OECD - Non binding standards show the way encourage rather than Imposing

OECD stands for Organization for Economic Cooperation and Development is an international organization whose mission is to promote policies to improve economic and social well-being. It comprises of 38 Member Countries as on date. The OECD helps countries formulate their economic and social policies. OECD members and key partners represent 80% of world trade. A member must be willing to make economic reforms in compliance with OECD standards.

OECD Objectives

The main purpose of the OECD is to improve the global economy and promote world trade. It provides an outlet for the governments of different countries to work together to find solutions to common problems. It includes working with democratic nations that share a commitment to improving the economy and well-being of the general population.

The OECD’s main focus is to help governments around the world achieve the following:

§   Improve confidence in markets and the institutions that help them function.

§   Obtain healthy public finances to achieve future sustainable economic growth.

§   Achieve growth through innovation, environmentally friendly strategies, and the sustainability of developing economies.

§   Provide resources for people to develop the skills they need to be productive.

§   It has also contributed to the expansion of world trade. 

§   Over the years, OECD has raised the standards of living in multiple countries.

OECD’s Organizational Structure

The OECD is composed of Member Countries, Substantive Committees, and the OECD Secretariat. OECD currently has 38 member nations and the Member Countries are each represented by a delegation which is led by their ambassadors. The European Commission participates in the work of the OECD alongside the EU member states. The organization is structured in three tiers: the Council, the Secretariat, and the Committees.

(i)   The Council

The Council consists of ambassadors from the member nations. They exercise authority over decision-making and establishing goals for the organization. They are in charge of the strategic direction of the OECD.

(ii)  The Secretariat

The second tier is the Secretary-General, the deputy, and the directorates. The OECD Secretariat is led by the Secretary-General and provides support to Standing and Substantive Committees. It is organized into Directorates. The Secretariat lists 2,500 members and includes economists, scientists, and lawyers who are in charge of the collection of data and research and analysis. The council and the Secretary-General oversee the work of the Secretariat.

(iii)  The Committees

The third tier is the committees, which include representatives from different member nations that meet to discuss the environment, education, trade, and investment.

OECD Functions and Responsibilities

The OECD plays an integral role in promoting economic stability on a global scale. The OECD publishes and updates a model tax convention that serves as a template for allocating taxation rights between countries.

• The OECD is responsible for publishing economic reports, statistical databases, analyses, and forecasts on the outlook for economic growth worldwide.
• The group analyzes the impact of social issues on economic growth and makes recommendations to foster economic growth globally. These recommendations extend forethoughts to the environmental concerns associated with economic development too.
• The organization endeavors to eliminate bribery and other forms of financial crimes worldwide.
• The OECD also maintains a “blacklist” of nations that are considered uncooperative tax havens.
• It also took efforts to eradicate tax avoidance by profitable corporations and in the G-20 countries. It also encourages the G-20 countries to promote tax reforms.

OECD is not a law

They are not formal Acts of the Organisation and are not intended to be legally binding, but they are noted by the OECD Council and their application is generally monitored by the responsible OECD body.

OECD recommendations are not legally binding

Recommendations are adopted by Council and are not legally binding. They represent a political commitment to the principles they contain and entail an expectation that Adherents will do their best to implement them.

Importance of OECD guidelines

They provide voluntary principles and standards for responsible business conduct in areas such as employment and industrial relations, human rights, environment, information disclosure, combating bribery, consumer interests, science and technology, competition, and taxation.

What is OECD Transfer Pricing Guidelines?

OECD has been publishing its transfer pricing guidelines, which have been a reference point for transfer pricing lawmakers, practitioners, multinational companies worldwide. The first guidance was published in 1995 and since then, there have been updates on the transfer pricing guidance. In 2017, it came up with the latest version of the OECD guidelines, which is available now. 

The OECD Transfer Pricing Guidelines provide guidance on the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises

OECD Model Tax Convention

There are two influential model tax conventions — the United Nations and OECD Model Conventions. In addition, many countries have their own model tax treaties, which are often not published but are provided to other countries for the purpose of negotiating tax treaties. The United Nations Model Convention draws heavily on the OECD Model Convention.

The OECD Model Convention was first published, in draft form, in 1963. It was revised in 1977 and again in 1992, at which time it was converted to a loose-leaf format in order to facilitate more frequent revisions. Since then, revisions have been made every few years

The main difference between the two model Conventions is that the United Nations Model Convention imposes fewer restrictions on the taxing rights of the source country; source countries, therefore, have greater taxing rights under it compared to the OECD Model Convention. For example, unlike Article 12 (Royalties) of the OECD Model Convention, Article 12 of the United Nations Model Convention does not prevent the source country from imposing tax on royalties paid by a resident of the source country to a resident of the other country.

OECD Legal Instruments

Since the creation of the OECD in 1961, around 460 substantive legal instruments have been developed within its framework. These include OECD Acts (i.e. the Decisions and Recommendations adopted by the OECD Council in accordance with the OECD Convention) and other legal instruments developed within the OECD framework (e.g. Declarations, international agreements).

All substantive OECD legal instruments, whether in force or abrogated, are listed in the online Compendium of OECD Legal Instruments. They are presented in five categories:

(i)       Decisions

Acts of the Organisation, adopted by the OECD Council, which are legally binding on all those Member countries which do not abstain at the time they are adopted. While they are not formally international treaties, they do entail the same kind of legal obligations as those subscribed to under international treaties. Members are obliged to implement Decisions and they must take the measures necessary for such implementation.

(ii)     Recommendations

Acts of the Organisation, adopted by the OECD Council, which are not legally binding, but practice accords them great moral force as representing the political will of Member countries and there is an expectation that Member countries will do their utmost to fully implement a Recommendation. Thus, Member countries which do not intend to implement a Recommendation usually abstain when it is adopted. Moreover, the implementation of Recommendations is regularly monitored.

(iii)   Declarations

Solemn texts setting out relatively precise policy commitments are subscribed to by the governments of Member countries. They are not formal Acts of the Organisation and are not intended to be legally binding, but they are noted by the OECD Council and their application is generally monitored by the responsible OECD body.

(iv)    Arrangements and Understandings

Instruments, negotiated and adopted in the framework of the Organisation by some Member countries. They are not Acts of the Organisation and are not legally binding, but they are noted by the OECD Council and their implementation is monitored.

(v)     International Agreements (Conventions)

International treaties concluded in the framework of the Organisation, they are legally binding on the Parties.

 The first two categories of legal instruments, Decisions and Recommendations, are known as the “Acts of the Organisation” since they are formally adopted by the OECD Council pursuant to Article 5 of the Convention on the OECD.

As set out above, there are two types of legal instruments which are legally binding on countries under international law: Decisions and International Agreements (Conventions). However, even the non-legally binding instruments are also taken very seriously and their implementation is regularly monitored.

India is not a member of OECD

Though all developed countries are members of OECD, India is still refraining itself from becoming its member in order to expand its sectoral engagement. As of now India is only member of various committees of OECD. However, though India is also an emerging country, it still does not feel appropriate to be part of this forum. However, OECD is pretty much keen on India being its member. India is still on feasibility stage to have a crux on what would be the consequences on becoming its member. Currently India is member of about 30 committees of OECD like taxation, transport research, chemicals, pesticides, consumer policies, fiscal policies, private pension etc. 

Also, OECD and India have enhanced their co-operation in dealing with issues related to transfer pricing and to promote better tax compliance in order to improve the prevention of cross border disputes. It does actively comment and partake in the discussion, but the OECD transfer pricing guidelines do not bound India since India is not a member. Therefore, you can not put forth OECD guidelines in the court of law and say that this is the law applied. Whereas in some of the OECD member countries, you can cite the OECD transfer guidelines if you want to make a particular point. OECD guidelines are essential in the Indian context because wherever the Indian transfer pricing regulations fall short on guidance, practitioners take guidance from OECD. Time and again, the courts have held that if Indian Transfer pricing regulations are silent on a particular issue, them OECD guidelines can be referred for assistance.

               OECD Member Countries

S. No.	OECD Members	Date of Joining the OECD
1.	Canada	10.04.1961
2.	United States	12.04.1961
3.	United Kingdom	02.05.1961
4.	Denmark	30.05.1961
5.	Iceland	05.06.1961
6.	Norway	04.07.1961
7.	Turkey	02.08.1961
8.	Spain	03.08.1961
9.	Portugal	04.08.1961
10.	France	07.08.1961
11.	Ireland	17.08.1961
12.	Belgium	13.09.1961
13.	Germany	27.09.1961
14.	Greece	27.09.1961
15.	Sweden	28.09.1961
16.	Switzerland	28.09.1961
17.	Austria	29.09.1961
18.	Netherland	13.11.1961
19.	Luxemburg	07.12.1961
20.	Italy	29.03.1962
21.	Japan	28.04.1964
22.	Finland	28.01.1969
23.	Australia	07.06.1971
24.	New Zealand	29.05.1973
25.	Mexico	16.05.1994
26.	Czech Republic	21.12.1995
27.	Poland	22.11.1996
28.	Hungary	07.05.1996
29.	Korea	12.12.1996
30.	Slovak Republic	14.12.2000
31.	Chile	07.05.2010
32.	Slovenia	21.07.2010
33.	Israel	07.09.2010
34.	Estonia	09.10.2010
35.	Latvia	01.07.2016
36.	Lithuania	05.07.2018
37.	Colombia	28.04.2020
38.	Costa Rica	25.05.2021

 Interpretation of Most-favored-nations (MFN) clause [CBDT Circular No. 3/2022 dated 03.02.2022]

The CBDT vide Circular No. 3/2022 dated 03.02.2022, clarifying the applicability of MFN clause of Indian Double Taxation Avoidance Agreements (DTAAs or treaties) with OECD member states (or countries). The CBDT has issued the Circular in light of several representations received, seeking clarity on the applicability of the MFN clause.

The Circular provides that benefit of lower rate and restricted scope under MFN clause will be extended only when all the below conditions are satisfied cumulatively:

• India’s DTAA with the country which has beneficial lower rate or restricted scope (referred as the third State) is entered into after the signature/entry into force, depending on language of MFN Clause, of India’s DTAA.
• The third State has to be an OECD member at the time of signing its treaty with India.
• India limits its taxing rights in relation to rate or scope of taxation in its treaty with the third State.
• India issues a separate notification under the Income Tax Laws (ITL) for importing the favorable benefits of third State treaty into the original treaty.

Further, the above Circular will not be applicable in case of taxpayers who have received a favorable decision by any court on the applicability of MFN clause.

CBDT’s clarification on MFN clause in DTAAs

CBDT issued Circular No. 3 of 2022, dated 03.02.2022 on MFN clause in the Protocol to India’s DTAAs with certain countries; Clarifies that:

(i)              unilateral decree of a treaty partner does not represent a shared understanding on the applicability of the MFN clause,

(ii)             the third state should be the member of OECD on the date of conclusion of the DTAA with India,

(iii)           concessional rate or restricted scope to apply from the date of entry into force of the DTAA with the third state and not from the date on which such third state becomes an OECD member,

(iv)           as per Supreme Court ruling in Azadi Bachao Andolan, a notification under section 90 is required and states that India has not issued any notification for importing the beneficial provisions from DTAAs with Slovenia, Lithuania & Colombia to the DTAAs with France, the Netherlands or Switzerland, and

(v)             import of concessional rates by invoking MFN clause cannot be done selectively and the benefit of lower rate or restricted scope of source taxation will available only when the conditions specified in the Circular are met

 CBDT Circular No. 3/2022, Dated 03.02.2022

Subject: Clarification regarding the Most-Favoured-Nation (MFN) clause in the Protocol to India’s DTAAs with certain countries- Reg.

The Protocol to India's Double Taxation Avoidance Agreements (DTAAs) with some of the countries, especially European States and OECD members (The Netherlands, France, the Swiss Confederation, Sweden, Spain and Hungary) contains a provision, referred to as the Most-Favoured-Nation (MFN) clause. Though each MFN clause in these DTAAs has a different formulation, the general underlying provision is that if after the signature/ entry into force (depending upon the language of the MFN clause) of the DTAA with the first State, India enters into a DTAA with another OECD Member State, wherein India limits its source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) to a rate lower or a scope more restricted than the scope provided for those items of income in the DTAA with the first State, such beneficial treatment should also be extended to the first State.

2. The Central Board of Direct Taxes (CBDT) has received representations seeking clarity on the applicability of the MFN clause (particularly to dividend withholding rates) available in the Protocol to some of the DTAAs with OECD member States. India's DTAAs with countries, namely Slovenia, Colombia and Lithuania, provide for lower rate of source taxation with respect to certain items of income. However, these States were not members of the OECD at the time of the conclusion of their DTAAs with India and have become members of the OECD thereafter.

3. Reference is drawn to the decree issued by the Directorate General for Fiscal Affairs, International Fiscal Affairs, Netherlands (Decree No IFZ 2012/54M dated 28th February 2012) (hereinafter referred to as lithe decree”), the French official bulletin of Public finances-Taxes (Bulletin Officiel des Finances Publiques-Impots) published by DGFIP on 4th November, 2016 (hereinafter referred to as lithe bulletin”) and the publication by the Federal Department of Finance, the Swiss Confederation on 13th August, 2021 (hereinafter referred to as lithe publication"). The unilateral decree/bulletin of The Netherlands and France declare that the tax rate on dividends under their respective DTAAs with India stands modified under the MFN clause after India entered into a DTAA with Slovenia, which became a member of the OECD on 21st July, 2010. The DTAA has a lower tax rate of 5% if the holding is above 10%. It has been further stated in the decree/bulletin that the lower rate will be applicable retrospectively from the date Slovenia became member of the OECD. Similarly, the unilateral publication of the Swiss Confederation declares that the tax rate on dividends under their DTAA with India stands modified under the MFN clause after India entered into a DTAA with Lithuania and Colombia who became members of the OECD on 5th July, 2018 and 28th April, 2020 respectively. The publication further states that the lower rate of 5% will be applicable for holding above 10% retrospectively from 5th July, 2018 (i.e. date of Lithuania joining the OECD) and for dividends arising from qualified interests and portfolio dividends retrospectively from 28th April, 2020 (i.e. date of Colombia joining the OECD).

4. In view of the above-mentioned decree/bulletin/publication on interpretation of the MFN clauses and the representations received from the taxpayers and field formation seeking clarity, the CBDT hereby issues the following clarifications on the applicability of the MFN clause:

4.1 Unilateral decree/bulletin/publication do not represent shared understanding of the treaty partners on applicability of the MFN clause:

Both The Netherlands and France have passed the said decree/bulletin without having any bilateral consultation with India. Therefore, these decree/ bulletin do not represent the shared understanding of India and the respective treaty partners on the applicability of the MFN clause and have no binding force as far as interpretation of MFN clause in the respective treaties is concerned. At best these unilateral decree/bulletin only represent the views of the respective governments for providing relief from The Netherlands/France tax. Since these decree/bulletin were passed without any discussion with the Government of India, it would not have any effect on curtailing the tax liability that is payable to the Government of India under the respective tax treaty.

 4.1.1 India has also communicated its position to The Netherlands and France that the decree/bulletin in question is not in accordance with the object and purpose enshrined in the respective DTAAs and that the lower tax rate in the India-Slovenia treaty cannot be imported into these treaties by virtue of the MFN clause as Slovenia was not a member of the OECD when India had entered into DTAA with it. Reliance on the mere fact that Slovenia is an OECD member State at the time of applicability of the MFN clause defeats the object and purpose of the MFN clause. There has been no response from The Netherlands and France to India's interpretation of MFN clause conveyed to them.

4.1.2 In the case of the Swiss Confederation, India has communicated its position that the benefits of India's DTAA with the third State cannot be imported into the India-Swiss DTAA unless the third State was a member of the OECD at the time of signing that treaty.

4.2 Conditionality for the third State being a member of the OECD on the date of conclusion of the DTAA:

On a plain reading of the MFN clauses in India’s DTAAs especially with respect to the abovementioned countries, it is clear that there is a requirement that the third State is to be a member of the OECD both at the time of conclusion of the treaty with India as well as at the time of applicability of MFN clause. Therefore, it is clarified that for applicability of the MFN clause, the third State has to be an OECD member State on the date of conclusion of DTAA with India.

4.3 Application of concessional rates/restricted scope from the date of entry into force of the DTAA with the third State and not from the date the third State becomes member of the OECD:

It may also be pointed out that the MFN clause in these DTAAs clearly states that the reduced rate takes effect from the date of entry into force of Indian DTAA with the third State. Thus, the declaration in the decree/bulletin/publication of The Netherlands, France and the Swiss Confederation to make the reduced rate effective from the date of the third State becoming member of DECD subsequent to entry into force of a DTAA is not in accordance with the relevant provision of the MFN clause in the Protocol. In fact, these countries could not have made it effective from the date of entry into force of Indian DTAA with the third State as the third State was not a member of the DECD on such date of entry into force. This makes it clear that the intention of the MFN clause in the Protocol of the DTAAs is not to give the benefit of India's DTAA with the third State which was not a member of DECO when India entered into DTAA with it. In this regard, Hon'ble Supreme Court in the case of Ram Jethmalani & Others (writ petition civil no 176 of 2009) had observed that:

"61. This Court in Union of India v. Azadi Bachao Andolan approvingly noted Frank Bennion's observations that a treaty is really an indirect enactment, instead of a substantive legislation, and that drafting of treaties is notoriously sloppy, whereby inconveniences obtain. In this regard this Court further noted the dictum of Lord Widgery, c.J. that the words "are to be given their general meaning, general to lawyer and layman alike .... The meaning of the diplomat rather than the lawyer." The broad principle of interpretation, with respect to treaties, and provisions therein, would be that ordinary meanings of words be given effect to, unless the context requires or otherwise. However, the fact that such treaties are drafted by diplomats, and not lawyers, leading to sloppiness in drafting also implies that care has to be taken to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase or sentence redundant would lead to a manifestly absurd situation, particularly from a constitutional perspective. The government cannot bind India in a manner that derogates from Constitutional provisions, values and imperatives.” (emphasis supplied)

Thus, one cannot ignore the clear wording of the MFN clause which mandates the application of lower rate from the date of entry into force of the Indian DTAA with the third State. All three countries have in effect through their unilateral decree/bulletin/publication made this part of the MFN clause redundant which according to the above Indian Supreme Court judgment cannot be done. The above-mentioned decree/bulletin/publication have no application so far as taxation liability of a person in India is concerned.

4.4 Requirement of notification under Section 90 of the Income-tax Act, 1961:

Further, it is a domestic requirement in India under sub-section (1) of section 90 of the Income-tax Act, 1961 that DTAA or amendment to DTAA are implemented after its notification in the Official Gazette. In the famous case of Azadi Bachao Andolan (2004,10 SCC) as well, Hon'ble Supreme Court of India has observed that the DTAA provisions come into force on the date of issue of notification of such DTAA. Hon'ble Supreme Court also made it clear in the judgment that the beneficial provision of sub-section (2) of section 90 springs into operation once the notification is issued. The relevant extract of that judgment reads as under it

A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions oj the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle oj chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act then there was no purpose in making those sections “subject to the provisions of the Act”. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income- tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. ........ . .................... ........................................... This Court is not concerned with the manner in which tax treaties are negotiated or enunciated; nor is it concerned with the wisdom of any particular treaty. Whether the Indo-Mauritius DTAC ought to have been enunciated in the present form, or in any other particular form, is none of our concern. Whether section 90 ought to have been placed on the statute book, is also not our concern. Section 90, which delegates powers to the Central Government, has not been challenged before us, and, therefore, we must proceed on the footing that the section is constitutionally valid. The challenge being only to the exercise of the power emanating from the section we are of the view that section 90 enables the Central Government to enter into a DTAC with the foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the DTAC is entitled to seek benefits thereunder, even if the provisions of the DTAC are inconsistent with the provisions of Income-tax Act 1961." (emphasis supplied)

4.4.1 It may be noted that India has not issued any notification importing the benefit of treaties with Slovenia, Lithuania and Colombia to treaties with The Netherlands, France or the Swiss Confederation.

4.5 No selective import of concessional rates under MFN clause:

Without prejudice to the above discussion, it may be further noted that some jurisdictions have been selective in invoking and applying the MFN clause, which the provisions of the treaty, read with the Rules of interpretation of international treaties do not permit. India’s treaties with Slovenia and Lithuania consist of a split rate of tax for dividends. Article 10(2) of the India-Lithuania treaty is being reproduced here:

“However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends;

(b) 15 per cent of the gross amount of the dividends in all other cases.”

A plain reading of the above extract leads to the inference that the beneficial rate of 5% on Dividend income is applicable only if the company (other than a partnership) receiving the dividends holds directly at least 10% of the capital of the company paying the dividends. The same was also communicated to the authorities of The Netherlands, France and the Swiss Confederation. Even though The Netherlands, France and the Swiss Confederation have taken this into account in their decree/bulletin/publication by providing that the rate of 5% will be applicable only when the condition of 10% ownership is satisfied, there is no sound rationale/basis provided for the selective import on account of not switching to 15% tax rate in other cases. The concern expressed by India to these countries, on this issue, has remained unaddressed.

5. In view of the above, it is hereby clarified that the applicability of the MFN clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) provided in India's DTAAs with the third States will be available to the first (OECD) State only when all the following conditions are met:

(i)    The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State;

(ii)   The second treaty is entered into between India and a State which is a member of the OECD at the time of signing the treaty with it;

(iii)  India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and

(iv)  A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of sub-section (1) of Section 90 of the Income Tax Act, 1961.

If all the conditions enumerated in Paragraph 5(i) to (iv) are satisfied, then the lower rate or restricted scope in the treaty with the third State is imported into the treaty with an OECD State having MFN clause from the date as per the provisions of the MFN clause in the DTAA, after following the due procedure under the Indian tax law.

6. Notwithstanding the clarification given in the above paragraphs, where in the case of a taxpayer there is any decision by any court on this issue favourable to such taxpayer this Circular will not affect the implementation of the court order in such case.

Danish Tax Council holds German company’s employee’s home-office in Denmark constitutes PE

Danish Tax Council (DTC) holds that German Company constituted a PE in Denmark through its employee residing and working from Denmark; Assessee-Company, registered and domiciled in Germany, engaged in production and sale of certain products worldwide through subsidiaries, external dealers or through direct sales from Assessee’s head office in Germany; Assessee hired a sales employee, domiciled in Denmark, who for personal reasons did not move to Germany and continued working from his residence in Denmark; DTC notes that in order to constitute a PE in Denmark, three conditions should be satisfied as per Article 5 of Danish-German DTAA i.e. (i) there must be place of business, (ii) it must be ‘fixed’ and (iii) the foreign entity must carry on its business ‘wholly or partly’ from such place of business; DTC refers to Commentary on OECD Model Tax Convention 2017 wherein it was clarified that a home office can be considered to be at the disposal of an enterprise if the employee does not have an office provided by the enterprise and the employee continuously carries out the enterprise's business activity from the home office; Also relies on rulings rendered by DTC outlining the following factors to indicate that a home office constitutes a permanent place of business for the company: (i) employee does not have any other permanent workplace, (ii) enterprise has agreed that the employee will perform part of work from his home office, (iii) employees work from home office can be planned and (iv) employer has interest in work being carried out from Denmark; Observes that in the present case, the employee worked from his residence to the extent that the work does not require the employee’s presence elsewhere and that the employee was hired as area sales manager to handle sales in Africa, Belgium, Germany, the Netherlands, the Baltics and the Nordic countries; DTC acknowledges Danish Tax Agency’s estimation that the employee uses around 40%-50% of the working time to perform work in Denmark, remarks that “a significant part of this work is performed from the Employee's home office…. the work from the home in Denmark therefore does not arise so irregularly and randomly that it in itself precludes the home from being regarded as a place of business for Spørger.”; Further notes that the employee’s task is to develop and build, among other things. the Nordic (including Danish) market, which includes contacting with new potential dealers and other partners, thus accepts Tax Agency’s finding that “the placement of the Employee in Denmark must be considered to have independent value for Assessee, as Assessee must be assumed to have a business interest in having the Employee located in Denmark near its customers and the work in Denmark is thus not solely due to private circumstances.”; Opines that the tasks performed by the employee from home in Denmark are closely related to the sales activities in connection with customer visits and thus the company's core activity and thus cannot be considered to be of preparatory and auxiliary nature; Accordingly, holds that the employee's home office constitutes a permanent place of business for Assessee. [In favour revenue] – [Sporger (German Company) – Date of Judgement : 26.04.2022 [Foreign Court Denmark]

CBDT Circular on MFN clause is neither binding nor retrospective

In the case of GRI Renewable Industries S.L., a company incorporated in Spain, it rendered technical services to an Indian company and offered the income to tax at the rate of 10% instead of 20% rate as provided in India-Spain Double Taxation Avoidance Agreement (DTAA) pursuant to most-favored-nation (MFN) clause read with (r.w.) Article 12 of India-Portugal DTAA. 

The Tax Authority denied the benefit of MFN clause on the premise that there was no notification granting benefit of India-Portugal DTAA. 

Pune Tribunal held that the Tax Authority was not justified in denying the benefit of 10% tax rate as per India-Spain DTAA r.w. India-Portugal DTAA for the following reasons:

• Opening part of the Protocol to India-Spain DTAA, which is duly signed by the competent authorities of both the countries, states that it shall be an integral part of the India-Spain Convention. On notifying the DTAA or Convention, all its integral parts get automatically notified. There remains no need to again notify the individual limbs of the DTAA so as to make them operational one by one.
• Circular 3/2022 dated 3 February 2022 issued by Central Board of Direct Taxes (CBDT), requiring issuance of separate notification overlooks the plain language of the section 90(1) of the Income Tax Act as seen in juxtaposition to the language of the Protocol, which treats the MFN clause an integral part of the DTAA. 
• Circular issued by the CBDT is binding on the tax authority and not on the assessee or the tribunal or other appellate authorities. 
• Further, notwithstanding above, the Circular cannot be applied to the period prior to the date of its issuance (i.e., tax year 2015-16 in the present case) as it is detrimental to the taxpayer for taking benefit conferred by the DTAA. - [GRI Renewable Industries S.L. v. ACIT (2022) 140 taxmann.com 448 (ITAT Pune)]

Withholding rate of 5% applicable on dividend receivable by Dutch Co., follows Concentrix ruling

Delhi High Court allows Assessee’s writ petition against certificate issued under section 197 bearing withholding rate of 10% and order rejecting Assessee’s application for issuance of certificate for lower withholding tax at 5%, follows ratio laid down in Concentrix Services Netherlands B.V. v. ITO (TDS) (2021) 127 taxmann.com 43 (Del.), directs Revenue to issue certificate with lower withholding tax rate of 5%; Assessee-Company holds 58.39% shareholding in Deccan Fine Chemicals India (P) Ltd. (DFCPL) which proposes to distribute dividend of Rs. 65.68 Cr to the Assessee; Assessee filed an application under section 197 for certificate authorizing Assessee to receive dividend from DFCPL subject to lower withholding tax rate of 5% as applicable under the Double Taxation Avoidance Agreement (“DTAA”) between India and Netherlands read with the Protocol and was submitted that though India-Netherlands DTAA prescribed a withholding rate of 10% on the basis that India's DTAAs with other OECD members - Slovenia / Lithuania / Colombia provided for withholding rate of 5% on dividend income and owing to the MFN clause, the lower rate shall also be applicable to any dividend income covered under the India-Netherlands DTAA; Assessee relied on the coordinate bench ruling in Concentrix Services and contended that the certificate was passed in contravention of settled position of law; Revenue admits the issue to be squarely covered by the Concentrix Services ruling; High Court thus, sets aside the impugned order and certificate, and directs for issuance of certificate under section 197 indicating the applicable rate of tax on dividend at 5%. – [Deccan Holdings B V v. ITO & ANR - [TS-1008-HC-2021(DEL)] – Date of Judgement : 25.10.2021 (Del.)]

Fees paid to Polish law firm not taxable in India, follows Linklaters ruling

Bangalore ITAT allows Assessee’s (Infosys BPO Ltd.) appeal, holds payments made to Polish law firm not taxable in India as firm is a fiscally transparent entity under Polish law and the partners did not satisfy the conditions for taxability under Article 15 of India-Poland DTAA, thus, Assessee was not liable for TDS; Also holds that Assessee is entitled to interest under section 244A on refund of TDS deposited under section 195A; Assessee-Company, engaged in business process outsourcing services made payments to non-residents in the US and Poland for Assessment years 2015-16 and 2016-17 by grossing up the invoice amount and deducted tax at source under section 195A and deposited TDS from its own funds under protest; Assessee paid for legal services to a Poland-based law firm and for site license subscription fee and retainership to a US-based; Assessee moved applications under section 248 before CIT(A) seeking declaration that no tax was deductible on payments made to the non-residents in Poland and the US and the TDS refund was to be made with interest under section 244A; CIT(A) rejected the application by holding that payments made to the entities in Poland and the US were chargeable to tax as Royalty/FTS and there is no provision of interest on refund on TDS paid under section 195A; On taxability of sum paid to the Polish law firm, ITAT holds that the law firm was limited partnership which is a fiscally transparent entity under the domestic law of Poland is not a person for the purpose of India-Poland DTAA, thus, not entitled to treaty benefits and relies on Mumbai bench rulings in Linklaters LLP v. ITO (2010) 132 TTJ 20 : 42 DTR 233 : 40 SOT 51 (2011) 9 ITR 217 (ITAT Mumbai) and ING Bewaar Maatschappij v. DCIT – Date of Judgement 27.11.2019 (ITAT Mumbai) and OECD Commentary as per which, “since the income of the partnership “flows through” to the partners under the domestic law of that State, the partners are the persons who are liable to tax on that income and are thus the appropriate persons to claim the benefits of the conventions concluded by the States of which they are residents.”; ITAT holds that the partners are taxable for income received by the partnership firm in Poland and since the partners did not have a PE in India, there could not be any taxability under Article 15 (Independent Personal Services) of the DTAA; On refund with interest under section 244A, ITAT relies on Supreme Court ruling in Union of India Tata Chemicals Ltd. – Date of Judgement : 24.02.2014 (SC) and holds that the Assessee is entitled to interest on refund of TDS deposited; ITAT remands the issue of taxability of payments made to US-based company and directs CIT(A) to analyse it in the light of Supreme Court ruling in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT - Date of Judgement 02.03.2021 (SC) – [Infosys BPO Ltd. v. DCIT – Date of Judgement : 11.10.2021 (ITAT Bangalore)]

Danish Tax Council: COVID-19 forced stay does not constitute PE; Refers to OECD Memorandum dated 03.04.2020

Danish Tax Council holds that the employee of the Questioner-Company compelled to work in Denmark due to COVID-19 did not constitute a permanent establishment (PE) of the Questioner-Company in Denmark under Danish-English DTAA; The employee in Denmark discharged the functions of a Portfolio Development Director, member of the Board and a member of the Investment Committee; The employee only had the authority to make decisions affecting the company together with other members, never alone and was forced to spend time in Denmark and attend board meetings digitally for which he would ordinarily be physically present; Danish Tax Council opines that work carried out by the employee could not be regarded as an undertaking connected with Denmark or which could be considered as Questioner's main business and thus, the activity did not constitute a PE; Outside of COVID-19 situation, employee's new tasks did not create more work in Denmark than before, as the new tasks were primarily handled outside Denmark and nor did the employee exercise any authority in Denmark; Observes that this was a temporary situation and the changed facts were not due to the Questioner’s business activity and did not change the fact that the normal workplace for the employee remained the workstation of the Questioner; Under Article 5(1) of the OECD's Model Convention too if a person during the pandemic performs work from a different jurisdiction extraordinarily or temporarily than they would normally do, this does not create a permanent establishment abroad for the company, unless they already met the conditions for constituting a permanent establishment; Thus, virtual attendance in meetings of the Board and the Investment Committee did not constitute a PE in Denmark. Danish Tax Agency had clarified its legal position that due to COVID-19 where an employee performs his work from a different jurisdiction in an extraordinary and temporary manner than he would normally do, he would not create a PE under Article 5(1) of the OECD Model Convention, unless the conditions for constituting a PE were already met; Danish Tax Agency’s legal position was in line with the Memorandum that OECD’s secretariat had published on April 3, 2020 dealing with the COVID - 19 crisis' impact on the taxing rights under DTAAs in relation to the OECD’s PE rules; Danish Tax Council analyses the legal position under the DTAA while in the light of domestic law i.e., The Corporation Tax Act, opines that employee’s work in Denmark did not result in a ‘permanent place of business’ and thus it was not necessary to examine whether in accordance with Article 5 of DTAA a PE came into existence or not. – [H1 [TS-466-FC-2021(DEN)] – Date of Judgement : 19.05.2021 (Foreign Court Denmark)]

 

MFN clause in India-Netherlands Protocol applicable from date of OECD membership; Approves lower dividend WHT

Delhi High Court sets aside lower withholding certificate of 10% and directs Revenue to issue fresh certificates at a lower rate of 5% on dividend payments from Indian Subsidiary to Dutch parent; Applies principle of common interpretation and adopts the view expressed in decree issued by Kingdom of Netherlands clarifying that beneficial rate of 5% in India-Slovenia DTAA will be applicable to recipients of Netherlands from date when Slovenia became OECD member, i.e., from August 21, 2010, although, the India - Slovenia DTAA came into force on February 17, 2005; Observes that the protocol to DTAA is an integral part of the India-Netherlands DTAA and as wrongly contended by the Revenue, no separate notification is required to apply the provisions thereof; Assessees, residents of Netherlands, applied for lower withholding certificate u/s 197 seeking withholding rate of 5% on dividends payable by Indian  Subsidiary by importing the benefit of MFN clause from DTAA’s executed with Slovenia, Lithuania, and Columbia which provides for a beneficial witholding rate of 5% on dividend payments; Revenue refused such lower rate of WHT on the contention that Slovenia, Lithuania, and Columbia were not OECD member countries when subject DTAA was executed; High Court clarifies that the word ‘is’ in Clause IV(2) of protocol which reads “which is a member of the OECD”  describes the state of affairs when request for application u/s 197 is made, not at the time when subject DTAA was executed; Refers to the principle of ‘common interpretation’ and judgement cited by assessees in Corocraft Ltd. v. Pan American Airways Inc on the applicability of the common interpretation principle in the context of foreign decisions; Remarks that in the present case, “principle of common interpretation should apply on all fours to ensure consistency and equal allocation of tax claims between the contracting States”; Relies on Supreme Court ruling in Azadi Bachao Andolan and holds, “while interpreting international treaties …the rules of interpretation that apply to domestic or municipal law need not be applied, for the reason, that international treaties…are negotiated by diplomats and not necessarily by men instructed in the law” - [Concentrix Services Netherlands B.V. and Optum Global Solutions International BV v. ITO(TDS) – Date of Judgement : 22.04.2021(Del.)]

 

Nigeria's Tax Appeal Tribunal restricts applicability of OECD Commentary to verbatim provisions of DTAAs

The Tax Appeal Tribunal of Nigeria observed the following:

The words of a treaty are not those of a regular Parliamentary draftsman but a text agreed upon by negotiation between the two contracting Governments, and thus a good-faith interpretation must reflect the intention of the contracting states.

Although the OECD MTC and the OECD Commentary carry significant weight in the interpretation of tax treaties, only if a tax treaty is, in principle, based on the OECD MTC and a certain provision follows the wording of the OECD MTC, it is then only reasonable to assume that the contracting states intended such a provision to have the meaning it has in the OECD MTC, as outlined in the OECD Commentary.

Application of the OECD MTC Commentary is not dependent on the membership of OECD but the adoption verbatim of the wordings of the OECD MTC. Accordingly the argument canvassed by the tax authorities that OECD MTC Commentary is inapplicable since Nigeria is not an OECD member is misconceived.

The wordings of Article 8 of OECD MTC is different from Article 8 of the tax treaty, and thus the Commentary to Article 8 of the OECD MTC is inapplicable to the interpretation of Article 8 of the tax treaty.

The proper scope of Article 8 of the tax treaty is to exempt income from tax in Nigeria to the extent it relates to the carriage of passengers, mails, livestock or goods in international traffic, whether inbound or outbound. As per Article 3(1)(h) of the tax treaty, any transaction that occurs between places in or within the jurisdiction of a Contracting State (i.e., Nigeria in the instant case) do not fall within the definition of international traffic.

In this background, the Tribunal held that the non-freight income earned by the taxpayer is not part of international traffic, and thus not covered by Article 8 of the tax treaty. - [CMA CGM DELMASA SA v. Federal Inland Revenue Service [TS-759-FC-2020(NIG)] – Date of Judgement : 03.12.2020  (Foreign Court Nigeria)]

NOTE

OECD Model Tax Convention

Article 8 – Shipping and Air Transport

Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that  state.

The provisions of paragraph 1 shall also apply to profits from participation in a pool, a joint business or an international operating agency.

On OECD Commentary

Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. [TS-106-SC-2021] upholds the significance of the OECD Commentary as persons (deductors/assessees) of different Contracting States can conclude their business transactions on the basis of the taxability of income as royalty or business profits as per the Commentary and it will continue to have persuasive value for the interpretation of the term ‘royalties’; Finds from CBDT Circular No. 10/2002 dated 09.10.2002 that Revenue had appreciated the difference between the payment of royalty and the supply/use of computer software in the form of goods, which is then treated as business income of the assessee taxable in India if it has a PE in India. The decision of the Nigeria Tribunal is on similar lines, though with a caveat.

 

Spanish Supreme Court rejects ‘dynamic’ PE interpretation under DTAA based on later version of OECD commentaries

Spanish Supreme Court rules on 'dynamic' interpretation of tax treaties, holds that tax treaties cannot be interpreted based on later versions of model conventions (and their commentaries) published by the OECD, where the definition of the terms in the treaty and the model convention are materially different; Assessee-company (a resident of Spain) claimed refund of the taxes paid w.r.t the income attributable to its branch office in Switzerland [which was also taxed by the Swiss Authorities] under the Spain-Switzerland DTAA of 1966, however the same was denied by the Revenue on the ground that assessee's presence in Switzerland did not give rise to PE as per subsequent OECD commentary; Notes that the Spanish National High Court, placing its reliance on the 2005 OECD Model Convention commentary had held that the assessee’s activities of collection of interest and granting intra-group loans were purely auxiliary in nature and thus did not constitute PE in Switzerland; Annuling High Court ruling, Supreme Court observes that the DTAA did not include such exception at the time of applying to the income so being taxed, opines that “the interpretive operation carried out by the Trial Chamber results in an unfavorable retroactive application to the inspected company…”; Clarifies that (i) OECD commentaries are not normative sources of law, (ii) dynamic interpretation could not be projected retroactively on a case governed by the previous rule, and (iii) "in no case.... such interpretation could be based exclusively on comments, models or interpretative guidelines that have not been explicitly assumed by the signatory states in their agreements..., without prejudice to the fact that the established criteria may serve as a guideline to the courts when the comment or recommendation may coincide with that resulting from interpreting the agreement itself..". – [Stryker Iberia – Date of Judgement : 03.03.2020 (Foreign Court Spain)]

Grants Treaty benefit to Cyprus-entity as ‘beneficial owner’; Cites OECD 2017 Model Convention

Mumbai ITAT rules in favour of a Cyprus based entity [assessee, undertaking business activities of an investment holding company], directs Assessing Officer to accept assessee’s return for Assessment year 2013-14 offering interest income from Compulsorily Convertible Debenture [CCDs] in an Indian entity [ABPL] at a concessional rate of 10% as per Article 11 of India-Cyprus DTAA; Noting that assessee is a 100% subsidiary of a Mauritius based co. [GWDL] which had remitted funds to assessee and such funds were further invested in the CCDs of ABPL, Assessing Officer had held that assessee was a mere conduit and not the beneficial owner of interest income, consequently Assessing Officer had taxed the interest income at rates in force [i.e. approx. 42%]; Rejecting Revenue's action, ITAT rules that The mere fact that the investment was funded using a portion of an interest-free shareholder loan and share capital does not affect the appellant's status as the beneficial owner” of interest income, as the entire interest income was the sole property of the appellant.”, cites OECD 2017 Model Convention to appreciate the meaning of beneficial owner”; Observes that assessee had the absolute control over the funds received from its immediate shareholder, further the assessee wholly assumed and maintained the foreign exchange risk on the CCDs (as they were INR denominated), and the counter party risk on interest payments arising on the CCDs;  Furthermore, observes that the Assessing Officer/DRP have failed to prove that (i) the appellant did not have exclusive possession and control over the interest income received, (ii) the appellant was required to seek approval or obtain consent from any entity to invest in ABPL, or to utilize the interest income received at its own discretion and (iii) the appellant was not free to utilize the interest income received at its sole and absolute discretion, unconstrained by any contractual, legal, or economic arrangements with any other third party.”; In view of the above factual scenario, ITAT concludes that the transaction between the appellant-assessee and ABPL cannot be considered a mere back-to-back transaction lacking economic substance.”. [In favour of assessee] (Related Assessment year : 2013-14) – [Golden Bella Holdings Ltd. v. DCIT(International Taxation) – Date of Judgement : 28.08.2019 (ITAT Mumbai)]

 

NOTE

Para 10.2 of the OECD Commentary (2017) on Article 11 (Interest) of the Model Tax Convention defines beneficial owner” as under:

Where the recipient of interest does have the right to use and enjoy the interest unconstrained by a contractual or legal obligation to pass on the payment received to another person, the recipient is the beneficial owner of that interest”.

 

Google, Yahoo websites not PE, rejects India’s reservations on OECD Commentary

No TDS attracted on payment to Yahoo, Google for online advertisement on search engines; Search engine having its presence through website cannot create fixed place (basic rule) PE, unless web servers located in relevant jurisdiction; Concurs with report of High Powered Committee on e-commerce transactions, relies on OECD Model Commentary; India's reservations on ‘website PE’ in OECD Commentary not relevant in judicial analysis; Reservations relevant only for interpreting treaties entered into after expression of such observations; Conventional PE tests fail in virtual world; Accordingly, Govt should take policy decision on whether suitable remedial measures to protect revenue base needed; Advertisement revenue not in the nature of 'royalty', concurs with coordinate bench rulings in Pinstorm and Yahoo; Absent human intervention, payment also not taxable as fees for technical services under Act as well as DTAA; Google Ireland and Yahoo USA also did not create business connection in India, hence income not taxable in India. [In favour of assessee] (Related Assessment year : 2005-06) – [ITO v. Right Florists (P) Ltd. [TS-137-ITAT-2013(Kol)] – Date of Judgement : 12.04.2013 (ITAT Kolkata)]

 

Grants treaty benefits to German partnership; Rejects Revenue reliance on OECD commentary

The assessee, Chiron Bearing Gmbh & Co, a non-resident filed its return of income for Assessment year 2002-03 declaring an income of Rs. 3.35 crores. The assessee had claimed benefit of lower rate of tax [10%] under Article 12(2) of the Indo-German DTAA in respect of Royalties and Fees for technical services (FTS) received by it in India for services rendered in India.

The Assessing Officer denied the benefit of the Indo-German DTAA on the basis that the assessee, being a limited partnership, was not liable to tax in Germany. This conclusion was reached on the basis of the OECD Publication “The Application of the OECD Model Tax Convention to Partnership.” However, both the CIT(A) as well as the ITAT accepted the assessee’s claim for the benefit of lower rate of tax with respect to royalties/ FTS under the Indo-German DTAA. Reliance was placed on the Tax Residency Certificate (TRC) issued by the German tax authorities and the fact that the assessee had paid Trade Tax in Germany. Trade tax is tax paid on profits of the business.

On appeal by the Revenue, a division bench of Bombay High Court ruling in favour of the assessee, held that the assessee was a tax-resident of Germany who was eligible for the benefit of lower rate of tax under the DTAA.

Bombay High Court observed that as per Article 2(3), the DTAA is applicable to the trade tax paid by the assessee in Germany. High Court further observed that as per Article 3(d), person includes any entity treated as taxable unit in Germany. High Court also noted that the term 'resident' in Germany included any person who is liable to tax in Germany by reason of domicile, residence, etc. Based on the fact that the German authorities treated the assessee as a taxable unit under the taxation laws of Germany (as evidenced by the TRC) and that the assessee had paid trade tax in Germany, High Court held that the DTAA was applicable to the assessee.

High Court also rejected the Revenue’s contention that the assesseee could not be considered as a taxable entity in view of the OECD commentary. Justice M.S. Sanklecha ruled .. ‘This is for the reason that entire issue is governed by the DTAA and on the basis of evidence led before the authorities. In these circumstances, it is not open to deny the benefit of the DTAA on the basis of the OECD commentary.’ [In favour of assessee] (Related Assessment year : 2002-03) – [Director of Income Tax, (International Taxation) v. Chiron Bearing Gmbh & Co [TS-12-HC-2013(BOM)] – Date of Judgement : 08.01.2013 (Bom.)]