CORPORATE AND PROFESSIONAL UPDATE FEBRUARY 28, 2016 CRATE RENTALS RECOVERED BY BEVERAGE MANUFACTURERS LIABLE TO VAT AND NOT SERVICE TAX In the case of Hindustan Coca Cola Beverages (P.) Ltd. v. Commissioner of Service Tax, Delhi (2016) (New Delhi – CESTAT), The New Delhi CESTAT has held that such crate rentals would be liable to …
CORPORATE AND PROFESSIONAL UPDATE FEBRUARY 27, 2016 Direct Tax: The validity of assessment – if a matter falls u/s. 153(2A) of the Act i.e. if the Tribunal has set aside or canceled the assessment then the fresh order by the AO of assessment shall be passed within the period as prescribed u/s. 153(2A) – Tri …
SECTION 12A
CHARITABLE OR RELIGIOUS TRUST – REGISTRATION OF
Cancellation of : Where assessee-educational trust undertook only one activity of running of school out of 21 objects for charitable purposes and it was charging reasonable fees from students and it also gave a concession to poor and deserving students, registration of trust under section 12AA was to be granted – [2016]
SECTION 40(a)(i)
BUSINESS DISALLOWANCE – INTEREST, ETC., PAYABLE OUTSIDE INDIA
Commission payments to the nonresident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. The services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of “fees for technical services” and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer u/s 40(a)(i) towards export commission paid by the assessee to the non-resident was rightly deleted by the Tribunal. In GE India Technology’s case, it was held by SC that the tax deducted at source obligations under Section 195 (1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Consequently, the ratio of SC decision in G.E. India Technology’s case would apply notwithstanding insertion of Explanation 4 to Section 9 (1) (i) of the Act with corresponding introduction of Explanation 2 to Section 195 (1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962 – [2016] 66 taxmann 321 (Madras)
SECTION 74
LOSSES UNDER HEAD CAPITAL GAINS
Setting off deemed short term capital gain : Where deemed short term capital gain arose on account of sale of depreciable assets that was held for a period to which long term capital gain would apply, assessee would be entitled to claim setting off said gain against brought forward long term capital losses and unabsorbed depreciation – [2016] 66 taxmann 330 (Bombay)
SECTION 92C
TRANSFER PRICING – COMPUTATION OF ARM’S LENGTH PRICE
Comparables and adjustments/TNMM v. CUP : Where on assessee becoming agent of parent shipping company, erstwhile agent was appointed as sub-agent of assessee, price agreement between assessee and its sub-agent could not be used as internal CUP for determining ALP – [2016](Mumbai – Trib.)
Comparables and adjustments/Comparables – Illustrations : In case of assessee, providing investment advisory and support services to its AE, companies engaged in handling of IPOs and carrying on activity of managing directly or indirectly investments mutual funds, venture capital fund, could not be accepted as valid comparables while determining ALP – [2016] (Delhi – Trib.)
SECTION 132A
SEARCH & SEIZURE – REQUISITION OF BOOKS OF ACCOUNT, ETC.
Reassessment : Accounts which were duly verified during regular assessment of assessee could not be reappreciated merely because further a search was conducted in premises of assessee as same would amount to reopening of concluded assessment – [2016] 66 taxmann 264 (Karnataka)
SECTION 194C
DEDUCTION OF TAX AT SOURCE – CONTRACTORS/SUB-CONTRACTORS, PAYMENTS TO
Transportation charges : Where assessee-company, engaged in business of cargo handling, made payments for transportation of goods to transporter which also supplied containers, since use of containers was only incidental to transporting of cargo, assessee was justified in deducting tax at source under sec. 194C from payments in question – [2016] (Rajkot – Trib.)
SECTION 445
WINDING UP – COPY OF WINDING UP ORDER TO BE FILED WITH REGISTRAR
Contract of Company (in liquidation) with its employees comes to an end on passing of winding up order –[2016] (Bombay) (more…)
Expectations from Union Budget 2016
The countdown for the Budget 2016 has begun. From average taxpayer to tax experts, all eyes are transfixed on the Union Budget 2016. It is to our credit that many of our predictions came true in the Union Budget.
This time also we have recommended substantive/procedural changes and various other matters which CBDT should clarify to end the controversy and to bring about certainty in the Income-tax laws.
Our expectations from the Union Budget, 2016
Union Budget likely to reduce corporate tax rate with rationalization of exemptions
On February 28, 2015 the Hon’ble Finance Minister, Mr. Arun Jaitley had proposed to reduce the corporate tax rate from 30% to 25% in his Budget Speech. Snippets from budget his speech are given hereunder:
“The basic rate of Corporate Tax in India at 30% is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive. Moreover, the effective collection of Corporate Tax is about 23%. We lose out on both counts, i.e. we are considered as having a high Corporate Tax regime but we do not get that tax due to excessive exemptions. A regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion. I, therefore, propose to reduce the rate of Corporate Tax from 30% to 25% over the next 4 years.“
On the expected lines, the Finance Ministry on November 20, released following plan to bring down the tax rate from 30% to 25% over the next four years.
1) Profit linked, investment linked and area based deductions will be phased out for both corporate and non-corporate taxpayers.
2) The provisions having a sunset date will not be modified to advance the sunset date nor will the sunset dates provided in the Act be extended.
3) In case of tax incentives with no terminal date, a sunset date of March 31, 2017 will be provided either for commencement of the activity or for claiming of benefit, depending upon the structure of the relevant provisions of the Act.
4) There will be no weighted deduction with effect from March 31, 2017.
Thus, it is clear that corporate tax rate would be reduced and some tax exemptions will be rationalized in the ensuing budget 2016.
Tax incentives for start-ups
The Government of India has announced ‘Start-up India’ initiative for creating a conducive environment for start-ups. So, it is very likely that big announcements would be made in upcoming Budget 2016 to promote start-ups in India.
As per recent notification issued by the Ministry of Commerce and Industry, Government of India, an entity shall be considered as a ‘start-up’:
a) For a period of five years from the date of its incorporation/registration;
b) If its turnover for any of the financial years does not exceeded Rs. 25 crore; and
c) It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
However, any such entity formed by splitting-up or reconstruction of a business already in existence shall not be considered a ‘start-up’.
The tax incentives which could be proposed for Start-ups in Union Budget 2016 are as under:
a) Exemptions may be proposed in respect of a capital gain arising in respect of investment made in the Start-up eco-system.
b) Profits of Start-up may be exempted from income-tax for a period of 3 years. The exemption may be available subject to non-distribution of dividend by the Start-up;
c) Consideration received by a start-up for issuing shares at a price higher than its fair market value may not be taxable as income from other sources in the hands of start-up under section 56(2)(viib) of the Income-tax Act.
Disallowance under Section 14A should be reconsidered
a) Dividend income and share in profit of firm should not be treated as exempt income for Section 14A disallowance as these incomes always suffer economic taxation.
b) Section 14A disallowance should not exceed amount of total expenditure claimed under any provision of the Act.
Such recommendations are in line with the report submitted by the Income Tax Simplification Committee headed by Hon’ble Justice R.V. Easwar.
Amendments needed in MAT provisions
Corporate India gleefully greeted the Budget 2015 when the Finance Minister announced the scaling down of corporate tax rate in the next 4 years to finally halt at 25 percent. In the backdrop of slowdown of economies across the globe, corporate India might be tempted to seek some tax benefits to spur growth in India by way of amendments to certain tax provisions, besides reduction in tax rates in the ensuring budget.
Such reduction in the corporate tax rate would not be able to achieve cherished objective of the corporate sector if such benefits are taken back by way of Minimum Alternative Tax. Thus, it is recommended as under:
a) Relief from applicability of MAT should be allowed to foreign companies if they do not have PE in India;
b) Interest under sections 234B and 234C should not be levied for default/deferment in payment of advance tax when the income is assessed under MAT provisions;
c) Unutilized MAT credit should be allowed to successor in cases of business reorganization;
d) Long-term capital gains exempt under Section 10(38) should be exempt from levy of MAT as well; and
e) No disallowances should be made under section 14A while computing book profit in terms of section 115JB.
Applicability of Section 206AA if tax rate under treaty is more beneficial
As per section 206AA where the deductee does not furnish the PAN, tax shall be deducted at source at higher of the following rates:
a) rate specified in the relevant provision of this Act; or
b) rate or rates in force; or
c) 20%.
As per provisions of Section 90, non-resident taxpayers (to whom provisions of DTAA are applicable) shall apply provisions of the Income-tax Act or DTAA whichever, is more beneficial to them. However, due to application of Section 206AA such non-residents are taxed at higher rate of 20% even if tax rates under treaty are beneficial. In certain judicial precedents it was held that section 206AA, being just a procedural section relating to recovery of tax, cannot override section 90(2) and upheld the TDS at rates as per DTAA.
Thus, this issue needs to be clarified in the ensuing Budget.
Transfer Pricing and Marketing intangibles
Marketing intangibles have been one of the most contentious issues in Indian Transfer pricing litigation history. With a number of game changing and landmark rulings rolled out in 2015, a level playing field has been created in the matter. However, there is still room for more clarity to be provided as the matter travels to The Supreme Court, for the multinationals to take steps to mitigate onerous litigation and tax exposure in the matter.
It is recommended that following transfer pricing issues should be addressed to in the ensuing Finance Bill, 2016:
a) Whether AMP expense could be considered as an international transaction?
b) Whether Bright line test should be applied to identify excess AMP expenses?
c) Whether direct marketing, sales promotion and selling expenses should form part of AMP expense?
d) Aggregation of closely linked transactions in case of marketing intangibles.
DTAA benefit should be allowed on basis of self-declaration instead of TRC
Non-residents in India intending to avail benefit under the DTAA between India and any other country need to produce a certificate of his being resident, i.e., Tax Residency Certificate (‘TRC’) from the tax authorities of the country of which he is a resident. It poses a few challenges, which are given hereunder:
a) Many of the countries follow calendar year as the tax year. Therefore, when claiming benefit for the Indian fiscal year (from April 1 to March 31), TRCs for two tax years of that country would be required, which may not be available at the same time. Therefore, the tax benefit for the entire Indian FY may not be claimed together.
b) Many countries may not have any provision under their tax laws for issuance of TRC. It implies that the benefit under the tax treaty, which is otherwise available, cannot be claimed just because TRC is not issued by foreign country, although the individual qualifies as resident in the foreign country.
c) Obtaining TRC is time taking and is not an instant process. Foreign tax authorities need to review details furnished by an individual before issuing TRC. Also, many countries issue TRC only after the tax return for the year for which TRC is sought has been filed and processed by the tax authorities. A dilemma is often caused taxpayers whether to claim treaty benefit in India pending the receipt of TRC at the time of filing the Indian tax return. This is because requirement in the tax return forms to mention the TRC details
Thus, it would be a welcome move if the provisions of the Indian income-tax laws are amended to enable the individual to claim the DTAA benefit based on self-declaration or foreign tax return to avoid these challenges.
Interest on refund arising on excess payment of self-assessment tax
Section 244A of the Act, deals with the grant of interest on refund of any amount of tax, which becomes due to the assessee in terms of the provisions of the Act. The section was inserted in the statute as a measure of rationalization, to ensure that the assessee was duly compensated by the Government by way of payment of interest for monies legitimately belonging to him and wrongfully retained by the Government without any gaps.
Though section 244A starts with the words ‘refund of any amount of tax’, yet when we talk about eligibility of interest on amount of refund which is deposited by the taxpayers by way of self-assessment tax under section 140A, the same is highly debatable issue and has been a subject matter of litigation.
So, it is recommended to amend section 244A to allow interest on refund arising due to excess payment of self-assessment tax.
Clarity needed on taxability of Joint Development Agreements
For development of real estate, concept of joint development arrangement has emerged as a popular model wherein land owner and developer combine their resources and efforts. Under a typical joint development agreement, land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost. Thus, land is contributed by the land owner and the cost of development and construction is incurred by the developer.
The land owner may get consideration in the form of either lump sum consideration or percentage of sales revenue or certain percentage of constructed area in the project, depending upon the terms and conditions agreed upon between them. In this manner, the resources and efforts of land owner and developer are pooled together so as to bring out the maximum productive results.
There is no clear cut guideline under the Income-Tax Act to determine the taxability of joint development agreements. Thus, guidelines prescribed by judicial precedents have to be considered to determine taxability of land owner and developer. However, divergent views have been expressed by the Courts on certain complex issues in case of Joint Development Agreements. It is expected that in the forthcoming Union Budget 2016-17 clarity may be brought out with respect to taxability of Joint Development Agreement.
Taxability of secondment arrangements
Under a typical secondment arrangement, the seconded employees/assignees are transferred to the host country entity (the Indian entity) to work on special assignments, which are generally technical or managerial in nature. For the period under secondment, the secondees work under the direction, control and supervision of the Indian entity. Through the seconded employees the investors are able to efficiently nourish their investments in India. However, there are no clear cut guidelines to determine taxability in secondment arrangements. Thus, the secondment agreements have led to legal wrangle’s between revenue and foreign entities.
The Indian Revenue alleges that that foreign entity ultimately exercises its powers and it is the real and economic employer of the secondees. Consequently, the foreign entity has a presence in Indian through its employees and thus has a service PE in India.
Furthermore, in situations where it is not possible to attract service PE, the revenue alleges that the reimbursement of salaries of secondees by the Indian entity is in the nature of ‘fees for technical services under the provisions of Indian tax laws/tax treaty.
It is recommended that in the forthcoming Finance Bill, 2016 the stand of revenue on taxability of sum paid under secondment agreements should be made clear. (more…)
ROLE OF DEEMING FICTION OF SEC. 50C TO CLAIM RELIEF UNDER SEC. 54/54F
Section 50C of the Income-tax Act (the Act) was introduced with effect from 1st April, 2003 by the Finance Act, 2002. The purpose of this section was explained thus by the Memorandum to the Finance Bill 2002:
“The Bill proposes to insert a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property.
It is proposed to provide that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration, and capital gains shall be computed accordingly under section 48 of the Income-tax Act.”
When this provision was introduced the Legislature would not have envisaged that so much of controversy would arise as has happened already.
To illustrate the following few case laws may be gone through-
The Mumbai Bench of ITAT in the case of Raj Babbar v. ITO [2013] (Mumbai – Trib.) held that where investment in new asset was more than net consideration received as well as full value of consideration computed as per section 50C, assessee would not be chargeable to capital gains.
The Indore Bench of ITAT in the case of Dhanveer Singh Gambhir v. ITO [2015] (Indore – Trib.) decided in favour of Revenue by holding that while allowing deduction under section 54 of the Act from long-term capital gain, provision of section 50C was not applicable.
The Bangalore Bench of ITAT in the case of Gouli Mahadevappa v. ITO [2011] 128 ITD 503/[2010]held that for computing Capital Gain, section 50C has to be taken into consideration but the exemption under section 54F or 54 of the Act being a complete Code in itself, exemption has to be worked out as per the provisions of that section itself. This decision which was cited before the Indore Bench in this case was distinguished after making the following observations at para.14 of its order
“As per the provisions of Section 54, exemption is allowable with reference to the amount of Capital Gain and not with reference to the amount of net consideration. Therefore, the issue which arose with reference to exemption under Section 54F wherein exemption is allowed with reference to amount of net consideration does not arise in granting exemption under Section 54.”
The decision of the Bangalore Bench in the case of Gouli Mahadevappa(supra) was approved by the Karnataka High Court on the point of allowing exemption with reference to section 54F of the Act inGouli Mahadevappa v. ITO [2013] 33 . The Karnataka High Court also enlarged the deduction under section 54F of the Act by holding that “where capital gain is assessed on notional basis, whatever amount is invested in new residential house within prescribed period under section 54F of the Act, entire amount so invested, would get benefit of deduction, irrespective of fact that funds from other sources are also utilized for new residential house.” The assessee had claimed, apart from investing the net consideration, a further sum of Rs.4 lakhs invested out of agricultural income under section 54F of the Act and this claim which was negatived till the Tribunal’s stage was allowed by the High Court.
The ITAT Jaipur Bench in the case of Nand Lal Sharma v. ITO [2015] (Jp. – Trib.)following the decision of the Delhi High Court in the case of CIT v. Smt. Nilofer I. Singh [2009] (Delhi) held that while computing exemption under section 54 of the Act, actual sale consideration has to be taken into consideration and not stamp duty valuation under section 50C of the Act. The Delhi High Court in Smt. Nilofer I. Singh’s case (supra) held that “the expression ‘full value of consideration’ used in section 48 does not have any reference to market value but only to consideration referred to in sale deeds as sale price of assets which have been transferred”.
The Mumbai Bench of ITAT in the case of Bhaidas Cursondas & Co. v. Addl. CIT [2015] (Mum.) has held that deeming provision under section 50C applies to compute capital gains and not to determine written down value of relevant block of assets. (more…)
CBDT had issued Clarifications for implementation of FATCA and CRS Vide Press release dated 19.02.2016
ITAT: Rejects double-deduction on BSE membership card; Special provisions u/s 50 override Sec 55(2)(ab) [TS-75-ITAT-2016(Mum)]
IT: Tax cannot be levied on assessee at a higher amount or at a higher rate merely because assessee, under a mistaken belief or due to an error, offered income for taxation at that amount or that rate [2016] 66 taxmann.com 181 (Rajkot – Trib.) ACIT v. Rupam Impex
Compensation received in connection with termination of share purchase agreement to be taxed as revenue receipt [2016] 66 taxmann.com 183 (Himachal Pradesh) Avantor Performance Materials India Ltd. v. CIT
IT: Penalty u/s 271(1)(c) – the return which was filed on the basis of the certificate issued by the Chartered Accountant though under mistake the assessee could take the benefit on the basis of bonafide belief – CIT-3, Ludhiana Vs. S.S. Food Industries (2016 (2) TMI 517 Punjab & Haryana High Court)
IT: Section 194C(2) had no application when the Union was merely acting in representative capacity and there was no separate contract between the Union and its members (truck operators) for performance of the work – CIT-I, Ludhiana Vs. Truck Operator Union (2016 (2) TMI 520 Punjab & Haryana High Court)
ITAT: False claim supported by CA opinion irrelevant, upholds Sec 271(1)(c) penalty [TS-74-ITAT-2016(CHNY)]
IT: Deduction u/s 80-IA – Whether the Tribunal was right in holding that the deduction under Section 80-IA is not allowable at all to the assessee since there was no taxable income though the unit eligible for deduction had net profit – Held Yes – Sanra Software Ltd. Vs. DCIT, Chennai (2016 (2) TMI 574 Madras High Court)
IT: Advance Rulings – it serves no purpose and certainly not that of the Petitioner to pronounce on the validity of the portion of clause (i) of Section 245R(2) of the Act that exempts resident PSUs from the bar of that provision to be violative of Article 14 of the Constitution – Hyosung Corporation Vs. AFR & ANR (2016 (2) TMI 575 Delhi High Court)
ST: CESTAT dismissed the appeal for non prosecution – The order passed by the CESTAT with regard to the non-appearance of the Assessee is cryptic and devoid of reasons. The reasons are the soul of the Judgment. The order passed without giving reasons cannot be sustained – Empee Distilleries Ltd. Vs. DCST (2016 (2) TMI 581 Madras High Court)
ST: Refund of service tax on the basis of Credit Note – value of services provided (sharing of expenses) earlier got reduced as per the mutual agreement – refund allowed – Piramal Enterprises Ltd. Vs. CST, Mumbai (2016 (2) TMI 545 CESTAT Mumbai)
CBEC has notified the Service Tax and Central Excise (Furnishing of Annual Information Return) Rules, 2016 which shall come into force from 1st April, 2016. The Central Board of Excise and Customs will now use the annual information returns to detect tax evasion.
DVAT Created a separate E-commerce Zone and Ward No.300 for E-Commerce Companies.
Service Tax : Flying training services provided by an approved flying training institute are not liable to service tax, as services fall within meaning of ‘qualification recognized by law’
[2016] 66 taxmann.com 180 (Ahmedabad – CESTAT) Ahmedabad Aviation & Aeronautics Ltd. v. Commissioner of Service Tax
All services provided by Govt. to business entities would be taxable from April 1, 2016
No service-tax on services provided by Govt. to business entities having turnover below 10 lacs
CG appointed 1th day of April, 2016 as the date with effect from which all the services provided by the Government or local authority to a business entity, except the services that are specifically exempted, or covered by any another entry in the Negative List, shall be liable to service tax i.e. the provisions of Section 109(1) as contained in the Finance Act, 2015 shall come into effect w.e.f. 01.04.2016 Vide Notification No. 06/2016-Service Tax dated 18.02.2016
CG also exempted the services provided by Government or a local authority to a business entity with a turnover up to rupees ten lakh in the preceding financial year w.e.f. 1.4.2016 Vide Notification No. 07/2016-Service Tax dated 18.02.2016.
Delhi VAT Commissioners vested with power to specify dealers who have to furnish returns with digital signature (more…)
CORPORATE & PROFESSIONAL UPDATE FEBRUARY 20, 2016 Direct Tax Bogus purchases – CIT(A) was fully justified in deleting the addition made by the AO on account of alleged bogus purchases particularly when the GP rate declared by the assessee was progressive and was accepted by the AO. – ITO, Ward 2 (2) , Ghaziabad Versus Ray …
CORPORATE AND PROFESSIONAL UPDATE FEBRUARY 19, 2016 INCOME TAX ACT SECTION 4 INCOME – CHARGEABLE AS Interest : Where assessee engaged in generating electric power, kept margin money in form of fixed deposits for procurement of various capital goods for setting up of power project, interest earned on said deposits would be in nature of capital receipt not …