• Government of India (‘GOI’) by a Notification dated November 1, 2013 has notified Cyprus as a Notified Jurisdiction under Section 94A of the Income-tax Act, 1961 (‘ITA’) on grounds of lack of effective exchange of information. The key implications of the above Notification are:

i. Long term capital gains on shares arising to a person in Cyprus covered under India- Cyprus Double Taxation Avoidance Agreement (‘Cyprus Treaty’) will attract withholding tax at the rate of 30% on such gains;
ii. Short term capital gains on shares arising to a person in Cyprus covered under Cyprus Treaty will attract withholding tax at the rate of 40% on such gains (taking into account applicable surcharge and education cess);
iii. Interest payments on borrowing from a financial institution in Cyprus will attract withholding tax at the rate of 30% on gross basis. Despite withholding at the rate of 30%, such expenditure will not be allowed as a deduction, unless the payer furnishes an irrevocable authorisation in Form 10FC, allowing the income tax authorities to seek relevant information and records from the said financial institution; and
iv. Royalty and fees for technical services will attract withholding tax at the rate of 30%. Despite such withholding, such expenditure will not be allowed as deductions, unless the tax payer maintains additional Transfer Pricing (‘TP’) documentation as per Rule 21AC(5) of the Income-tax Rules, 1962 over and above normal TP documentation under Rule 10D(1) of the Income-tax Rules, 1962.

In the meantime, the Cyprus Government has issued a Press Release dated November 7, 2013, stating that they are communicating with GOI, trying to clarify and resolve the situation.

• The Bombay High Court (‘Bombay HC’) has remanded the writ petition in the matter of Vodafone India Service Pvt. Ltd. v. Union of India, Ministry of Finance, New Delhi & Others¹, dated November 29, 2013, to the Dispute Resolution Panel (‘DRP’). Some key observations by Bombay HC are:

i. In view of Section 92(1) of the ITA, there must be income/ potential income arising and/or affected by way of an International Transaction before TP provisions can be applied;
ii. Assessing Officer (‘AO’) should consider assessee’s objections regarding non-taxability of the transaction as a preliminary requirement. Once the AO has recorded a finding that the impugned transaction is taxable, the question of reference to Transfer Pricing Officer will arise only upon such finding;

iii. Where an issue has not been considered by the AO, such issue can be considered by the DRP since the process before the DRP is a continuation of the ongoing assessment proceedings; and
iv. The Bombay HC granted liberty to Vodafone India Service Private Limited (‘Vodafone’) to approach the Bombay HC again by way of a writ petition in case the decision of DRP on this preliminary issue happens to be adverse to Vodafone and Vodafone can demonstrate that DRP’s decision is patently illegal.

End Notes:

1 [2013] 39 taxmann.com 201 (Bombay)

For further information, please contact:

Zia Mody, AZB & Partners
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Abhijit Joshi, AZB & Partners 
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Shuva Mandal, AZB & Partners 
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Samir Gandhi, AZB & Partners
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Percy Billimoria, AZB & Partners 
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Aditya Bhat, AZB & Partners 
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