NRI PROBLEMS

I have been associated with the banking sector and I may consider returning to India if I can set up a payment bank which I am told is now encouraged by the Reserve Bank guidelines. Is this possible and what are the advantages?
— R P Sarin, Manama

NRIs who return to India for good are permitted to apply for licence for payment and small finance banks. Therefore, you should consider returning to India and becoming a resident, failing which you can only be a minority shareholder.

The application for licence is now permitted to be made by February 2, 2015. The Reserve Bank will give preference to those applicants who propose to set up the payment bank in under-banked States and districts, such as the North-East, Eastern States, etc.

There is no limit on the number of licences which the Reserve Bank may issue. At the time of making application for the payment bank, the promoters or promoter-group will have to furnish a plan and methodology to comply with the requirements of the guidelines.

This plan has to be furnished within eighteen months from the date of obtaining the in-principle approval or on the date of commencement of operations, whichever is earlier.

A British company for which I work wants to set up a subsidiary company in India. Employees will be seconded by the parent company to the Indian company. The salaries of such employees will be reimbursed by the subsidiary company to the British company. Will tax be deducted at source in India at the time when the subsidiary remits the amount to its parent company?
— K L Ramarao, Dubai

There has been a conflict of judicial view on this point. Certain Benches of the Income-tax Appellate Tribunal have held that such reimbursement of salaries by the subsidiary to the parent company is in the nature of fees for technical services which are taxable in the hands of the parent company.

In other cases, it has been held that such amount is not taxable as it is mere reimbursement of expenses incurred by the parent company on paying salaries to its seconded staff.

However, the Delhi High Court has held that reimbursement of salaries to the overseas entity would be taxable as fees for technical services. Further, it would be deemed that the parent company has a permanent establishment in India which is generally referred to as Service PE.

The Supreme Court has dismissed the special leave petition filed against the Delhi High Court judgment. Therefore, the British company should proceed on the footing that the Indian subsidiary will be required to deduct tax at source when it remits the amount of salaries to its parent company.

In the last budget, the Finance Minister had stated that dispute resolution mechanisms would be set up to expedite settlement of disputes in respect of matters pertaining to international taxation and transfer pricing. Have any steps been taken in this regard?
— B K Rastogi, Dubai

With effect from 1st January this year, five dispute resolution panels have been set up. Two panels each are set up in Mumbai and Delhi and one in Bengaluru. The panels have been set up with dedicated full-time Commissioners.

It is expected that the involvement of three senior Commissioners will help to improve the functioning of the dispute resolution mechanism, mainly in case of transfer pricing issues. There is also substantial progress made by the Central Board of Direct Taxes in entering into advance pricing agreements which totally eliminate possibilities of litigation.

The writer is a practicing lawyer, specialising in tax and exchange management laws of India.