply to the India-Spain treaty. Crucially, this benefit has been extended through a formal government notification. On 19 March 2024, the Indian Ministry of Finance issued a notification confirming that the conditions for invoking the MFN clause had been satisfied, citing the India-Germany income tax treaty as the basis for the reduced rate. The revised 10% tax rate will take effect from the financial year 2024-25.
The judgment has significant implications for taxpayers and international agreements. Taxpayers intending to avail benefits under the MFN clause of a DTAA must ensure that the requisite notifications have been issued by the Indian government. Without such notifications, the MFN provisions remain inoperative. The decision also highlights the critical interplay between international agreements and domestic law, emphasizing the procedural compliance required to implement treaty benefits. Furthermore, in response to this ruling, Switzerland unilaterally announced the suspension of India's MFN status effective January 1, 2025, citing the Supreme Court's judgment as a basis for this decision.
Disclaimer:
The views expressed in this article are the author&rsquo;s personal opinions and do not constitute legal, tax, or financial advice. While every effort has been made to ensure accuracy, readers are advised to consult with a professional advisor before making any decisions based on the content. The author and publisher disclaim any liability for any errors or omissions in the information provided. This article is for informational purposes only and does not represent the official stance of any institution or organization.

Most Favoured Nation (MFN) Clause in DTAAs: Interpretation, Judicial Precedents, and India's Stand

Most Favoured Nation (MFN) Clause in DTAAs

Introduction
In the realm of international business transactions, taxation issues often arise, particularly when it comes to determining the taxability of income received from overseas subsidiaries. One such case of significance is the dispute regarding the taxability of guarantee commission received by Johnson Matthey Public Limited Company (hereinafter referred to as "the Company") from its Indian subsidiaries. This article delves into the legal intricacies surrounding this matter and the recent judicial interpretation thereof.
Background
The crux of the issue revolves around the tax treatment of guarantee charges received by the Company from its Indian subsidiaries under the India-UK Double Taxation Avoidance Agreement (DTAA). The Company initially characterized the guarantee charges as interest income, subject to taxation under Article 12 of the DTAA. However, during the assessment proceedings, the tax authorities took the stance that the guarantee charges should be classified as "other income" under Article 23(3) of the DTAA, thus subjecting it to taxation in India.
Legal Analysis
The primary contention before the court was twofold:
<ol>
<li>Whether the guarantee charges received by the Company from its Indian subsidiaries can be categorized as "interest" under Article 12 of the DTAA.</li>
<li>Whether the income derived from guarantee fees can be said to arise or accrue in India.</li>
</ol>
Upon careful consideration of the arguments presented, the court opined that the guarantee charges cannot be construed as "interest" under Article 12(5) of the DTAA. This conclusion stemmed from the fact that the guarantee charges were not received in connection with any debt owed to the Company by its Indian subsidiaries. Rather, they were remunerations for providing parent company guarantees and counter-indemnification services to lending entities extending credit facilities to the Indian subsidiaries.
Judicial Ruling
The court upheld the decision of the Income Tax Appellate Tribunal, affirming that the guarantee charges do not fall within the ambit of "interest" as defined in Article 12 of the DTAA. Consequently, the court ruled against the Company, holding that the guarantee charges are taxable under the category of "other income" as per Article 23(3) of the DTAA.
Conclusion
The judicial pronouncement in the case of Johnson Matthey Public Limited Company provides clarity on the tax treatment of guarantee charges received from Indian subsidiaries under the India-UK DTAA. While the court's decision sheds light on the characterization of guarantee charges, it leaves open the question of whether such income could constitute business income under Article 7 of the DTAA, to be addressed in future cases.
In conclusion, the case underscores the importance of carefully analyzing the nature of income in cross-border transactions to determine its taxability under relevant tax treaties and domestic laws.
Citation: ITA 727/2018, Delhi High Court

Taxability of Guarantee Commission Received by Johnson Matthey Public Limited Company from Indian Subsidiaries: A Legal Analysis

Taxability of Guarantee Commission Johnson Matthey Case India UK DTAA

<h2>Introduction:</h2>
Double Taxation Avoidance Agreements (DTAA) play a significant role in international taxation, aiming to prevent the double taxation of income earned by taxpayers in two different countries. However, the requirement of a Tax Residency Certificate (TRC) for claiming DTAA benefits has become a subject of legal complexities and practical challenges. In this article, we will delve into the various aspects surrounding TRCs, including their differentiation from other registration certificates, the legal issues surrounding Section 90(4) of the Income Tax Act, the absence of TRC provisions in India's DTAA agreements, and the implications for businesses.
<h2>TRC vs. Incorporation Certificate and Other Registration Certificates:</h2>
It is crucial to clarify that a TRC cannot be equated with an incorporation certificate or any other registration certificates. The provision stated in Section 90(4) of the Income Tax Act explicitly mandates the production of a TRC, along with other relevant information (in Form 10F), for claiming DTAA benefits. While obtaining a TRC can be challenging, especially for individuals, it is vital to comply with the law's mandate.
<h2>Legal Issues Surrounding Section 90(4):</h2>
One of the key legal issues arises from the potential contradiction between Section 90(4) and Section 90(2) of the Income Tax Act, as well as various judgments of the High Court, including the Supreme Court. These judgments establish that, in case of conflict between the Income Tax Act and the provisions of the DTAA, the provisions of the DTAA should prevail. This raises questions about the absolute necessity of a TRC as mandated by Section 90(4).
<h2>Skaps Industries India Pvt Ltd vs ITO, International Taxation, Ahmedabad ITAT</h2>
In this case, the ITAT held that Section 90(2) of the Income Tax Act, 1961 in India provides a unique and unqualified "treaty override" provision. This means that regardless of the provisions in the Income Tax Act, if a person is covered by an agreement under Section 90(1), the provisions of the Act will only apply to the extent that they are more beneficial to the taxpayer. The Act cannot impose a greater burden on the taxpayer than what is specified in the applicable tax treaty.
However, the only limitation to this unqualified treaty override provision is that the provisions of Chapter X-A, which deals with the General Anti Avoidance Rules, will apply to the taxpayer even if they are not beneficial. This exception is stated in Section 90(2A), which is the only provision in the Income Tax Act, 1961 that starts with a non-obstante clause in relation to Section 90(2). Therefore, it is the only restriction on the superiority of tax treaty provisions over the provisions of the Indian Income Tax Act, 1961.
ITAT also observe that:
<blockquote>
8. In the light of our this analysis, when we turn to Section 90(4), as indeed other sub sections of Section 90, we find that these provisions do not start with a obstante clause vis-&agrave;vis Section 90(2) and, therefore, these sub sections cannot be construed as limitation to, or rider to, somewhat unqualified treaty override stipulated in Section 90(2). Whatever interpretation one assigns to this sub section, essentially the fundamental approach has to be that this sub section will be applicable only when the same are more beneficial to the assessee vis-&agrave;-vis the provisions of the applicable tax treaty; that principle of treaty override, as set out in Section 90(2), remains unaffected by these provisions. As we hold so, we make it clear that whether the same position will also apply with respect to Explanations to Section 90 or not is still an open question, uninfluenced by these discussions, as Explanations to Section 90 may perhaps not have the same legal connotations as the sub sections to Section 90. We leave it that for the time being.
</blockquote>
The above decision was also cited and relied by Hyderabad ITAT in the case of Sreenivasa Reddy Cheemalamarri [TS-158-ITAT-2020(HYD)].
<h2>A Unilateral Attempt to Deny Treaty Benefits:</h2>
Furthermore, Section 90(4) can be seen as a unilateral attempt to deny treaty benefits, potentially conflicting with international law and the principles of reciprocity and mutual benefits that underpin international tax treaties. The timing of the insertion of Section 90(4) through the Finance Act 2012, which came after the conclusion of various DTAA agreements, adds to the complexity and requires careful evaluation.
In the realm of international law, the position on unilateral modification of treaties is guided by the principle of pacta sunt servanda, which means that treaties must be observed and complied with in good faith by all parties involved. This principle serves as the cornerstone of the international legal system and promotes stability, predictability, and trust among nations.
Under customary international law, a treaty can only be modified or terminated by the consent of all parties involved. This principle of consent ensures that the rights and obligations established by a treaty are protected and that no party can unilaterally alter or disregard the provisions of a treaty without the agreement of others.
Unilateral modification of a treaty by one party without the consent of the other parties is generally considered a violation of the treaty and may be viewed as a breach of international law. Unilateral modifications can undermine the integrity of the treaty and erode the trust and confidence among the parties.
<h2>Non-Inclusion of Mandatory TRC Requirement in India's DTAA Agreements:</h2>
A noteworthy observation is that none of India's DTAA agreements with other countries contain provisions specifically requiring the mandatory submission of a TRC for availing DTAA benefits. If the TRC were universally mandated, it would necessitate countries to enter into agreements clarifying that benefits can only be availed upon producing a TRC. However, the absence of such provisions in the DTAA agreements raises questions about the absolute necessity of a TRC for claiming DTAA benefits.
<h2>Navigating the Way Forward:</h2>
Considering the legal complexities and practical challenges surrounding TRCs, businesses are advised to make diligent efforts to obtain TRCs from payees. However, in cases where obtaining a TRC is not feasible, businesses must carefully assess the facts and circumstances of each case. This assessment should consider the legal issues discussed earlier, the absence of TRC provisions in DTAA agreements, and the potential risks and consequences of proceeding without a TRC.
It is essential to weigh the available legal avenues and evaluate the potential litigations that may arise from deviating from the TRC requirement. Seeking professional guidance is recommended to ensure compliance with prevailing regulations while balancing the practical challenges faced in obtaining TRCs.
<h2>Conclusion:</h2>
The requirement of a TRC for claiming DTAA benefits presents businesses with a complex and intricate landscape to navigate. While the legal issues surrounding Section 90(4) and the absence of explicit TRC provisions in India's DTAA agreements raise valid concerns about the essential nature of a TRC, businesses must still endeavor to obtain TRCs whenever possible. In cases where TRCs cannot be procured, a meticulous evaluation of the specific circumstances, coupled with expert guidance, is crucial to making informed decisions that ensure compliance and mitigate potential litigations.

Navigating the Complexities of Tax Residency Certificate (TRC) for DTAA Benefits

Navigating the Complexities of Tax Residency Certificate TRC for DTAA

<h2>Overview Tax Residency Certificate (TRC)</h2>
A tax residency certificate (TRC) is a document that confirms an individual's or a company's residency status for tax purposes. The certificate is issued by the tax authorities of the country where the taxpayer is considered a tax resident, based on the local tax laws and regulations.
The purpose of a TRC is to avoid double taxation on income earned in a foreign country. Double taxation occurs when two or more countries levy taxes on the same income. To prevent this, many countries have entered into Double Taxation Avoidance Agreements (DTAAs) with each other. These agreements typically provide for reduced withholding tax rates or NIL withholding on certain types of income, such as dividends, interest, royalties or business income.
To take advantage of these reduced tax rates, taxpayers must provide proof of their residency status in the form of a tax residency certificate. The certificate is usually valid for one fiscal year.
To obtain a tax residency certificate, the taxpayer needs to provide evidence of their residency status, such as proof of their address, employment, and income sources. The application process and requirements may vary depending on the country's tax laws and regulations.
<h2>Regulations for TRC in UAE</h2>
In UAE, the TRC is categorised in two broad catagoreis viz: (1) Natural persons &amp; (2) Legal persons
<h2>Eligibility Criteria Natural Persons</h2>
The applicant must have been a resident of the UAE for at least 180 days. Also an annual lease agreement officially documented by the competent authorities, such as EJARI in Dubai, municipalities in other Emirates and free zone authorities must be attached to the application.
<h2>Eligibility Criteria Legal / Judicial Persons</h2>
In order to be eligible to apply for a TRC, the legal person must have been established for a period of at least one year. Financial accounts must be audited or prepared by an accredited audit firm and attached with other required documents to the application. The report must be certified and stamped by the audit firm. The audited financial report to be attached to the application must cover the year for which the certificate is requested. If the certificate is requested for the present year, the audit report must be covering the past year.
(Note: Offshore companies are not allowed to apply for the service because they are not listed in the Double Taxation Avoidance agreements.)
However, the Cabinet Decision which is effective from 1 Mar 2023 provides that a juridical person shall be considered a Tax Resident in the State in either of the following cases:
1. It was incorporated, formed or recognised in accordance with the legislation in force in the State, and that does not include the branch that is registered by a foreign juridical person in the State. 
2. It is considered a Tax Resident in accordance with the Tax Law in force in the State.
<h2>TRC v/s Citizenship</h2>
It's important to note that tax residency is not the same as citizenship. A person may be a citizen of one country but a tax resident of another. Factors that determine tax residency status vary by country but generally include the number of days spent in the country, the person's permanent home, and the location of their economic interests.
Overall, a tax residency certificate is a useful tool for avoiding double taxation and accessing tax benefits under DTAAs. It's important for taxpayers to understand the local tax laws and regulations and maintain proper documentation to obtain and keep their tax residency certificate.
<h2>Benefits of Having TRC</h2>
TRC is now a days part of legal framework of many contries. In India, section 90(4) of the Income tax Act, 1961 mandatorily requires TRC for availing the benefits of the Double Tax Avoidance Agreements (DTAAs). Such benefits are:
<ul>
<li>Avoidance of double taxation</li>
<li>Reduced or NIL withholding tax rates</li>
<li>Access to tax benefits under the DTAA</li>
<li>Considered as an evidence for the purpose of determing resident country</li>
</ul>
<h2>Connect with Us</h2>
In case if you want to apply for the TRC in UAE or India, then connect with us. Our contact details are as follows:
Mail: <a href="mailto:info@harchandani.in">info@harchandani.in</a>
Mobile: +91 9909880111
WhatsApp: +91 9909880111

How to Apply for Tax Residency Certificate (TRC) of the United Arab Emirates (UAE)

Apply for Tax Residency Certificate (TRC) of UAE

The Hon'ble Bangalore Tribunal while dealing with the matter related to the claiming of Foreign Tax Credit (FTC) held that on perusal of provisions of Rule 128 (8) &amp; (9), it is clear that, one of the requirements of Rule 128 for claiming FTC is that Form 67 is to be submitted by assessee before filing of the returns. The Tribunal opined that this requirement cannot be treated as mandatory, rather it is directory in nature. This is because, Rule 128(9) does not provide for disallowance of FTC in case of delay in filing Form No.67. This view is fortified by the decision of coordinate bench of this Tribunal in case of Ms.Brinda Kumar Krishna vs.ITO in ITA no.454/Bang/2021 by order dated 17/11/2021.
During the hearing, the assessee submitted that "when there is no condition prescribed in DTAA that the FTC can be disallowed for non-compliance of any procedural provision. As the provisions of DTAA override the provisions of the Act, the Assessee has vested right to claim the FTC under the tax treaty, the same cannot be disallowed for mere delay in compliance of a procedural provision."
Accordingly, the Tribunal remand this issue back to the AO to consider the claim of assessee in accordance with law, based on the verification carried out in respect of the supporting documents filed by assessee.

Foreign Tax Credit cannot be denied merely because assessee has not filed the Form 67

FTC, foreign tax credit, DTAA, Form 67 of Income Tax 

On 11th October 2021, CBDT issued vide Notification No.119/2021/F. No. 225/76/2021-ITA.I exempting certain non-resident from furnishing of the Income Tax Return for the AY 2021-22 and onwards subject to fulfilment of certain conditions. The class of person and corresponding conditions are stated as under:
<table>
<tbody>
<tr>
<td width="96">
Sr. No.
</td>
<td width="258">
Class of Person
</td>
<td width="270">
Conditions
</td>
</tr>
<tr>
<td width="96">
1
</td>
<td width="258">
(i)&nbsp; a&nbsp; non-resident,&nbsp; not&nbsp; being&nbsp; a company; or
(ii) a foreign company
</td>
<td width="270">
(i)&nbsp; &nbsp;The&nbsp; said&nbsp; class&nbsp; of&nbsp; persons&nbsp; does&nbsp; not&nbsp; earn&nbsp; any&nbsp; income&nbsp; in India,&nbsp; during the previous&nbsp; year,&nbsp; other&nbsp; than the income&nbsp; from investment&nbsp; in&nbsp; the&nbsp; specified&nbsp; fund referred&nbsp; to in sub-clause&nbsp; (i) of&nbsp; clause&nbsp; (c)&nbsp; of Explanation to&nbsp; clause&nbsp; (4D)&nbsp; of&nbsp; section&nbsp; 10&nbsp; of the said Act; and
&nbsp;
(ii)&nbsp; The&nbsp; provisions&nbsp; of&nbsp; section&nbsp; 139A&nbsp; of&nbsp; the&nbsp; said&nbsp; Act&nbsp; are&nbsp; not applicable&nbsp; to&nbsp; the&nbsp; said&nbsp; class&nbsp; of&nbsp; persons subject&nbsp; to&nbsp; fulfillment of&nbsp; the&nbsp; conditions&nbsp; mentioned&nbsp; in&nbsp; sub-rule &nbsp;(1)&nbsp; of&nbsp; rule&nbsp; 114AAB of&nbsp; the&nbsp; Income-tax&nbsp; Rules,&nbsp; 1962&nbsp; (hereinafter&nbsp; referred&nbsp; to&nbsp; as &ldquo;said rules‟)
</td>
</tr>
<tr>
<td width="96">
2
</td>
<td width="258">
a&nbsp;&nbsp;&nbsp; non-resident being&nbsp;&nbsp;&nbsp; an eligible foreign investor
</td>
<td width="270">
(i)&nbsp; The&nbsp; said&nbsp; class&nbsp; of&nbsp; persons,&nbsp; during&nbsp; the&nbsp; previous&nbsp; year,&nbsp; has made&nbsp; transaction &nbsp;only&nbsp; in&nbsp; capital&nbsp; asset&nbsp; referred&nbsp; to&nbsp; in&nbsp; clause (viiab)&nbsp; of&nbsp; section&nbsp; 47&nbsp; of&nbsp; the&nbsp; said&nbsp; Act,which&nbsp; are&nbsp; listed on&nbsp; a recognised&nbsp;&nbsp; stock&nbsp;&nbsp; exchange&nbsp;&nbsp; located&nbsp;&nbsp; in&nbsp;&nbsp; any&nbsp;&nbsp; International Financial Services Centre and the consideration on transfer of such capital asset is paid or payable in foreign currency;
&nbsp;
(ii)&nbsp; The said&nbsp; class&nbsp; of&nbsp; persons&nbsp; does&nbsp; not&nbsp; earn&nbsp; any&nbsp; income&nbsp; in India,&nbsp; during&nbsp; the&nbsp; previous&nbsp; year,&nbsp; other&nbsp; than&nbsp; the&nbsp; income&nbsp; from transfer of capital asset referred to in clause (viiab) of section 47 of the said Act; and
&nbsp;
(iii)&nbsp; &nbsp;The provisions&nbsp; of&nbsp; section&nbsp; 139A&nbsp; of the&nbsp; said&nbsp; Act are&nbsp; not applicable&nbsp; to&nbsp; the&nbsp; said&nbsp; class&nbsp; of&nbsp; persons&nbsp; subject&nbsp; to&nbsp; fulfillment of the conditions mentioned in sub-rule (2A) of rule 114AAB of the said rules
</td>
</tr>
</tbody>
</table>
&nbsp;
&nbsp;

CBDT conditionally exempts certain non-residents from furnishing ITR

CBDT Circular, Non Resident Return, Income Tax on Non Resident

The Income Tax Appellant Tribunal finds Assessee's reasons behind filing of TRC before CIT(A) instead of Assessing Officer is justifiable
In this case, the Assessee-Individual, a non-resident, in his return of income for AY 2014-15 sought to avail special rates of tax on income from fixed deposits and bank deposits under the India-USA DTAA
Assessee's claim was denied by the AO as the Assessee failed to furnish TRC and information in Form No. 10F under Rule 21AB during the course of assessment proceedings
Assessee's furnished TRC&nbsp;and Form No. 10F as additional evidence before CIT(A) who also rejected Assessee's claim due to delay in furnishing&nbsp;TRC&nbsp;and Form No.10F by holding that Rule 21AB casts an obligation&nbsp;on the assessee to&nbsp;maintain and furnish the documents, therefore, the said information ought to have been available with the Assessee at the time of filing of the return of income itself and was required to furnish&nbsp;TRC and Form No.10F and thus, held that the Assessee failed to comply with the mandate of Section 90(4)/(5).
The Hon'ble ITAT Directs the Assessing Officer to determine the taxability on interest income as per the special rate of tax under the India-USA DTAA.
Rule 21AB(2A) provides as under:
<blockquote>
<div>(2A) The assessee shall keep and maintain such documents as are necessary to substantiate the information provided under sub-rule (1) and an income-tax authority may require the assessee to provide the said documents in relation to a claim by the said assessee of any relief under an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A, as the case may be.]</div>
</blockquote>
<div>The Tribunal considered the facts of the case at length and held as under:</div>
<div>
<blockquote>
After perusing the aforesaid facts, we are of the considered view that there were justifiable reasons for the assessee in not filing the TRC in the course of the assessment proceedings. But then, we cannot also remain oblivious of the fact that the A.O had declined to apply the special rate of tax as per the DTAA, for the reason, that the assessee had failed to substantiate that the interest income in question was offered by him for tax in his return of income filed in U.S.A. As observed by us hereinabove, the very basis of rejection of the assessee‟s claim for applying of special rate of tax as per the India-USA DTAA by the A.O is absolutely misconceived and in fact misplaced. As stated by the ld. A.R, and rightly so, the assessee was not seeking credit of taxes paid on his income abroad, but was seeking taxing of his interest income as per the special rates on the basis of the India-USA DTAA. Considering the fact that the assessee had filed the TRC with the A.O 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, we are unable to persuade ourselves to the summarily rejection or in fact discarding of the same by the CIT(A). We, thus, in the backdrop of our aforesaid deliberations, are of the considered view, that as the assessee had filed the TRC and Form 10F, therefore, there was no justification in declining the applying of the special rate of tax qua the interest income on fixed deposits &amp; bank interest...
</blockquote>
Accordingly, the Tribunal allowed the appeal of the assessee and finds Assessee's reasons behind filing of TRC before CIT(A) instead of Assessing Officer is justifiable.
</div>

Delay in furnishing TRC justifiable. ITAT Allows benefit of India-USA DTAA

TRC, non availability of TRC, India US DTAA

The Hon'ble Supreme Court in it's recent decision in the case of DIT vs. Samsung Heavy Industries (Civil Appeal No. 12183 of 2016) dismissed the appeal of the department and held that project office of the assessee is not permanent establishment within the meaning of the Article 5 of India-Korea DTAA. Although, it is settled position of law that the Project Office is PE (subject to threshold of numbers of days as per relevant DTAA), however, looking the facts of the case, the Hon'ble Supreme Court held that the Project Office in the question is not a PE withing the meaning of the Article 5(1) of DTAA rather it would fall within Article 5(4)(e) of the DTAA. Lets the discuss the facts of the case and findings of the each authority.
 
The critical fact of the case are that the ONGC awarded a &ldquo;turnkey&rdquo; contract to a consortium comprising of the Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company incorporated in South Korea), and Larsen &amp; Toubro Limited, being a contract for carrying out the &ldquo;Work&rdquo;, inter alia, of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the &lsquo;Vasai East Development Project&rsquo;
 
The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as &ldquo;a communication channel&rdquo; between the Assessee and ONGC in respect of the Project. Accordingly for the AY 2007-08 the assessee filed nil return and claimed the losses.
 
During the assessment proceedings, the AO concluded that "the Project in question is a single indivisible &ldquo;turnkey&rdquo; project, whereby ONGC was to take over a project that is completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only in India."
 
The DRP also concluded that "the Assessing Officer has given a specific finding that the assessee had a project office in India, when it was given the contract. The assessee has not contested the existence of the Project office in India but it has only contested that the project was used merely for preparatory and auxiliary activities. This submission of the assessee does not hold merit because if it wanted to perform only preparatory and auxiliary activities then it could have opened a liaison office. The opening of a project office clearly shows that the assessee was doing something more than what would have been done through liaison office. In any case nature and purport of activities undertaken in India determine the existence of PE. Considering the nature of activities undertaken in India it is clear that PE existed in the case of assessee."
 
During the hearing before the ITAT, the Ld. DR bought on record the resolution of Board of Directors meeting dated 3rd April, 2006. The opening para of said resolution provides that "the company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation (&ldquo;ONGC&rdquo;), India". Based on such resolution, the Ld. DR concluded that these documents make it clear that all the activities to be carried out in respect of impugned contract will be routed through the project office only. However, it is noteworthy to state here that the Ld. DR only reproduce the first para of the Board Resolution, the second para of said resolution provides that "That the Company hereby does make and constitute Mr. Sangsoon Park Yard General Manager of the Company, as the Company&rsquo;s true and lawful representative with full power and authority for the purpose of establishing a project office and coordinating and executing delivery of documents in connection with construction of offshore platform modification of existing facilities for ONGC above."
 
On other hand, the assessee before the ITAT argued that the Project Office was only an auxiliary office, and did not involve itself in any core activity of business, as accounts that were produced would show that there was no expenditure which related to execution of the project. The Hon'ble Tribunal disposed off that argument of the assessee by stating that "the way the terms of the contract are described and the way the work on contract has to proceed clearly describe that in all the activities of contract there will be the role of Mumbai project office as the same has to work as a channel between assessee company and ONGC. If PE of the assessee exists within the meaning of Article 5.1 and 5.2 and assessee claims that despite there being PE in terms of clause 5.1 and 5.2, it falls under exclusionary Article 5.4 then onus is on assessee to prove that activities of its PE are in the nature of preparatory or auxiliary in nature. No material has been brought on record by the assessee to prove the said fact. The arguments put forward in this respect are only by inference such as the accounts maintained by the assessee in India through which it is the argument of the ld. Counsel of the assessee that it does not contain any expenditure relating to execution of the contract. But such argument is not acceptable as the maintenance of account is in the hands of assessee and mere the mode of maintaining the accounts alone cannot determine the character of PE as the role of PE only will be relevant to determine what kind of activities it has carried on." However, the ITAT found that there was a lack of material to ascertain as to what extent activities of the business were carried on by the Assessee through the Mumbai Project Office, and therefore it was considered just and proper to set aside the attribution of 25% of gross revenue earned outside India &ndash; which was attributed as income earned from the Mumbai project office &ndash; the matter being sent back to the Assessing Officer to ascertain profits attributable to the Mumbai project office after examining the necessary facts.
 
Surprisingly, the Hon'ble High Court pronounced its decision on entire different footing. The core grievance of the assessee was regarding considering the PO as PE by the lower authorities looking to the peculiar facts and circumstances of the case. However, the High Court re-framed the question of law as "can it be said that the Agreement permitted the India Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India?&rdquo;
 
Accordingly, the Hon'ble High Court held - "that being the situation we allow the appeal, set aside the judgment and order under appeal as well as the assessment order insofar as the same relates to imposition of tax liability on the 25% of the receipt upon the appellant in the circumstances mentioned above, and observe that the questions of law formulated by us, while admitting the appeal, have not, in fact, arisen on the facts and circumstances of the case, but the real question was, whether the tax liability could be fastened without establishing that the same is attributable to the tax identity or permanent establishment of the enterprise situate in India and the same, we think, is answered in the negative and in favour of the appellant."
 
However, the Supreme Court while pronouncing its decision, gone into details and considered the findings of the all lower authorities. The critical findings of the Hon'ble Supreme Court are with regards to documents filed by the assessee before the RBI and which was heavily relied by the ITAT also. The Hon'ble quote the Board Resolution of the assessee company and held that "A reading of the Board Resolution would show that the Project Office was established to coordinate and execute &ldquo;delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC&rdquo;. Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside."
 
The Hon'ble Supreme Court further observe that "Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC."
 
Therefore, it is rightly to conclude here that for the purpose of applying the DTAA, the legal form is not much relevant where the facts says something different. In this case, even the office of the assessee was registered as Project Office with the RBI, however, the Supreme Court went on the facts, considered the actual activities carried out by such office, considered the purpose of such office and concluded that the Project Office in question is not a PE rather it would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC.
 
(views are personal, for more details, it is advisable to go through with the order of the SC)

Project Office is not PE; SC affirm substance over legal form

project office, LO PO BO FEMA, Permanent Establishment Income tax

Mumbai ITAT allowed the appeal of assessee by relying upon the judgement in the assessee's own cases for the AY 2003-04 to AY 2011-12.
 
During the course of assessment proceedings, it was submitted by the assessee that the Tribunal in its own case for A.Y 2003-04, A.Y 2005-06, A.Y 2006-07, A.Y 2007-08, A.Y 2009-10 &amp; A.Y 2011-12, had held the receipts earned by the assessee under similar fact pattern as its &ldquo;business income&rdquo;, which in the absence of its &ldquo;Permanent Establishment&rdquo; (PE) in India were not taxable in India. Further, the assessee drawing support from the &ldquo;Software Distribution Agreements submitted, that the distributors/resellers sold the shrink-wrap software bought in the fully packaged condition, as received from the assessee to the end users in India i.e without opening the package. It was further submitted by the assessee, that the SolidWorks software was given to the customers in India along with and pursuant to an end user license agreement. Although the end user license agreement was not physically signed, it was buit-in-as a part of the installation process and would &lsquo;pop up&rsquo; on the computer screen, and had to be indispensably &lsquo;accepted&rsquo; by the user, as it was only then the user could operate the software. It was further submitted by the assesee, that the end-user had limited rights to use the software for internal purposes, right to copy the software on hard disk or to make copies for archive purpose. It was the clam of the assessee, that the end-user was divested of any right to transfer the software or reproduce the same, as the same per the terms of the license agreement were specifically prohibited. The assessee also made submissions before the A.O on the scope of the term &lsquo;royalty&rsquo; as per &lsquo;Explanation 2&rsquo; to Sec. 9(1)(vi); the meaning of the term &lsquo;copyright&rsquo; under the Copyright Act, 1957; the amendment introducing &lsquo;Explanation 4&rsquo; below Sec. 9(1)(vi) and its impact on software distributor and on the DTAA; and the definition of &lsquo;royalty&rsquo; under the India-USA tax treaty.
 
A.O after deliberating on the contentions advanced by the assessee, therein observed, that as per the &lsquo;License and Subscription Service Agreement&rsquo;, SolidWorks granted the end-user a non-exclusive nontransferable license to use the software and the printed or electronic documentation. I was observed by the A.O, that in lieu of the single user license which entitled the end-user to use one copy of the software or a multiple user or network license, as the case may be, the end-user would pay license fees. Admittedly, as claimed by the assessee, it was observed by the A.O that the software was owned by SolidWorks and the copyright, trademark and proprietary rights were retained by it and not transferred to the end-user. At the same time, the A.O held a conviction that the software was not goods or tangible property but was an intangible intellectual property, which being similar to patent, invention, design, secret formula etc. would fall within the meaning of &lsquo;process&rsquo; as mentioned in &lsquo;Explanation 2&rsquo; to the definition of &lsquo;royalty&rsquo; under the Act. In support of his aforesaid view, the A.O relied on the CBDT Circular No. 621 of 19/12/1991 to hold that payment for acquisition of software was to be held as &lsquo;royalty&rsquo;. Insofar the claim of the assessee that the issue was covered in its favor by the orders of the Tribunal in its own case for the preceding years, the A.O observed that the same had been assailed by the revenue before the Hon&rsquo;ble High Court, and thus had not yet attained finality.
 
Also, it was observed by the A.O, that the Hon&rsquo;ble High Court of Karnataka in the case of CIT Vs. Samsung Electronic Co. Ltd (2012) 345 ITR 494 (Kar), had concluded, that the payments received by the assessee from the resellers in India for the acquisition of computer software was in the nature of &lsquo;royalty&rsquo;, and thus chargeable to tax. Also, the A.O in order to drive home his aforesaid conviction relied on the amendment to &lsquo;Explanation 4&rsquo; to Sec. 9(1)(vi) of the Act, that was made available on the statute vide the Finance Act, 2012, w.r.e.f 01.06.1976.
 
The Tribunal concluded that the factual situation pertaining to the year under consideration had not witnessed any change as in comparison to the immediately preceding year, therefore, respectfully following the view taken by the Tribunal in the assesses own case for A.Y 2015-16 in ITA No. 7027/Mum/2018, dated 10.01.2020, we herein conclude that the addition made by the A.O by treating the sale receipts of shrink-wrap software as &lsquo;royalty&rsquo; cannot be sustained, and is hereby vacated.
 
Citation: ITA No. 7313/MUM/2019
 
Author, Manish Harchandani, CA
 
Disclaimer:&nbsp;The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Harchandani &amp; Associates does not accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Articles on FEMA and International Taxation