The government on Monday afternoon clarified that according to the amended Cyprus treaty, investors need to pay only 10% tax with retrospective effect from November 1, 2013, instead of the 30% tax they have already paid. While bringing in clarity on this matter, a lacuna over transfer pricing still remains. The genesis of the problem lies in 2013.

The government had, on November 1, 2013, blacklisted Cyprus as an investment destination through a notification. So, investments made through Cyprus attracted 30% tax (TDS) instead of 10% tax under the original India-Cyprus treaty. The government had blacklisted Cyprus after the island country had refused to share some data related to investors with India.

The government also said that transfer pricing could also apply on returns given to Cyprus investors by Indian companies.

However, the government later amended the treaty (through a notification on December 14, 2016) after Cyprus agreed to cooperate on sharing investor data. Under the amended treaty, the higher taxation part was rescinded. But the transfer pricing portion still remains unclear.

What led to a cause of worry was the fact that many private equity investors had paid 30% tax between 2013 and 2016 on returns from Indian investments. The government clarification on Monday came as many foreign investors were worried that the 10% tax would not be applicable for the three years between 2013 and 2016. However, following Monday's clarification, they can now claim refunds from the tax department. Most of the investors used Cyprus as a pooling vehicle to invest in India's real estate. Most of the investments were in debt vehicles.

TRANSFER PRICING ISSUE
Transfer pricing is normally only applied in cases where two companies -one an Indian and another multinational -do a merger or acquisition.

People close to the development said that some of the transfer pricing adjustments could be made in the coming months. In cases where the tax officers have already gone ahead with the transfer pricing procedures, it may not be possible to undo it, say experts.

"Even though the transfer pricing compliances (that is the transfer pricing documentation and accountant's report) cannot be undone, the taxpayers can benefit from the withdrawal of notification for their ongoing transfer pricing assessments," said Amit Maheshwari, partner, Ashok Maheshwary & Associates.

"The November 1, 2013, notification had also created a deeming fiction of "associate enterprise (AE)" between the parties and transfer pricing (TP) provisions were artificially made applicable. There are several cases where the references to the TP officer were already made by the assessing officer for the TP assessment pursuant to the notification," said Punit Shah, partner, Dhruva Advisors.

Industry trackers say that transfer pricing adjustments could lead to litigations going ahead.

"It is unclear whether transfer pricing references by tax officials will survive after the retrospective rescission of the notification. This lack of clarity may lead to some litigation with regard to validity of the TP proceedings initiated under the notification," said Shah.

ET VIEW
Make Clear Tax Rules:
This is absurd, that too after India demonstrated flexibility and lifted the so called sanctions after Cyprus agreed to share information on tax evaders. The reworked tax treaty between India and Cyprus for effective information sharing is also a step towards global cooperation on tax transparency. It will provide relief to genuine investors in Cyprus. But investors loathe uncertainty. The need is for stability and certainty in the tax system, and therefore tax rules must be clear.