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India: Data transmission services; tax credits in demerger

Treatment of tax credits in demerger in India

The KPMG member firm in India has prepared reports discussing the following tax developments (read more at the hyperlinks provided below).


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Payment for data transmission services, via transponder, not “royalty” under income tax treaties: The Delhi High Court held that a payment for data transmission services made through a transponder is not a royalty under the India-Thailand income tax treaty and the India-Netherlands income tax treaty. A retroactive amendment (introduced by the Finance Act, 2012) to the definition of “royalty” does not affect Article 12 of these income tax treaties. The High Court further observed that no amendment to the Income-tax Act, 1961, can be read in a manner so as to extend its operation to the terms of an international treaty. The case is: Shin Satellite Public Co. Ltd.


Treatment of tax withholdings, advance tax payment in demerger: The Ahmedabad Bench of Income-tax Appellate Tribunal held that a credit for tax withheld at source (referred to in India as “tax deducted at source”), for the minimum alternate tax (MAT), and for advance tax paid by the “demerged” company (relating to the demerged undertaking) is allowed the resulting company upon demerger. The plan provided for the transfer of all assets and properties of the demerged undertaking to the resulting company—and this includes the transfer of various tax credits. The case is: Adani Gas Ltd.


Sale of group shares to related parties treated as “sham transaction,” thus, loss disallowed: The Delhi Bench of the Income-tax Appellate Tribunal held that the sale of shares of the group company during a “lock-in period” to related parties was not “genuine” but was a “sham transaction.” Therefore, the capital loss claimed from this transaction was disallowed. The case is: AAA Portfolios Pvt. Ltd.

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