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2020

2 April 2020

Glimpses of “The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020”

Key highlights of “The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020”

Background:

The Ministry of Finance vide press releasedated 24 March 2020, had announced various relief measures taken by the government on statutory and regulatory compliance matters in view of the outbreak of COVID–19. Deloitte alert of 25th March 2020 on the same can be accessed from the link given: https://www2.deloitte.com/in/en/pages/tax/articles/global-business-tax-alert.html.

Since the Parliament is not in session, the President of India has promulgated The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (Ordinance 2020)2  which has been published in the Gazette of India on 31 March 2020.

The Ordinance 2020 provides for relaxations in the provisions of the following “Specified Act”:

  • Wealth Tax Act, 1957;
  • Income Tax Act, 1961;
  • Prohibition of Benami Property Transactions Act, 1988;
  • Chapter VII of the Finance (No. 2) Act, 2004 relating to securities transaction tax;
  • Chapter VII of the Finance Act, 2013 relating to commodities transaction tax;
  • Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015;
  • Chapter VIII of the Finance Act, 2016 relating to equalisation levy;
  • Direct Tax Vivad se Vishwas Act, 2020;

The Ordinance 2020 also provides relaxations in the following indirect tax laws:

  • Central Excise Act, 1944
  • Customs Act, 1962;
  • Customs Tariff Act, 1975;
  • Chapter V of the Finance Act, 1994 relating to service tax; 
  • Finance (No. 2) Act, 2019 relating to Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019; and 
  • Central Goods and Services Tax Act, 2017

Coming into force:

The Ordinance 2020 shall come into force at once, unless specified otherwise.
The key amendments with respect to various timelines and compliance matters are summarised hereunder:

Direct Tax

  • Where any time limit has been specified in or prescribed or notified under the Specified Act, which falls during the period 20 March 2020 to 29 June 2020, or such other date as the Central Government may notify for completion or compliance of the following action as:

- Completion of any proceedings or passing of any order or issuance of any notice, intimation, notification, sanction or approval, or such other actions by whatever named called by any authority, commission or Tribunal by whatever name called under the provisions of the specified Acts;

- Filing of any appeal, reply or application, or furnishing of any report, document, return, statement, or such other record under the provisions of the Specified Acts.

  • The press release generally provided that the time limit expiring between 20 March 2020 to 29 June 2020 for making investments in saving instruments or investments for roll over benefit of capital gains shall be extended to 30 June 2020. The Ordinance 2020, provides that the time limits expiring between 20th March 2020 to 29th June 2020 for making investments, deposit, payment, acquisition, purchase, construction or such other action in order to claim deduction, exemption or allowance under sections 54 to 54GB or under any provisions of Chapter VI-A under the heading “B – Deductions in respect of certain payments” of the Income-tax Act, shall be extended to 30 June 2020. 
  • The time limit to begin to manufacture or produce articles or things or provide any services during the previous year ended 31 March 2020 by the SEZ units for the purpose of claiming deduction under section 10AA of the Income-tax Act, 1961, has been extended to 30 June 2020, only for those units which have been issued the letter of approval as per the provisions of Special Economic Zones Act, 2005 by 31 March 2020. 
  • The Central Government may specify different dates for completion or compliance of different actions. 
  •  The above relaxation / extension of time limit for compliance of the provisions of Specified Act shall not include payment of any amount of tax/levy as discussed hereunder. 
  • Where any due date has been specified in or prescribed or notified under the Specified Act for payment of any amount of tax or levy by whatever name called which falls for payment during the period 20th March 2020 to 29th June 2020 or such other date after 29 June 2020 as the Central Government may notify, and such amount has not been paid within such date and has been paid by 30 June 2020 or a date to be notified by the Central Government, then the rate of interest payable if any in respect of such amount for the period of delay shall not exceed 3/4th percent for every month or part thereof. 
  • Further no penalty shall be levied and prosecution shall not be sanctioned for the delay in making aforesaid payments.
  • Income received by Prime Minister Citizen Assistance and Relief in Emergency Situation Fund (PM CARES Fund) is exempt from income-tax under section 10(23C)(i) of the Act. 
  • Section 80G of the Income-tax Act has been amended for including PM CARES Fund in sub-clause (iiia) to clause (a) of section 80G(2) of the Income-tax Act. Accordingly, donation made to the PM CARES Fund should be eligible for 100 percent deduction under section 80G of the Income-tax Act, 1961. Further, the limit on deduction of 10 percent of gross total income should also not be applicable for donation made to PM CARES Fund. However as per section 80G(5D) no deduction shall be allowed under this section in respect of donation of any sum exceeding INR 2000 unless such sum is paid by any mode other than cash.
  • Section 3 of the Direct Tax Vivad se Vishwas Act, 2020 has been amended. Under the Vivad se Vishwas Act, if a taxpayer opts under the Act for withdrawal of appeals, the taxpayer is required to pay 100 percent of the disputed tax if paid by 31 March 2020, and if paid after 31 March 2020, 110 percent of the disputed tax is payable. Under the Ordinance 2020, it is provided that additional 10 percent amount shall not be payable if the amount is paid by 30 June 2020.

Indirect Tax

  • Time limit of certain compliances under customs, central excise and service tax laws has been extended in the following manner:

- Any time limit, falling between 20 March 2020 to 29 June 2020, for completion of any proceedings or issuance of any order, notice, intimation, notification or sanction or approval, by any authority, commission or tribunal has been extended to 30 June 2020 or any later date to be notified by the government in this regard.

- Any time limit, falling between 20 March 2020 to 29 June 2020, for filing of appeal, reply or application or furnishing of any report, document, return or statement has been extended to 30 June 2020 or any later date to be notified by the government in this regard.

  • With respect to Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (the Scheme), time limit for issuance of statement by the designated committee has been extended in the following manner:

- Where the amount declared by the declarant equals the amount estimated by the designated committee, statement shall be issued till 31 May 2020

- Where the amount estimated by the designated committee is more than the amount declared by the declarant, statement shall be issued till 1 May 2020

- Statement indicating the final amount payable by the declarant shall be issued till 31 May 2020

  • Time limit for payment by the declarant under the Scheme has been extended till 30 June 2020.
  • A new provision has been inserted in the Central Goods and Services Tax Act, 2017 (CGST Act) giving powers to the government, on recommendations of the GST Council, to extend the time limit in respect of actions which cannot be complied / completed due to force majeure by way of suitable notifications. The term “force majeure” means a case of war, epidemic, flood, draught, fire, cyclone, earthquake or any other calamity caused by nature affecting the implementation of the CGST Act.

Observations:

  • The Ordinance 2020 gives effect to the announcements made by the Finance Minister recently due to the outbreak of COVID-19. The extensions provide some relief, both to the Revenue as well as taxpayers, in complying with the provisions of various legislations.
  • The Ordinance 2020 has provided powers to the Central Government to extend the timelines post 29 June 2020 so further changes should not require amendments to the law and can be done through notifications.
  • The Ordinance 2020 has extended the time limit to file original as well as revised income-tax returns for the FY 2018-19 (AY 2019-20) to 30th June, 2020, as also extension of Aadhaar-PAN linking date to 30th June, 2020.
  • The extension of time limit provided to the SEZ units to begin manufacture or produce or provide services for claiming deduction under section 10AA of the Income-tax Act, is a welcome move and would certainly help to address some of the issues faced by SEZ units.
  • The Ordinance 2020 allows for time to make investments until 30 June 2020 for claiming deductions inter alia under section 80C (PF, PPF, LIC Premium, etc], 80CCD (contribution to NPS], 80D (medical insurance premium, etc), 80G (Donation) etc under Chapter VI-A of the Income-tax Act, 1961 from total income for the financial year 2019-20.
  • The Ordinance 2020 provides for time to make investments in specified securities / purchase or construct property until 30 June 2020 for the purpose of claiming deduction under section 54 to 54GB from long-term capital gains arising on transfer of specified capital asset during the FY 2019-20.
  • The date for payment of donations has been extended up to 30 June 2020 for claiming deduction under section 80G of the Act, the donation made up to that date should also be eligible for deduction from the income of the financial year 2019-20. Hence, any person, including corporates, paying concessional tax rate on income of FY 2020-21 under new regime can make donation to PM CARES Fund up to 30 June 2020 and can claim deduction u/s 80G against income of FY 2019-20 and shall also not lose eligibility to pay tax in concessional taxation regime for income of FY 2020-21.
  • The government has not extended the timeline for making payment of taxes but has reduced the rate of interest leviable if payment of taxes are made by 30 June 2020, for the delay period and also condone the penalty and prosecution for the delay in payment of taxes and levies for the delayed period.
  • Announcements on extensions around GST compliances, which are expected as notifications, need to be looked out for next.

 
1https://pib.gov.in/PressReleseDetail.aspx?PRID=1607942
2http://egazette.nic.in/WriteReadData/2020/218979.pdf

1 April 2020

Interest paid by an Indian branch of US bank is not taxable under the Act, being payment to self, prior to AY 2016-17

Explanation (a) to section 9(1)(v)(c) of the Income-tax Act, 1961 inserted by Finance Act, 2015 is prospective in nature and cannot be applied prior to AY 2016-17 The Mumbai Tribunal in JP Morgan Chase Bank N.A has held that interest paid by an Indian branch of a US bank to its head office/ overseas branches shall not be deemed to accrue or arise in India for any assessment year prior to AY 2016-17.

Facts of the case:

JP Morgan Chase Bank N.A. (the taxpayer)1 is a non-resident banking company incorporated in USA. The taxpayer carries on its banking activities in India through its branch located in Mumbai. In the return of income filed for the assessment years 2011-12 and 2012-13, the taxpayer has not brought to tax the interest income received from Indian branch and has appended a note explaining in detail the reasoning for not offering such income to tax. In the course of assessment proceedings, the Assessing Officer had made specific enquiry with regard to the interest income earned and accepted the taxpayer’s claim that interest paid by the Indian branch to head office/overseas branches is not taxable as it is considered to be a payment made to self, hence, governed under the principle of mutuality.

Subsequent to completion of assessment, the learned Commissioner of Income-tax (CIT), in exercise of power conferred under section 263 of the Income-tax Act, 1961 (the Act), called for the assessment records for the years under dispute. The CIT has held that the assessment orders passed for the AY 2011-12 and AY 2012-13 are erroneous and prejudicial to the interest of revenue and directed the Assessing Officer to tax the interest income received from the Indian branch by head office/ overseas branches in the hands of the head office/overseas branches. The observations of the learned CIT were as under:-

  • Once the taxpayer opts to be governed under the beneficial provisions of the DTAA and it is accepted that it has PE in India, the single entity approach under the Act gives way to the distinct and independent entity or separate entity approach under the DTAA.
  • The interest is taxable as per Article 14(3)2 of the India USA DTAA.
  • CBDT Circular no.740 dated 17 April 1996 states that the branch of a foreign company in India is a separate entity for the purpose of taxation under the Act.
  • Explanation (a) to section 9(1)(v)(c) of the Act introduced by Finance Act, 2015, w.e.f. 1st April 2016 has also clarified that the interest paid by an Indian branch of a non-resident banking company shall be deemed to be accruing or arising in India and shall be chargeable to tax in addition to any income attributable to the PE in India. The explanation further says that the PE in India shall be deemed to be a person separate and independent of the non-resident person. The learned CIT was of the view that the aforesaid explanation should apply retrospectively since such amendment is clarificatory in nature.
  • The decision of Special Bench of the Mumbai Tribunal in the case of Sumitomo Mitsui Banking Corpn.3 has not been considered by CIT since such decision had not considered various arguments provided by him in the context of treaty provisions.

Aggrieved by the order passed by CIT, taxpayer preferred an appeal before the Income Tax Appellate Tribunal (ITAT).

Decision of ITAT:

  • The Tribunal observed that the issue of taxability of the interest paid by the Indian branch to the head office/other overseas branches of non-resident banking company is squarely covered by the decision of the Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corpn. (supra). The Special Bench after considering all the aspects of the issue, including the interplay between the provisions of the Act and the Tax Treaty, has held that the interest paid by the Indian branch to foreign head office/overseas branches is in the nature of payment made to self, will be governed by the principle of mutuality and hence would not be taxable under the provisions of the Act. Since the provisions of the Act are more beneficial to the taxpayer, it will prevail over the provisions of the Tax Treaty as per section 90(2) of the Act.
  • Further, the Special Bench decision also referred to the CBDT Circular no.740 dated 17 April 1996, and held that if the interest income is not chargeable to tax under the provisions of domestic law, it cannot be brought to tax by way of a Board circular.
  • To nullify the effect of the Special Bench decision, the legislature had thought it prudent to make amendment to the provisions of section 9(1)(v)(c) of the Act. Accordingly, the amendment was made to the aforesaid provision by introducing Explanation (a) and (b) by Finance Act, 2015, w.e.f. 1st April 2016. The Tribunal has held that the aforesaid explanation would apply prospectively with effect from 1st April 2016 and not prior to that. Similar view has been expressed by the Co-ordinate Bench in the case of BNP Paribas S.A4.
  • Assuming for the sake of argument that Explanation (a) to section 9(1)(v)(c) of the Act will apply retrospectively, the Tribunal held that proceedings under section 263 of the Act cannot be initiated on the basis of retrospective amendment as the Assessing Officer has to proceed on the basis of law prevailing as on the date of assessment and the order passes cannot be considered to be erroneous or prejudicial to the interest of revenue. 

Observations:

India USA DTAA has a specific Article 14(3) for taxation of such interest income received by the HO from the Indian branch of the US Bank. However since such interest income was not taxable under domestic tax law prior to AY 2016-17, such interest income was held to be not taxable in India for the AY 2011-12 and 2012-13.

The issue with respect to the prospective or retrospective applicability of Explanation (a) to section 9(1)(v)(c) of the Act has been a matter of debate. It is a settled principle of statutory construction that every statute is prima facie prospective unless it is expressly or by necessary implications made to have retrospective operations. The Tribunal has observed that Explanation (a) to section 9(1)(v)(c) of the Income-tax Act, 1961 inserted by Finance Act, 2015, is prospective in nature and cannot be applied prior to AY 2016-17. Therefore, interest paid by an Indian branch of a non-resident banking company to the head office/ overseas branches should not be deemed to accrue or arise in India under section 9(1)(v)(c) of the Act for any assessment year prior to AY 2016-17.

 

1114 taxmann.com 700

2Article 14(3) of the India USA DTAA - In the case of a banking company which is a resident of the United States, the interest paid by the permanent establishment of such a company in India to the head office may be subject in India to a tax in addition to the tax imposable under the other provisions of this Convention at a rate which shall not exceed the rate specified in paragraph 2(a) of Article 11 (Interest).

319 taxmann.com 364/136 ITD 66

4109 taxmann.com 391

31 March 2020

COVID 19 - Extension of Nil or Lower TDS /TCS Certificate to 30 June 2020

CBDT Notification granting relief for lower / Nil 195/197/206C certificate The Central Board of Direct Taxes (CBDT) vide order under section 119 dated 31 March 2020, provided extensions/clarifications to the applicants of certificates for lower or nil tax deduction/collection at source, under section 195/197/206C of the Act for the FY 2020-21.

Background:

Recognising the disruption caused due to COVID-19 pandemic, in the functioning of most sectors including the Income-tax Department and to mitigate the hardship caused to taxpayers, the CBDT on 31 March issued a notification easing the requirements of making an application for issue of certificates for lower or Nil tax deduction at source (TDS) or tax collection at source (TCS), for the Financial Year (FY) 2020-21.

The approach in this regard adopted by the CBDT is as under:

Extension:

  • In case of those assessees who have applied for a nil or lower rate of TDS on the TRACES portal [section 197 / 206C(9)] for FY 2020-21, which are pending disposal as of date and who have been issued a certificate for the preceding FY 2019-20, such certificate shall be applicable till 30 June 2020 for FY 2020-21, or disposal of their applications by the Assessing Officer (AO), whichever is earlier.
  • In case of those assessees who could not apply for FY 2020-21 on the TRACES portal [section 197 / 206C(9)] and who have been issued a certificate for FY 2019-20, such certificate shall be applicable till 30 June 2020 for FY 2020-21. However, such assessees are required to make an application for issue of certificate for FY 2020-21 at the earliest, giving details of transactions, deductor/collector of the TDS/TCS to the AO, as soon as normalcy is restored or 30 June 2020, whichever is earlier as per the modified procedure as detailed hereunder.
  • With respect to payments to non-residents (including foreign companies) having a Permanent Establishment (PE) in India who are not covered by the situations mentioned above (i.e. they do not have an existing lower / nil TDS certificate for the FY 2019-20), tax is to be deducted at 10 percent plus surcharge and cess on payments to be made till 30 June 2020, or disposal of their applications, whichever is earlier.

Modified procedure:

  • Those assessees who have not applied for Nil or lower TDS/TCS certificate in the TRACES portal and who do not have a certificate for FY 2019-20, are required to make an application as per the modified procedure.
  • The modified procedure for application under sections 197/206C(9) is briefly stated below:

- Applications to be made via email to the concerned AO

- ­Email should contain the following data and documents:

- Duly filled Form 13 along with Annexure I or III as applicable;
- Details which otherwise are required to be uploaded on TDS-CPC website while filling up Form 13;
- Projected Balance Sheet (BS) and Profit & Loss (P&L) Account for FY 2020-21;
- Provisional BS and P&L Account for FY 2019-20;
- BS and P&L Account for FY 2018-19;
- Form 26AS for FY 2019-20 & 2018-19
- Income tax Return (ITR) Form for FY 2018-19.

  • The existing process for making applications under section 195(2) and 195(3) will continue to apply except that such applications need to be made via email to the concerned AO. The certificates under the said sections will be issued by email mode.
  • The certificates under the modified procedure shall be issued up to 30 June 2020 or any other date earlier to it, as specified by the AO communicated by email to the applicant containing the following information:
Sr no. TAN of the Deductor
PAN of the Deductee Financial Year Section under which TDS/TCS Estimated Account of income/sum to be received/paid Applicable rate of deduction/ collection Valid from Valid to
                 

The issuance of the certificate will be communicated to the applicant who can share the same with deductor / collector

Observations:

As per the Notification, we observe that the extension of existing certificates is for certificates issued under section 197/ 206C of the Act through TRACES, while certificates under section 195(2) and 195(3) of the Act for FY 2020-21 have to still be applied by email and the certificates issued by email.

Existing certificates under 197 of the Act for FY 2019-20 contain details of deductor as also the amounts payable during the relevant FY and the lower rate of tax. In light of the notification, since existing certificates are extended till 30 June 2020 or earlier, the amount covered per deductor for the FY 2020-21, should be considered proportionately to the amount covered in the certificate for FY 2019-20 for that particular deductor.

The timely clarification by the CBDT and extension of existing nil or lower TDS/TCS certificates for FY 2019-20 till 30 June 2020 for FY 2020-21, is much sought after relief given to taxpayers in the volatile situation caused due to the pandemic and consequent lockdown.

Source: Notification No. F.No.275/25/2020-IT(B) dated 31 March 2020

28 March 2020

Parliament enacts Finance Act 2020 with amendments in certain Finance Bill 2020 proposals

The Finance Bill, 2020 has been passed by the Parliament as Finance Act 2020 with amendments

Background

In the wake of the country-wide lockdown for dealing with the global Corona virus crisis, India’s Parliament, just before adjourning, enacted the Finance Bill 2020 (FB 2020) which contains the tax proposals for the coming Financial Year 2020-21. The Finance Act has now received Presidential assent on 27 March 2020.
The provisions of the Finance Act 2020 (FA 2020) will now get incorporated in the Income-tax Act, 1961 (Act) from 1 April 2020. Exceptionally, a large number of amendments, about 59, have been incorporated while passing FA 2020. This includes an entirely new form of Equalisation Levy on foreign e-commerce operators on their revenues earned from India.

The earlier Deloitte Publication on the Finance Bill 2020 can be accessed here.

Highlighted below are the key amendments to FB 2020 while enacting FA 2020.

Amendments to the Finance Bill, 2020

We have highlighted below, the key amendments to the Finance Bill 2020 (FB 2020):

Sr. No.

Provision per Finance Bill, 2020 [FB 2020]

Amendments to the provisions of  FB 2020 made by Parliament while passing it as Finance Act 2020 [FA 2020]

1

Equalisation Levy under Chapter VIII of the Finance Act, 2016

 

Currently, an Equalisation Levy (introduced through FA 2016) is levied at the rate of 6% on specified services received from a non-resident. Currently, the specified services cover online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement. The government may also notify other services. The levy is to be collected and deposited by the payer who is receiving the specified service.

FB 2020 had no new provisions regarding Equalisation Levy.

FA 2020 has now introduced a new provision (Section 165A in FA 2016) to enhance the scope of the Equalisation Levy. Equalisation Levy will now be extended to an e-commerce operator on ‘e-commerce supply and services’ undertaken on or after 1 April, 2020.

An “e-commerce operator” has been defined to mean a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.

“e-commerce supply and services” has been defined to mean:

(i)     online sale of goods owned by the e-commerce operator; or

(ii)    online provision of services provided by the e-commerce operator; or

(iii)   online sale of goods or provision of services or both, facilitated by the e-commerce operator; or

(iv)   any combination of the above activities

With regard to the above, the Equalisation Levy shall not be levied

(i)     where the e-commerce operator has a Permanent Establishment (PE) in India and the e-commerce supply or service is effectively connected to its PE.

(ii)    where Equalisation Levy is already levied on online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement.

(iii)   where sales, turnover or gross receipts of the e-commerce operator from the e-commerce supply and services is less than INR 2 crore during the previous year.

This Equalisation Levy will be at the rate of 2% on the amount of consideration from e-commerce supply and services made or provided or facilitated by an e-commerce operator to:

(i)     a person resident in India

(ii)    a non-resident in the following specified circumstances:

(a)  Sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement through internet protocol address located in India.

(b)  Sale of data, collected from a person who is resident in India or uses internet protocol address located in India.

(iii)   To a person who buys such goods or services or both using internet protocol address located in India.

Consequent to this new Equalisation Levy, an amendment has been made to section 10(50) of the Act. Income arising from e-commerce supply or services which will be covered by the Equalisation Levy will now be exempt from tax under section 10(50).

Our comments:

This amendment to the Equalisation Levy provisions now introduces a kind of digital tax on non-resident e-commerce operators at 2% on the revenue they generate in India from e-commerce supply or services. This levy has to be deposited by the e-commerce operator and not by the buyer of the supply or service. These non-resident e-commerce operators will therefore now need to arrange to compute and deposit Equalisation Levy on their India related revenue from e-commerce supply and services.

2

Exemption of income earned by Foreign Pension Funds from investments in Indian infrastructure enterprises

 

FB 2020 proposed to insert a new clause [section 10(23FE] to exempt income from dividend, interest and long term capital gains of sovereign wealth funds (and the Abu Dhabi Investment Authority) from their investments in Indian infrastructure enterprises. This exemption relates to investments which are made on or before 31 March 2024 and are held for at least three years.

FA 2020 proposes to extend the exemption to income from dividend, interest and long term capital gains of notified Foreign Pension Funds on investments in an Indian infrastructure enterprise, if such Funds are not liable to tax in the foreign country and satisfy the prescribed conditions. The investment needs to be made in the period between 1 April 2020 and 31 March 2024.

In case of all eligible persons, the exemption is also proposed to be extended to investments made during the above period in:

(i)     A business Trust registered as an Infrastructure Investment Trust under the Securities and Exchange Board of India (SEBI) (Infrastructure Investment Trusts) Regulations, 2014;

(ii)    SEBI regulated Alternative Investment Fund – Category I and II having 100% investment in one or more company/ enterprise/ entity engaged in infrastructure business.

The exempted income is proposed to be taxed in the hands of the exempted persons in the previous year in which the prescribed conditions are not satisfied.

Our comments:

Extension of exemption to notified Foreign Pension Funds and expansion of avenues of investments eligible for exemption will boost direct and indirect investments in the infrastructure sector.

3

Taxation of dividends in the hands of recipient

 

FB 2020 proposes to abolish Dividend Distribution Tax (‘DDT’) in the hands of a domestic company on dividends declared, distributed, or paid on or after 1 April 2020, and the dividend will now be taxed in the hands of the shareholders.

However, the amendment did not provide for relief from taxation in the hands of the shareholder in  a scenario wherein dividend is declared in financial year 2019-20 and paid in financial year 2020-21, and has already been subjected to DDT.

FA 2020 now states that dividends received by shareholders on or after 1 April 2020 on which tax has been paid under section 115-O or section 115BBDA, shall be exempt in the hands of shareholder.

Our comments:

An anomaly in the provisions of FB 2020 that would have created unintended hardship to shareholders on transition from the DDT regime has been removed.

4

Section 80M deduction

 

FB 2020 has reintroduced section 80M to remove the cascading effect of taxes on inter-corporate dividend, since dividend will now be taxed in the hands of shareholders on dividend declared, distributed, or paid on or after 1 April 2020.

Section 80M permits a deduction from the dividend income received by a domestic company from another domestic company of the onward distribution of dividend by the former company before computing the tax payable by the former company on the taxable dividend income.

FA 2020 states that dividend received by a domestic company from a foreign company or a business trust will also be eligible for deduction under section 80M.

Our comments:

The amendment is a welcome relief to shareholders in setting off inter-corporate dividends by allowing foreign dividend to also be set-off, on par with domestic dividends, under section 80M.

5

Taxation of dividend received by the business Trust from special purpose vehicle

 

FB 2020 proposed that dividend received by a business Trust from an SPV would be taxable in the hands of the unitholders of the business Trust, under section 10(23FD).

Prior to the amendment proposed by FB 2020, dividend received by the unitholder from the business Trust was exempt under section 10(23FD).

FB 2020 ( vide section  194LBA), also proposed, in light of the change in the dividend taxation regime to tax dividend in the hands of shareholders, that the business Trust will withhold tax at 10% on dividends it distributes.

FA 2020 has modified this proposed provision of FB 2020. Section 10(23FD) now identifies a specific class of SPVs, i.e. companies which have not opted for a lower rate of tax under section 115BAA of the Act. Dividend from such SPVs received by the business trust and  distributed to unit holders by the business trust will not be subject to tax in the hands of the unit holders under section 10(23FD).

An amendment is also made to withholding provisions in section 194LBA. Withholding on dividend distributed by business trust to its unitholders will not apply in a case where the dividend is from an SPV which has not opted for the lower corporate tax regime under section 115BAA.

Our comments:

This is a measure of relief as a specific class of dividend received by the unitholder from the business trust will now be exempt in the hands of the unit holder.

6

Change in Tax Residency Rule

 

(i)

Currently, under the Income tax Act ( Act), one of the criteria to consider an individual as resident of India is:

·    the individual has been in India for total period of 365 days or more within four years preceding that year; and

·    the individual is in India for a period of 60 days (182 days for Indian citizen / Person of Indian Origin) or more in that year.

In FB 2020, this provision was sought to be tightened in case of an Indian citizen / Person of Indian Origin, by reducing the period of stay in that year to 120 days or more (instead of 182 days or more).

FA 2020 has modified this proposed provision in the FB 2020. It will now cover an Indian citizen/Person of Indian Origin, if that individual’s total income, (other than ‘income from foreign sources’) exceeds INR 15 lakh during the previous year. ‘Income from foreign sources’ has been defined as income which accrues or arises outside India (except income derived from business controlled in or profession set up in India).

Our comments:

This is a relaxation for Indian citizens/Person of Indian Origin, who do not earn substantial income in India (i.e. a total income (excluding income from foreign sources) up to INR 15 lakh).

 

 

(ii)

FB 2020 proposed a new tax residence provision. This was that an Indian citizen who is not liable to tax in any other jurisdiction (by reason of his domicile or residence), shall be deemed to be resident in India.

FA 2020 has modified the proposed provision in FB 2020. It will now cover that Indian citizen whose total income (other than ‘income from foreign sources’) exceeds INR 15 lakh. ‘Income from foreign sources’ has been defined as income which accrues or arises outside India (except income derived from business controlled in or profession set up in India).

Our comments:

This is a relaxation for Indian citizens who do not earn substantial income in India (i.e. a total income (excluding income from foreign sources) up to INR 15 lakh).

Ambiguities remain regarding who will actually get covered under this new provision given disputes about the meaning of ‘liable to tax’ and that India has numerous tax treaties with other jurisdictions where tax disputes (including disputes regarding tax residency of a person who is considered tax resident in both countries) need to be resolved bilaterally.

 

(iii)

Currently, under the Act, for qualifying to be a ‘Not Ordinarily Resident’ under the tax residence provision, the individual needs to fulfill two conditions - that the individual:

·   has been a non-resident in India in 9 out of 10 previous years, or

·   has been in India for 729 days or less in 7 previous years.

FB 2020 proposed that the dual conditions above be replaced by one condition i.e. that the individual has been a non-resident in India in 7 out of 10 previous years.

This proposed provision in FB 2020 has been withdrawn so that existing dual conditions in the Act for an individual to qualify to be “Not Ordinarily Resident” (NOR), are retained.

Our comments:

This is reversion to the earlier thresholds.

Further, owing to the  new provisions under FA 2020 regarding tax residency of individuals,  the following individuals would now qualify to be NOR:

·    an Indian citizen or person of Indian origin with total income, other than income from foreign sources, exceeding INR 15 lakh during the previous year and who has been in India for 120 days or more but less than 182 days; or

·    Indian citizen who is deemed to be resident (i.e. Indian citizen with total income, other than income from foreign sources, exceeding INR15 lakh during the previous year) not liable to tax in any other jurisdiction (by reason of his domicile or residence).

Our comments:

Introduction of an income threshold of INR 15 lakh is a welcome relaxation.

7

Rationalisation of provisions relating to Trusts or institution

 

(i)

This is a new provision introduced in FA 2020 which was not included in FB 2020 earlier.

Currently, in section 10(23C) of the Act, there is an exemption from tax for the income of certain specified funds / Trusts / institutions / universities / other educational institutions / hospitals / other medical institutions, if the income is applied / accumulated wholly and exclusively to the objects for which such entity was established.

Unlike section 11 of the Act (which applies to Trusts), there is no explicit provision in section 10(23C) exempting from tax, voluntary contributions received by such entity with a specific direction that they will form part of the corpus of such entity.

In FA 2020, section 10(23C) has now been amended to clarify that voluntary contributions received by such entity with a specific direction that they will form part of the corpus of such entity, shall not be included in the income of such entity.

Our comments:

This is a welcome clarificatory amendment.

 

(ii)

These are new provisions introduced in FA 2020, which were not included in FB 2020 earlier.

Currently, under section 11 of the Act, voluntary contribution made by a Trust to any other registered Trust or institution is not treated as application of income of such donor Trust, if such contribution is made with a specific direction that they shall form part of the corpus of the donee Trust or institution.

Similarly, currently under section 10(23C) of the Act, voluntary contribution made by certain specified funds / Trusts / institutions / universities / other educational institutions / hospitals / other medical institutions to any Trust or institution registered under section 12AA of the Act is not treated as application of income of such donor entity, if such contribution is made with a specific direction that they shall form part of the corpus of the donee Trust or institution.

In FA 2020, this provision is now proposed to also be extended to voluntary contributions made to certain funds / Trusts / institutions / universities / other educational institutions / hospitals / other medical institutions (specified under section 10(23C) of the Act).

This amendment will be applicable to Trusts (under section 11 of the Act) and to certain specified entities (under section 10(23C) of the Act), who make these contributions.

Our comments:

The tax policy perspective is that a charitable entity should not contribute its funds to another charitable entity and claim such contribution as application of its income. These amendments are in line with this policy.

8

Taxation of Non-Resident (NRs) on income earned in India

 

FB 2020 extended the scope and period for which the concessional withholding tax rate on interest of 5% would apply for specified borrowings under sections 194LC and 194LD, as well as introduced the concessional withholding tax rate of 4% under sections 194LC in respect of long term bonds or rupee denominated bonds issued on or after 1 April 2020 but before 1 July 2023, and is listed on a recognised stock exchange in International Financial Services Centre.

However, section 115A(1)(a)(BA) was not correspondingly amended to reflect the new rate of 4% discussed above.

FA 2020 has now deleted the reference to the tax rate of 5% on interest income under sections 194LC, 194LD and 194LBA(2) under section 115A(1)(a)(BA) and now refer to the tax rates provided in the respective sections viz. 194LC, 194LD and 194LBA(2).

Our comments:

The amendment in section 115A aligns the tax rates as per section 115A with the corresponding withholding tax provisions under sections 194LC, 194LD and 194LBA(2).

 

 

9

Reduced tax rate on income of certain domestic companies and manufacturing companies

 

Under the Act, the lower rate of tax as per section 115BAA and 115BAB of the Act is applicable where the taxpayer foregoes deductions under Chapter VIA except for deduction under sections 80JJAA and 80LA.

FB 2020 had  proposed that with effect from AY 2020-21, companies governed by section 115BAA or section 115BAB shall also be allowed to claim deduction under section 80M (on inter-corporate dividends) of Chapter VI-A.

However, under a separate FB 2020 proposal, section 80M was to take effect from Assessment Year 2021-22.

This mismatch gave rise to an anomaly.

FA 2020 now provides that companies availing the lower rate of tax under sections 115BAA and 115BAB will be eligible to claim a deduction under section 80M with effect from 1 April 2021 (AY 2021-22).

Our comments:

This is an amendment to rectify the anomaly regarding the reference to the assessment year from which the new section 80M applies.

10

Simplified tax regime for individuals and HUF – option to the taxpayer

 

FB 2020 proposed that (under section 115BAC of the Act), individuals and HUFs could exercise the option of lower rate of tax (but with no other available tax deductions) available under section 115BAC. However, in case of Individuals and HUFs with business income, once this option is exercised, they will have to continue with the new regime for that year and all subsequent years. They are allowed a one-time exit from the regime but will then not be able to opt for the lower rate regime again, unless they cease to have income from business.

FA 2020 amends section 115BAC to now mandate that in case of individuals and HUFs who have income either from a business or a profession, once this option is exercised, they will have to continue with the new regime for that year and all subsequent years.

Our comments:

The provision for choosing the lower tax regime has been tightened for individuals/HUFs with income from profession as they will now, also have to continue with the new regime for all subsequent years, once they have opted for this regime. They are allowed a one-time exit from the regime but will then not be able to opt for the lower rate regime again, unless they cease to have income from business or profession.

11

Section 194A – Notification power

 

Section 194A of the Act deals with withholding of tax on interest (other than interest on securities) paid to a resident.

Under section 194A(3)(iii)(f), the Central Government is empowered to notify an institution, association or body or classes of institutions, associations or bodies, for reasons to be recorded in writing, so that their interest income is exempted from the withholding provisions under the section.

FB 2020 did not propose any change to this provision. An amendment to the above provision has been introduced while passing the Finance Act, 2020.

FA 2020 has dropped the notification provision under section 194A(3)(iii)(f) with effect from 1 April 2020. FA 2020 has introduced new provision under section 194A(5). Under this new provision, the Central Government can notify such person or class of persons from whose interest income, deduction of tax is not required to be made or deduction shall be made at lower rate of tax.

Our comments:

The replacement of the earlier notification power of the Central Government by a new one, allows it to notify payments to a person or class of persons in whose case income tax shall be deducted at a lower rate besides the earlier power of notifying those in whose case no tax needs to be deducted at source. It also drops the requirement for the Central Government to record reasons in writing before issuing the notification.

 

12

Section 197A – Notification power

 

The current provisions of section 197A(1F)  grant power to the Central Government to notify payments to an  institution, association or body or class of institutions, associations or bodies on which no tax shall be deducted.

FB 2020 did not propose any amendment to this section.

FA 2020 has amended section 197A(1F) to also grant power to the Central Government to notify payments to these entities on which tax shall be deducted at a lower rate.

 

13

Section 194J - TDS on fees for technical services paid to resident

 

Prior to FB 2020 proposals, the current general rate of 10% TDS under section 194J of the Act applies, among others, to the following:

(i)   fees for professional services

(ii)  fees for technical services

(iii) royalty

FB 2020 proposed to reduce the withholding tax rate applicable to fees for technical services to 2%.

FA 2020 has further amended Section 194J to provide a reduced rate of TDS of 2% on royalty which is in the nature of consideration for sale, distribution or exhibition of cinematographic films.

Our comments:

By way of a separate proposal, FB 2020 modified the definition of ‘Royalty’ (under Explanation 2 to section 9(1)(vi) of the Act) to remove the existing exclusion of the consideration for the sale, distribution or exhibition of cinematographic films from the definition of royalty.

Consequent to this amendment, a lower rate of TDS at the rate of 2 per cent has now been mandated on this new inclusion to royalty i.e. consideration in the nature of sale, distribution or exhibition of cinematographic films.

14

Section 194K - TDS on income distributed by mutual funds to unitholders

 

Prior to FB 2020 proposals, under the Act, the dividend income distributed on units from mutual funds to unit holders was exempt in the hands of the unit holder and dividend distribution tax in the hands of the mutual fund.

FB 2020 proposed to remove distribution tax at the level of the mutual fund and to tax it in the hands of unit holder. Separately, TDS at the rate of 10% (under section 194K of the Act) was proposed on the dividend/income distributed by the mutual fund to its unit holder, if the amount of the dividend/ income exceeds INR 5000 in a financial year.

This raised doubt whether (under the proposed section 194K), the mutual fund would need to do a TDS on the capital gains component arising to the unit holder, on redemption of units.

FA 2020 has now inserted a proviso in section 194 K to state that TDS shall not be applicable if the income of the unitholder from the units, is in the nature of capital gains.

Our comments:

After introduction of FB 2020, the government had clarified (vide a Press Release dated 4 February 2020 that) that TDS is applicable at the rate of 10% only on income distributed on units and no TDS needs to done by the mutual fund on income which is in the nature of capital gains from these units. This clarification has now been incorporated in the statute.

15

Section 194N – Withdrawals in cash

 

Currently, under the Act, Section 194N provides for withholding tax at the rate of 2% on withdrawal of cash (from a bank, co-operative bank and Post Office)  exceeding INR 1 crore in aggregate during the year.

FB 2020 did not propose any change to this provision.

An amendment to the provisions of section 194 N has been made through FA 2020.

Following are the amendments:

(i)     Added a first proviso to section 194N to stipulate that in case of a person who has not filed a return of income for preceding 3 years, tax will be deducted:

(a)  @ 2% on withdrawal exceeding INR 20 lakh and

(b)  @ 5% on withdrawal exceeding INR 1 crore.

These provisions will be applicable from 1st July 2020.

FA 2020 has also added another proviso to section 194N. This empowers the Central Government to notify, in consultation with RBI, persons to whom first proviso to section 194N shall not apply.

Our comments:

The amendments to section 194N which is a TDS on cash transactions have been further tightened. They will now also apply to substantial cash withdrawals by persons who have not been filing their return of income.

16

Section 194-O – TDS by e-commerce operator on payments made to e-commerce participants (sellers)

 

FB 2020 proposed to introduce TDS on e-commerce transactions through a new provision (section 194-O) in the Act.

The definition of ‘e-commerce operator’ under FB 2020 was as under:

“e-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce and is responsible for paying to e-commerce participant.

There were doubts on the application and mode of compliance with these proposed TDS provisions.

FA 2020 has amended the proposed section 194-O.

The amendments are:

(i) to give the Central Government, powers to issue guidelines for removing any difficulties in implementing these TDS provisions.

(ii) to clarify that for the purpose of this new TDS provision, an e-commerce operator means a person who owns, operates or manages a digital or electronic facility or platform for electronic commerce. Such e-commerce operator would be liable for TDS even if it is not responsible for paying to an e-commerce participant.

Our comments:

The proposal regarding TDS on e-commerce transactions will throw up a number of compliance issues. The government has therefore taken delegated powers to be able to issue binding guidelines for clarifying these issues.

Where the e-commerce operator is not responsible for making a payment to the e-commerce participant, deducting and paying TDS under this section will increase the compliance burden on such operators.

Further, there are certain other ambiguities regarding its applicability to non-resident e-commerce operators which need to be clarified.

17

Section 206C - Widening the scope of Tax Collection At Source (TCS)

 

FB 2020 proposed TCS provisions on certain new classes of transactions (by amending the existing section 206C of the Act). These relate to:

(i) overseas remittance,

(ii) sale of an overseas tour programme package and

(iii) sale of goods.

The TCS provisions were proposed to be applicable from 1 April 2020

The TCS provisions relating to these new classes of transactions shall now apply from 1 October 2020.

 

FB 2020 proposed, in case of TCS on:

(i)     overseas remittance, that the Authorised Dealer (AD), dealing in foreign exchange, receiving an amount of INR 0.7 million or more in the financial year (from a buyer) for remittance under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI), shall be liable to collect tax at source at the rate of 5% on the sum received from the buyer remitting such amount out of India.

(ii)    overseas tour programme package, that the seller shall be liable to collect tax at source at the rate of 5% on any amount received from the buyer of tour package.

In both the cases, if the buyer does not have PAN/Aadhaar, the rate of applicable TCS shall be 10%.

(iii)   sale of goods, above a specified limit subject to the conditions stated below:

A seller whose turnover from business exceeds INR 100 million during the immediately preceding financial year, shall be liable to collect tax at source (at the rate of 0.1%) on consideration received from a buyer in excess of INR 5 million.

If the buyer does not have PAN/Aadhaar, the rate of applicable TCS shall be 1%.

TCS provision not applicable if the buyer is liable to deduct tax at source under any other provision of the Act and has deducted tax.

These new TCS provisions not be applicable in case of certain buyers, such as government authorities and other buyers notified by the government.

Through FA 2020, new TCS provisions have been substantially overhauled:

(i)    TCS on overseas remittance/ (ii) overseas tour programme package,

·      TCS applied on all overseas remittances under the LRS scheme of the RBI. However, if the remittance is not for overseas tour programme package, there will be no TCS if the remittance is below INR 0.7 million.

·      TCS on overseas remittances (other than for purchase of overseas tour programme package) would be on amount in excess of INR 0.7 million

·      The AD will not be required to collect tax at source on the amount on which tax has been collected by the seller of the overseas tour programme package.

·      In case of remittance under LRS scheme over INR 0.7 million out of loan obtained from specified financial institution, for any education, the rate of TCS is 0.5% instead of 5%.

(ii)    TCS on sale of goods

·      TCS provision not to apply in case of export sales

·      The definition of buyer amended to exclude person importing goods into India

·      It has been clarified that TCS provision would not be applicable where a buyer is liable to deduct tax at source in respect of the goods purchased by him from the seller

FA 2020 has added a new provision to the Act to provide that if any difficulty arises in implementation of these new TCS provisions, the CBDT with the approval of the Central Government, shall issue guidelines for the purpose of removing the difficulty.

Our comments:

The overlap between the TCS provisions relating to overseas remittances and overseas tour programme package, has been removed.

To reduce the burden of TCS on remittance for education, the rate has been reduced from 5% to 0.5%, in case the remittance is out of loan obtained from specified financial institutions.

TCS provision on sale of goods is amended to exclude export sales. Further, to ease the TCS compliance burden on foreign sellers, a person importing goods into India will not be considered as buyer.

The amendments bring clarity to the new TCS provisions applicable on these new class of transactions.

18

Safe harbour rules to cover determination of profit attributable to a Permanent Establishment (PE)

 

The safe harbor rules [under section 92CB read with Rule 10TA to 10TF] have been proposed to be expanded to cover profits attributable [under section 9(1)(i) of the Act] to a PE. This will be applicable for AY 2020–21, and subsequent assessment years.

The expanded coverage of profits attributable to PE [under section 9(1)(i) of the Act] was left to be included in the definition of “safe harbor” in Explanation to section 92CB. Accordingly, the definition of “safe harbour” in explanation to section 92CB has been amended.

Our comments:

The amendment is only consequential to align the definition of safe harbour with the coverage of safe harbour provisions provided in section 92CB.

19

Withholding tax on dividends paid to non-residents under the First Schedule to the Finance Bill

 

Tax on dividend paid to foreign company or other non-residents is required to be withheld as per ‘rates in force’ under section 195.

FB 2020 did not provide for a specific withholding tax rate on dividend paid to a foreign company or other non-residents in Part II of First Schedule to FB 2020. Consequently, withholding tax rate of 40% (subject to treaty benefits, if any) was applicable in the aforesaid case.

FA 2020 now specifically provides, in Part II of the First Schedule of FB 2020, that tax shall be deducted at source on dividends paid to Non-resident Indians, other non-residents and foreign companies, at 20%.

Our comments:

An anomaly that existed on account of the withholding tax rate mismatch on dividends as per section 115A and the First Schedule, has been rectified.

 

FB 2020 proposed the following rates of surcharge in case of an individual or HUF or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person:

Total income

Rate of surcharge

50 lakhs – 1 crore

10%

1 crore – 2 crores

15%

2 crores – 5 crores

25%

> 5 crores

37.50%

 

 

In relation to dividend income of such persons included in the total income, FA 2020 caps the rate of surcharge to 15%.

 




28 March 2020

Equalisation levy on e-commerce supply or services

The India Finance Act 2020 has been enacted after it received the assent of the President on 27 March 2020. Finance Act, 2020 has widened the scope of equalisation levy to include e-commerce supply or services by an e-commerce operator. The definition of the terms ‘e-commerce operator’ and ‘e-commerce supply or services’ is fairly wide in scope and may cover various digital transactions and services. This provision was not part of the provisions of the Finance Bill, 2020 when the Finance Minister introduced it on 1 February 2020, but was included on 23 March 2020 when it was approved by the Lower House of the Parliament. It may be noted that the provisions of equalisation levy are not part of the income-tax law; this levy is under a separate provision of law.

Background:

Taking a cue from the G20 / OECD Base Erosion and Profit Shifting (BEPS) Action 1 dealing with digital economy, India introduced an equalisation levy in 2016. Broadly speaking, the equalisation levy at the rate of 6 percent was on non-resident companies engaged in online advertisement and related activities.
The scope of the said provisions has now been expanded to include equalisation levy of 2 percent on consideration received or receivable by an ‘e-commerce operator’ from ‘e-commerce supply or services’, and is effective from 1 April 2020. The key highlights related to this levy are summarised below.

Key highlights:

Equalisation levy on e-commerce transactions

  • The scope of equalisation levy has been expanded from 1 April 2020 to include e-commerce transactions.
  • Equalisation levy of 2 percent shall be chargeable on consideration received or receivable by an ‘e-commerce operator’ from ‘e-commerce supply or services’ made or provided or facilitated by it:

- To a person resident in India; or
- To a non-resident in ‘specified circumstances’; or
- To a person who buys such goods or services or both using internet protocol address located in India.

  • ‘e-commerce operator’ means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.
  • ‘e-commerce supply or services’ means:

i. online sales of goods owned by the e-commerce operator; or

ii. online provision of services provided by the e-commerce operator; or 

iii. online sale of goods or provision of services or both, facilitated by the e-commerce operator; or

iv. any combination of the above.

  • ‘specified circumstances’ means

i. sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and

ii. sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.

Exclusions from the scope of equalisation levy

Equalisation levy shall not be charged:

i. where the e-commerce operator has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment;

ii. where the equalisation levy is leviable on online advertisement and related activities; or

iii. sales, turnover or gross receipts, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated is less than INR 20 million) during the financial year.

Exemption from income-tax

The income-tax law has been amended to provide for exemption arising from any income arising from any e-commerce supply or services made or provided or facilitated on or after 1 April 20211, and chargeable to equalisation.

Who needs to comply and related timelines

The equalisation levy is to be paid by the non-resident e-commerce operator quarterly within the following due dates:

Date of ending of the quarter Due date
30 June 7 July
30 September 7 October
31 December 7 January
31 March 31 March

 

Consequences of delay in payment or non-compliance

  • Interest: Delayed payment carries simple interest at the rate of 1 percent for every month or part of a month
  • Penalty: Failure to pay equalisation levy attracts penalty equal to the amount of equalisation levy

Impact:

The equalisation levy on e-commerce transactions will have a significant impact on non-resident providers of digital supply or services, especially given the fact that the definition of the terms ‘e-commerce operator’ and ‘e-commerce supply or services’ is fairly wide in scope. For example, taxpayers may need to evaluate whether IT services provided by a non-resident parent / group company to an Indian subsidiary could attract equalisation levy. It is also pertinent to note that e-commerce supply or services by one non-resident to another non-resident could also attract equalisation levy in the specified circumstances (i.e. sale of advertisement / data having nexus with India).

Multinational enterprises earning income from India will need to evaluate the impact of the equalisation levy on their businesses. It is important to note that as the provisions of equalisation levy are not part of the income-tax law, the tax treaty benefits may not be available in relation to such levy. Additional guidance is expected from the Government on the provisions.

1The date should ideally be 1 April 2020 – presumably this will be modified and / or clarified shortly

25 March 2020

Relaxation of tax and regulatory compliance timelines due to COVID-19 outbreak

Tax and regulatory payments and compliance filings deferred due to COVID-19 outbreak in India.

The Finance Minister (FM), Nirmala Sitharaman held a press conference1 on Tuesday 24 March 2020 to announce various relief measures taken by the government on statutory and regulatory compliance matters in view of the outbreak of COVID–19. The decisions with respect to various compliance matters are summarised hereunder:

Income-tax:

  • Due date for filing belated and revised return of income per section 139(4) and 139(5) respectively for financial year (FY) 2018-19 relevant to Assessment Year 2019-20, extended from 31 March 2020 to 30 June 2020.
  • Pursuant to section 139AA of the Income-tax Act, read with Rule 114AAA(1), person having Permanent Account Number (PAN) is required to intimate/link his Aadhaar number on or before 31st March 2020. Failure to do so shall make the PAN inoperative immediately after 31 March 2020. Extension has been granted for linking of Aadhaar with PAN from 31 March 2020 to 30 June 2020.
  • Under the Vivad se Vishwas Act, if a taxpayer opts under the Act for withdrawal of appeals, the taxpayer is required to pay 100 percent of the disputed tax if paid by 31 March 2020, and if paid after 31 March 2020, 110 percent of the disputed tax is payable. Under the relief measures announced on Tuesday, additional 10 percent amount shall not be payable if the amount is paid by 30 June 2020.
  • Due date of issue of notice, intimation, notification, approval order, sanction order, filing of appeal, furnishing of return, statements, applications, reports, any other documents and time limit for completion of proceedings by the authority and any compliance by the taxpayer, including investment in saving instruments or investments for roll over benefit of capital gains under Income Tax Act, Wealth Tax Act, Prohibition of Benami Property Transaction Act, Black Money Act, STT law, CTT law, Equalisation Levy law, Vivad Se Vishwas law where the time limit is expiring between 20th March 2020 to 29th June 2020, shall be extended to 30th June 2020.
  • Delay in deposit of advance tax (section 234B / 234C of the Income-tax Act (ITA)), self-assessment tax (Section 234A of the ITA), regular tax (Section 220(2) of the ITA), TCS (Section 206C of the ITA), equalisation levy (Section 170 of the Finance Act (FA) 2016), Securities Transaction Tax (STT) (section 104 of the Finance (No.2) Act 2004), Commodities Transaction Tax (CTT) (section 123 of the FA 2013) attracts interest of 1 percent per month. Delay in deposit of TDS (Section 201 of the ITA), attracts interest 1.5 percent per month.

It has been decided that for delayed payments made during 20 March 2020 to 30 June 2020, interest of 9 percent per annum (i.e. 0.75 percent per month) will be charged for this period.

Goods and Services Tax:

  • Due date of filing return under Form GSTR-3B for taxpayers having aggregate annual turnover of more than INR 5 crore, has been proposed to be relaxed for returns due in March 2020, April 2020 and May 2020 till last week of June 2020. However, interest at 9 percent from 15 days after the relevant due date (as opposed to the current 18 percent) would be charged. No late fee or penalty would be charged.
  • Taxpayers having aggregate annual turnover less than INR 5 crore would also be allowed to file return under Form GSTR-3B for returns due in March 2020, April 2020 and May 2020, till last week of 30 June 2020. No interest, late fee, and penalty would be charged.
  • Due date of filing annual return in Form GSTR-9 for the FY 2018-19 has been extended till 30 June 2020.*
  • Due date for issue of notice, notification, approval order, sanction order, filing of appeal, furnishing of return, statements, applications, reports, any other documents, time limit for any compliance under the GST laws where the time limit is expiring between 20 March 2020 to 29 June 2020, has been proposed to be extended to 30 June 2020.

Legal circulars and legislative amendments to give effect to the aforesaid GST proposals shall be issued with the approval of GST Council.

*Notification no. 15/2020 – Central Tax dated 23 March 2020 has already been issued in relation to the extension of due date for filing annual return for FY 2018-19.

Customs:

  • Customs clearance on 24X7 basis proposed till 30 June 2020.
  • Due date for issue of notice, notification, approval order, sanction order, filing of appeal, furnishing applications, reports, any other documents etc., time limit for any compliance under the Customs Act and other allied laws where the time limit is expiring between 20 March 2020 to 29 June 2020, has been proposed to be extended to 30 June 2020.

Sabka Vishwas - (Legacy Dispute Resolution) Scheme, 2019:

  • Payment date under Sabka Vishwas - (Legacy Dispute Resolution) Scheme, 2019 has been proposed to be extended to 30 June 2020. Interest for this period would not be charged, if payment is made by 30 June 2020.

Corporate Laws:

  • Waiver of additional fees for delay in filing of any form, document, return, statement etc. with Ministry of Corporate Affairs (MCA), during the moratorium period starting from 1 April 2020 to 30 September 2020. This will allow non-compliant companies/ LLPs to clear their backlog of pending filings and make a 'fresh start'.
  • The maximum time gap to hold meeting of Board of Directors’ under Companies Act, 2013 (the 2013 Act) (viz., 120 days) has been extended by 60 days for quarter ending 30 June 2020 and 30 September 2020. In other words, time gap between two consecutive board meetings can be 180 days for this period.
  • The recently notified Companies (Auditor’s Report) Order, 2020 will be applicable from FY 2020-2021 instead of FY 2019-2020.
  • Inability to hold separate meetings of Independent Directors (without the attendance of non-independent directors and members of the management) in FY 2019-2020, will not be considered as non-compliance with the provisions of Schedule IV of the 2013 Act. Independent Directors may share their views amongst themselves through telephone / e-mail or other mode of communication as they deem fit.
  • Timelines for creation of deposit repayment reserve of 20% of the deposits maturing during FY 2020-2021 relaxed from 30 April 2020 till 30 June 2020.
  • Requirement to invest 15 percent of debentures maturing during FY 2020-2021 in specified instruments, extended from 30 April 2020 to 30 June 2020.
  • Additional time period of 6 months allowed to newly incorporated companies to file a declaration for Commencement of Business (in Form INC-20A). Accordingly, the newly incorporated companies can file form INC-20A within 1 year of its incorporation.
  • Inability to meet minimum residency requirement of stay in India for 182 days by at least one director, shall not be treated as a violation for FY 2019-20.
  • In order to prevent triggering of insolvency proceedings against MSMEs, the thresholds for default under section 4 of Insolvency and Bankruptcy Code, 2016 (IBC 2016) has been raised to INR 10 million (from the existing threshold of INR 100,000).

If COVID-19 outbreak continues beyond 30 April 2020, the government may consider suspending section 7, 9 and 10 of the IBC 2016 for a period of 6 months to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default.

Financial services:

Following relaxations announced with respect to banking related transactions for a period of 3 months:

  • No charges to be levied on cash withdrawal through Debit Card from any other bank’s ATM.
  • Waiver of fees for maintaining minimum balance requirement.
  • Reduction in bank charges for digital trade transactions for all trade finance consumers.

Observations:

Considering the difficulties being faced by the industry in adhering to the due dates for compliances under direct tax, indirect tax and company laws, the announcements of the government should benefit India Inc at this time of lockdowns due to outbreak of COVID-19.

The timeline for filing of Advance Pricing Agreements (APA) which is due by 31 March, 2020 and CbC report related Forms i.e Form 3CEAC and 3CEAD which is due for filing between March 20, 2020 to June 29, 2020 (depending on the accounting year of the parent entity) shall be extended to June 30, 2020.
Reporting statements in Form 61, 61A, 61B etc due by 31 May 2020, should also be extended till 30 June 2020.

This is only a Press Release and so the circular and legislative amendments will need to be looked into for the actual amendments in the respective sections of the Acts.

The Supreme Court vide its order dated 23 March 2020 in SUO MOTU WRIT PETITION (CIVIL) No(s).3/2020 IN RE : COGNIZANCE FOR EXTENSION OF LIMITATION, “has taken Suo Motu cognizance of the situation arising out of the challenge faced by the country on account of Covid-19 Virus and resultant difficulties that may be faced by litigants across the country in filing their petitions/applications/suits/ appeals/all other proceedings within the period of limitation prescribed under the general law of limitation or under Special Laws (both Central and/or State). To obviate such difficulties and to ensure that lawyers/litigants do not have to come physically to file such proceedings in respective Courts/Tribunals across the country including this Court, it is hereby ordered that a period of limitation in all such proceedings, irrespective of the limitation prescribed under the general law or Special Laws whether condonable or not shall stand extended w.e.f. 15th March 2020 till further order/s to be passed by this Court in present proceedings. We are exercising this power under Article 142 read with Article 141 of the Constitution of India and declare that this order is a binding order within the meaning of Article 141 on all Courts/Tribunals and authorities.”

1https://pib.gov.in/PressReleseDetail.aspx?PRID=1607942

Source: Press release issued by Ministry of Finance dated 24 March 2020, General Circular no. 11/2020 dated 24 March 2020 issued by MCA, Notification no. S.O. 1205(E) dated 24 March 2020 issued by MCA.

 

20 March 2020

Education cess is not disallowable under section 40(a)(ii) of the Income tax Act, 1961

Education cess is allowable expenditure as word “cess” is conspicuously absent under section 40(a)(ii) of the Income tax Act, 1961 The Bombay High Court in Sesa Goa Limited[1] has held that education cess is allowable expenditure as word “cess” is conspicuously absent under the provisions of section 40(a)(ii) of the Income tax Act, 1961.

Facts of the case:

Sesa Goa Limited (the taxpayer) is in the business of mining and export of iron ore and manufacture and sale of metallurgical coke. It had filed original return of income and revised return of income. While filing original return and revised return of income, it had not claimed deduction of cess as business expenditure. Taxpayer had claimed deduction of cess as business expenditure by filing a separate letter before the Assessing Officer (AO). The AO denied the claim for deduction of cess as business expenditure.

Aggrieved by the assessment order, taxpayer preferred an appeal before the Commissioner of Income tax (Appeals) [CIT(A)]. The CIT(A) denied the deduction of cess as business expenditure relying on the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. v. CIT2 wherein it has been held that where an assessee has claimed deduction after the return has been filed, the assessing authority has no powers to entertain such claim made otherwise than by a way of a revised return.

Aggrieved by the CIT(A) order, taxpayer preferred an appeal before the Income Tax Appellate Tribunal (ITAT). ITAT denied the deduction and held that education cess and secondary higher education cess levied, has been collected as part of the income-tax and the provisions of section 40(a)(ic) & 40(a)(ii) of the Income tax Act, 1961 (the Act) are clearly applicable. Further, it held that cess payment is not a fee but is a tax and in case of fees, payment is made against getting certain benefit or services while tax is imposed by the government and is levied for which the person who pays the tax is not promised to get any benefit or service in return and the taxpayer is not getting any benefit or service in return for making payment towards cess.

The taxpayer challenged the order of the Tribunal before the High Court.

Decision of Bombay High Court:

Whether education cess, higher and secondary education cess, collectively referred to as “cess” is allowable as a deduction in the year of its payment?

The High Court noted the following provisions of the tax law:

  • Goodyear Vs State of Haryanawherein it has been held that one can only look fairly at the language used and no tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions.
  • AGS Tiber Vs CIT4 wherein it has been held that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision.
  • CIT Vs Gurupada Duttawherein it has been held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense.
  • Jaipuria Samla Amalgamated Collieries Ltd Vs CIT6 wherein it has been held that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section, could not be disallowed under this sub-clause.
  • In Chambal Fertilisers and Chemicals Ltd. Vs CIT Range-2, Kota7, the Rajasthan High Court relied on above circular and held that the ITAT erred in holding that the “education cess” is a disallowable expenditure under Section 40(a)(ii) of the IT Act. This decision has been followed by the Tribunal in DCIT Vs Peerless General Finance and Investment and Co. Ltd.8, DCIT Vs Graphite India Ltd.9 and DCIT Vs Bajaj Allianz General Insurance10.
  • The High Court rejected the Revenue’s reliance on the Supreme Court decision in the case of M/s Unicorn Industries Vs Union of India and others11 on the basis that, the issue involved therein was different and accordingly cannot be applied.

The High Court held that although the taxpayer did not claim any deduction in respect of amounts paid by it towards “cess” in their original return of income nor in revised return of income, there was no bar to the CIT(A) and ITAT to consider and allow such deduction to the appellant. The High Court relied upon the decision of CIT Vs Pruthvi Brokers & Shareholders Pvt. Ltd.12 and Ahmedabad Electricity Co. Ltd Vs CIT13. The Appellate Authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. Further the High Court distinguished the decision of Goetze (India) Ltd. v. Commissioner of Income Tax14 relied upon by Revenue, as the Hon'ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority.

The High Court held that there is no reference to any cess in section 40(a)(ii) of the Act, accordingly there will not be any disallowance for cess paid under section 40(a)(ii) of the Act.

Observations:

There have been conflicting decisions of the Mumbai Tribunal in the past; adverse decisions in the case of Everest Industries Ltd vs JCIT [2018] 90 taxmann.com 330 (Mum ITAT) and Kalimati Investments Co. Ltd vs ITO (ITA No. 4508/Mum/2010) (dated 09-05-2012), while recent decision in Tata Steel Limited15 was favourable that cess paid was not disallowable under section 40(a)(ii) of the Act.

The High Court has not discussed the Supreme Court case in CIT vs K. Srinivasan [1972]16  wherein it has been held that, “The meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to section 2 of the Finance Act, 1963, it would lead to the result that income-tax and super-tax were to be charged in four different ways or at four different rates which may be described as: (i) the basic charge or rate (In Part I of the First Schedule); (ii) surcharge; (iii) special surcharge; and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way, the additional charges form a part of the income-tax and super-tax. According to the revenue, the word ‘surcharge’ has been used in Article 271 for the purpose of separating it from the basic charge of a tax or duty of the purposes of distributing the proceeds of the same between the Union and the States. The proceeds of the surcharge are exclusively assigned to the Union.”

1ITA no. 17 and 18 of 2013
2284 ITR 323
3188 ITR 402(SC)
4233 ITR 207
514 ITR 100
682 ITR 580
7Income Tax Appeal No.52/2018
8ITA No.1469 and 1470/Kol/2019 decided on 5th December, 2019 by the ITAT, Calcutta
9ITA No.472 and 474 Co. No.64 and 6/Kol/2018 decided on 22nd November, 2019 by the ITAT, Calcutta
10ITA No.1111 and 1112/PUN/2017 decided on 25th July, 2019 by the ITAT, Pune
11[2019] 112 taxmann.com 127 (SC)
12349 ITR 336
13199 ITR 351
14(2006) 284 ITR 323 (SC)
15ITA No. 5616, 4043, 5573 of 2012 – Mumbai ITAT
1683 ITR 346 (SC)
 

19 March 2020

Cost of technical personnel deputed to Indian subsidiary is taxable as fees for included services under India USA DTAA

Transfer of deputationist with technical expertise shall fall under FIS and will be charged on gross basis The Tribunal[1] has held that services provided from one entity situated in one tax jurisdiction to another entity situated in another tax Jurisdiction, through the transfer on deputation of its experienced/ expert technical employees, shall fall under the ambit of fees for included /technical services. Further, no deduction of expenses shall be allowed relating to income earned as per Article 7(3) of the India US DTAA read with section 44D of the Act

Facts of the case:

General Motors Overseas Corporation (taxpayer) is a tax resident of United States of America and is in the business of providing management and consulting services solely to the group entities worldwide. The taxpayer entered into a Management Provision Agreement (MPA) dated 26 December 1995, effective from 16 April 1994, with General Motors India Limited (GMIL). GMIL is engaged in the business of manufacture, assembly, marketing, sale of motor vehicles and other products in India. GMIL had a separate ‘technical information and assistance agreement’ with M/s Adam Opel AG.

Under the MPA, the taxpayer provided executive personnel in connection with development of general management, finance, purchasing, sales, service, marketing and assembly/ manufacturing activities to GMIL. The taxpayer charged salary and other direct expenses related to such personnel, to GMIL.

To ascertain the tax liability, if any, on amounts receivable, the taxpayer filed an application before the Authority of Advance Ruling (AAR)2. Based on the facts then available, AAR ruled vide order dated 19 August 1997 that, the services of the nominees of “XYZ” (taxpayer) are “managerial” and not “technical or consultancy” services within the meaning of Article 12 and so the amounts received are taxable as business profit under Article 7 as the taxpayer has Permanent Establishment (PE) in India as per Article 5(2)(1) of the India-US DTAA.

During the subject year, two expatriates – President and Managing Director and Vice President Manufacturing were assigned to GMIL. President and Managing Director will be Chief Executive and Operating Officer of GMIL and will be responsible for the overall management and direction of GMI operations. The President and Managing Director will be formally appointed to such office by GMIL and will discharge his or her powers and duties from that office. Vice President Manufacturing will be responsible for the overall management of GMIL facilities to manufacture and assemble products according to required standards and for production of such products, according to those standards.

The taxpayer raised invoices and disclosed the amount received as business receipts in return of income. Salary paid to the expatriates were after deduction of tax at source, under section 192 of the Income tax Act, 1961 (the Act). As the invoices raised were on cost-to-cost basis, no business profit was disclosed in return of income filed. The Assessing officer (AO) had issued notices under 143(2) and 142(1) of the Income tax Act, 1961 (the Act) and the assessee was called upon to file the copy of the service agreement of the deputationist. However, the representative of taxpayer did not file the service agreement of the employees.

The AO, left with no option, taxed the entire receipt as business income as per Article 7 of India US DTAA as income of Permanent Establishment (PE) in India, on gross basis since the income is to be computed in accordance with restrictions / limitation of the domestic tax law as provided in Para 3 of Article 7 of India US DTAA. Aggrieved by the order of AO, taxpayer preferred an appeal before the CIT(A).

Decision of CIT(A):

After considering the AAR ruling, the CIT(A) held that services rendered by the Managing Director are managerial services and cannot be held in the nature of fees for included services, as per Article 12 of India US DTAA. Fees received for such managerial services were taxable as business income on gross basis.
Further services of Vice President (Manufacturing), who is a qualified and well experienced technical personnel, will come under the purview of fees for included services under Article 12 of the India-USA DTAA and will be taxed on gross basis.

Aggrieved by the order of CIT(A), taxpayer preferred an appeal before the ITAT.

Decision of ITAT:

Whether the findings recorded by AAR are binding in Nature.

ITAT discussed Section 245S of the Act and stated that the ruling of AAR is binding on Commissioner and Income tax authorities subordinate to commissioner. However the same is not binding on the Tribunal and only has persuasive value. Further, any dispute in relation to ruling would reach to the Tribunal only when authorities bound by the ruling do not follow the ruling for valid reasons / invalid reasons.

The Tribunal held that, based on the findings of AAR (as mentioned above), it is abundantly clear that the ruling of AAR was not an absolute and unqualified ruling. It gives mandate to income tax authorities to examine factual situation in appropriate proceedings.

Whether services provided by Vice President (Manufacturing) will fall under ‘Make Available’ clause to be chargeable as Fees for Technical / Included Services.

The Tribunal upheld the order of CIT(A) after discussing following points:

  • The Vice President was not an ordinary engineer but was having sufficient experience, exposure and knowledge about the technology. The experience of an expert lies in the mind of an expert and if an expert having knowledge and expertise is transferred from one tax jurisdiction to another tax jurisdiction, then it cannot be said that only the employees were per se transferred and not the technology. In other words, technology is made available by one entity situated in one tax jurisdiction to another entity situated in another tax jurisdiction, through the transfer on deputation of its experienced/ expert technical employees. In the automobile industry, assembly of product and standards of company are patented/ protected technology and owner of the standards, charges Royalty for sharing the standards and assembling of products. But in the present case, no Royalty had been charged by the taxpayer to the Indian group entity. Under the garb of sending technical experts to India, it cannot be permitted to say that they were merely employees and the cost is reimbursed by the Indian counterpart to the Assessee for the services rendered by such employee.
  • The Tribunal distinguished the decision in the case of Rolls-Royce Indl Power (I) Ltd.on the facts of the case. In that case, there was no transfer of technology in the form of sending expert technical employees. However in the present case, employees with technical expertise are not only managing but also ensuring due adherence to the standards of the assessee, by continuously monitoring and mentoring the production.
  • As there was no examination of the fact by the AO in earlier years, there cannot be consistency for no-decisions taken by the AO in the earlier years.

Whether business income should taxed on gross basis or net basis.

The Tribunal upheld the order of CIT(A) of taxing business income on gross basis and discussed Article 7(3) of India-US DTAA wherein it is provided that in determination of profits of a permanent establishment, there shall be allowed deduction of expenses in accordance with the provisions of and subject to the limitations of the taxation laws of that state. As per Section 44D (b) of the Act, no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of fees for technical services. From the above two provisions, it is abundantly clear that the benefit of Article 7(3) is subject to the limitation provided under the domestic law (Section 44D of the Act). As the domestic law prohibits allowing any deduction for the purpose of calculating fees for technical services/fees for included services’, then, the same is taxable on gross basis.

The Tribunal discussed the decision of Rolls-Royce Indl Power (I) Ltd. relied by taxpayer wherein Article 26, read with article 13(4)(c) of India-UK DTAA does not permit revenue authorities to discriminate against the UK registered company and accord it less favourable treatment than a domestic company. Therefore, section 44AD cannot be invoked. The Tribunal distinguished the decision as it had not discussed “subject to limitation of domestic law under the India UK treaty”.

Transfer Pricing Adjustment

The CIT(Appeals) had confirmed the action of the AO in invoking transfer pricing provisions under Section 92 of the Act and adding 10 percent mark-up on the invoices billed by the appellant to GMIL.

The Tribunal allowed the ground of appeal of the taxpayer as the lower authorities had not benchmarked the transactions on the basis of any comparable instances or otherwise by using any of the prescribed methods in Rule 10B of the Rules.

Whether Interest under section 234B of the Act can be levied on foreign company

The Tribunal deleted the interest under section 234B of the Act relying on the decision of Ngc Network Asia LLC and GE Packaged Power Inc5.

Observations:

It appears from the reading of the Tribunal order, that the receipt for MD salary is taxable as business income attributable to PE in India on gross basis without deduction of expenses in view of Article 7(3) read with section 44D of the Act i.e. at 40 percent plus surcharge and cess. The Tribunal has held that the fees for VP Manufacturing is fees for included services taxable on gross basis, so would the rate of tax be 15% as per Article 12 of the India USA DTAA as the ground raised by the taxpayer that CIT(A) erred in ignoring Article 12(6) [such fees attributable to PE is taxable as business income under Article 7] has been dismissed.
The taxpayer is resident of USA. However, the provisions of non-discrimination under the India-USA DTAA which is different from India-UK DTAA, had not been discussed in the ITAT order. The non-discrimination Article under the India-USA DTAA does not prevent the Contracting State from imposing the limitations described in paragraph 3 of Article 7 (Business profits) and has carved out paragraph 3 of Article 7 as an exception for non-discrimination.

 

1TS-134-ITAT-2020(Mum)
2242 ITR 208
342 SOT 264
4[2009] 222 CTR 85 (Bombay)
556 taxmann.com 190 (Del)
 

17 March 2020

Loan given by foreign company to Indian subsidiary company is capital asset as per section 2(14) of the Act

Loss arising on assignment/sale of debt is capital loss The Bombay High Court in Siemens Nixdorf Information Systemse GmbH[1] held that, loss arising on assignment of loan given to its subsidiary in India, was capital loss, as loan constitutes capital asset within the meaning of section 2(14) of the Income Tax Act.

Facts of the Case:

  • Siemens Nixdorf Information Systems GmbH (SNISG) a foreign company had provided loan in September 2000 to its Indian subsidiary company named Siemens Nixdorf Information Systems Limited (SNISL).
  • Due to serious financial troubles, the subsidiary company SNISL, was likely to be wound up.
  • SNISG sold/assigned the debt to Siemens AG at a lower value as compared to the original debt obligation on the basis of valuation carried out. The difference between the amount of loan and consideration received was claimed as short-term capital loss.
  • The Assessing Officer disallowed short-term capital loss by contending that loan given is not covered under the definition of capital asset as per section 2(14) of the Act and also on the basis that no transfer in terms of section 2(47) of the Act took place on assignment of a loss.
  • CIT(A) upheld the order of the Assessing Officer, but not in its entirety. The CIT(A) held that such assignment of loss is a transfer as per section 2(47) of the Act. But since loan given is not a capital asset, the contention of SNISG was not accepted.

Decision of ITAT:

  • The Tribunal allowed the appeal of SNISG by order dated 31 March 2016.
  • ITAT held that the term 'capital asset’ is defined as 'property of any kind held by an assessee, whether or not connected with his business or profession', except those which are specifically excluded in the said section.
  • It placed reliance on decision of this Court in the case of CWT v. Vidur V. Patel [1995] [1995] 79 Taxman 288/215 ITR 30 rendered in the context of Wealth Tax Act, 1957, which construed the meaning of the word ‘property’ includes interest of every kind.
  • The Tribunal held that in the absence of loan being specifically excluded from the definition of capital assets under the Act, loan would stand covered by the meaning of the word 'capital asset' as defined under section 2(14) of the Act. It was also held that transfer of loan would be covered by section 2(47) of the Act.

Decision of Bombay High Court:

  • The High Court noted that word ‘capital asset’ as per section 2(14) of the Act has been defined very widely to mean property of any kind, subject to certain exclusions. It also noted that advancement of loan in the case is not a trading activity.
  • Tax Revenue did not prove that advancement of loan should be covered under any of the exclusions.
  • The Tax Revenue was also not able to point out any reasons mentioned in the case of Vidur Patel to understand meaning of the word 'property’ as per section 2(14) of the Act, differently from the meaning assigned under section 2(e) of the Wealth Tax Act, 1957.\
  • The objection of the Revenue that the decision in case of Vidur Patel is rendered under a different Act, is not valid since both the Income-tax Act, 1961 and Wealth Tax Act, 1957 are cognate.
  • The High Court relied the case law of Bafna Charitable Trust v. CIT [1998] 101 Taxman 244/230 ITR 864 (Bom.) wherein it was mentioned that ‘property is a word of widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded’. The Revenue was not able to point why this decision should not be applicable.
  • Hence, the appeal of Revenue was dismissed by the High Court.

Observations:

The definition of capital asset under section 2(14) of the Act is wide in nature. Any property held by the assessee except specific exclusions mentioned in the section should be considered as capital asset, thereby triggering capital gains on its transfer.

In Mahindra and Mahindra Ltd2 the Supreme Court had upheld the decision of the Bombay High Court on the facts of that case, that waiver / cessation of loan liability, is neither taxable under section 28(iv) nor under section 41(1) of the Act. In view of the Bombay High Court decision in SNISG, can the gains on waiver of loan liability be considered as capital gains?

 

1[2020] 114 taxmann.com 531 (Bombay)
293 taxmann.com 32 (SC)

10 February 2020

The Direct Tax Vivad se Vishwas Bill, 2020

Bill introduced for resolution of disputed direct tax

Background:

The Finance Minister while tabling Union Budget 2020 before the Parliament on 1 February 2020 stated that in the past the government had taken several measures to reduce tax litigation. “Sabka Vishwas Scheme” was introduced in Budget 2019 to reduce litigation in indirect taxes which resulted in settling over 1,89,000 cases.

As on 30 November 2019, disputed direct tax arrears amounted to INR 9,320 billion compared to the actual direct tax collection in the financial year 2018-19 of INR 11,370 billion, nearly a year’s direct tax collection. About 4,83,000 cases are estimated to be pending at various appellate forums. In light of the above, the Finance Minister proposed to bring a similar scheme for reducing litigation in the direct taxes “Vivad Se Vishwas” Scheme (the Scheme). Consequently, on 5 February 2020, the “Vivad Se Vishwas Bill 2020” (VSV Bill) was introduced in the Lok Sabha (i.e. the Lower House of the Parliament) to provide for resolution of disputed tax arrears and for matters connected therewith or incidental thereto.

Key highlights:

The key features of the VSV Bill are highlighted below:

Filing of declaration

In order to avail the scheme the taxpayer (those who have filed appeals before the appellate forum and such appeal is pending as on 31 January 2020) shall be required to file a declaration on or before the last date (to be notified), with the Designated Authority (DA) (an officer not below the rank of a Commissioner of Income-tax notified by the Principal Chief Commissioner) in respect of determined tax arrears consisting of disputed tax, disputed interest, disputed penalty or disputed fees.

Determination of disputed tax

Disputed tax in relation to an assessment year will be calculated as mentioned below:

  • Formula (A-B) + (C-D) where:

- A = Amount of tax on the total income assessed as per income tax provisions (General provisions) other than under Section 115JB or 115JC of the Income tax Act, 1961 (the Act).

- B = Amount of tax chargeable on the total income assessed as per general provision reduced by amount of income in respect of which appeal has been filed by the appellant (i.e. the person or the income-tax authority or both who has filed appeal before the appellate forum and such appeal is pending on 31 January 2020).

- C = Amount of tax on the total income assessed under Section 115JB or 115JC.

- D = Amount of tax chargeable on the total income assessed under Section 115JB or 115JC, reduced by amount of income in respect of which appeal has been filed by the appellant.

Amount of income under appeal which is considered under section 115JB or section 115JC as well as under general provisions, not to be reduced from total income assessed while determining the amount under item D above.

The item (C – D) above to be ignored where the provisions under section 115JB or section 115JC are not applicable.

Where amount of income under appeal results in reduction of loss declared in the return or converting that loss into income, the amount of tax to be determined in the item (A-B) above shall be amount of tax on the income under appeal had such income been the total income.

  • Tax determined based on:
    - Processing of statements of tax deducted at source (Section 200A)
    - Consequences of failure to deduct tax or pay withholding tax (Section 201)
    - Consequences of failure to collect tax at source in certain cases (section 206C(6A))
    - Processing of statement of tax collected at source (Section 206CB).

Amount payable

The amount payable on filing the declaration is given below:

Sr No. (A)

Nature of tax arrear (B)

Amount payable under the VSV Bill (on enactment) on or before 31 March 2020 (C)

Amount payable under the VSV Bill (on enactment) on or after the 1 April 2020 but before the last date (D)

(a)

Where tax arrear consists of disputed tax, interest chargeable or charged on such disputed tax and penalty leviable or levied on such disputed tax

Amount of disputed tax

Disputed tax plus ten percent of disputed tax.

Where ten percent of disputed tax exceeds the aggregate amount of interest chargeable/ charged and penalty leviable/ levied on such disputed tax, the excess shall be ignored for the purpose of computation of amount payable.

(b)

Tax arrear relates to disputed interest or disputed penalty or disputed fee

25 percent of disputed interest or disputed penalty or disputed fee

30 percent of disputed interest or disputed penalty or disputed fee

    

Filing of declaration and particulars

  • The declaration shall be filed by the declarant before the DA in such form and manner to be prescribed.
  • Once the declaration is filed, any appeal pending before CIT(A) or the Income tax Appellate Tribunal (ITAT) [whether by the taxpayer or by the income-tax authority], in respect of the disputed income / interest / penalty / fee and tax arrear shall be deemed to have been withdrawn from the date on which certificate is issued by the DA.
  • Where the declarant (means a person who files declaration) has filed any appeal before

- Appellate forum (CIT(A)/ ITAT/ High Court/ Supreme Court); or
- Writ petition before the High Court or the Supreme Court against any order in respect of tax arrear, he shall withdraw such appeal or writ petition with the leave of the Court, wherever required and furnish proof of such withdrawal along with the declaration.

  • Where the declarant has initiated any proceeding for
    - Arbitration
    - Conciliation
    - Mediation
    - Given any notice under any law for the time being in force
    - Given any notice under any agreement entered into by India with any other country or territory outside India whether for protection of investment or otherwise,
    he shall withdraw the claim in such proceedings or notice, prior to making the declaration and furnish proof thereof along with the declaration.
  • The declarant shall furnish an undertaking waiving his right, to seek or pursue any remedy or any claim in relation to the tax arrear which may otherwise be available to him under the statute or under any agreement as referred to above.
  • The declaration shall be presumed never to have been made if,
    - any material particular furnished in the declaration is found to be false at any stage;
    - the declarant violates any of the conditions referred to in the enacted provisions of the VSV Bill;
    - The declarant acts in a manner contrary to the undertaking filed.

In such cases, all the withdrawn proceedings and claims and all the consequences under the Act shall be deemed to have been revived.

  • No appellate forum or arbitrator, conciliator or mediator shall proceed to decide the issue in appeal relating to the tax arrear mentioned in the declaration in respect of which an order has been passed or the payment of sum as determined by the DA.

Procedure, time, and manner of payment

  • The DA shall pass an order determining the amount payable and grant a certificate to the declarant within 15 days from the receipt of declaration.
  • The declarant shall pay the amount so determined within 15 days of receipt of certificate. The declarant to intimate the details of payment to the DA which shall pass an order stating the payment by the declarant.
  • No matter covered by the DA’s order shall be reopened in any other proceedings.

Immunity from initiation of proceedings in respect of offence and imposition of penalty in certain cases

  • The DA shall not institute any proceeding in respect of an offence or impose or levy any penalty or charge any interest in respect of tax arrears.

Refund

  • The amount paid pursuant to declaration is not refundable.

Non-applicability of provisions

The provisions of VSV Bill should not apply:

  • In respect of tax arrears relating to:

- Assessment made under Search or requisition (Section 153A) and assessment of income of any person other than on whom proceedings of search or requisition are undertaken (Section 153C),
- Prosecution proceedings instituted before the date of filing of declaration,
- Undisclosed income form a source or undisclosed asset located outside India,
- Assessment or reassessment made on the basis of information received under an agreement referred in Section 90 or Section 90A of the Act,
- Where notice of enhancement has been issued by the CIT(A) before 31 January 2020.

  • To any person on whom an order of detention has been made under the provisions of the Conservation of Foreign Exchange and Prevention of Smuggling activities Act, 1971 on or before filing of declaration with the DA, subject to fulfillment of specified conditions.
  • To any person in respect of whom prosecution for any offence punishable under specified legislations have been instituted on or before filing of the declaration. 
  • To any person notified as Custodian under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

The Central Board of Direct Taxes may issue directions or orders to the income-tax authorities as it may deem fit, including on matters of collection of revenue, procedures to be followed as is necessary in the public interest. The Central Government may pass any order to remove difficulties arising to give effect to this law, after being laid before each House of Parliament.

No such order shall be made after the expiry of a period of two years from the date on which the provisions of this VSV Bill come into force.

Observations/ Comments:

Considering significant amounts locked up in litigation on direct taxes, this scheme should be a welcome relief for both taxpayers and the government as by paying the disputed tax amount, the taxpayer will be saved from litigation, interest, penalty and cost of litigation.

The timeline appears to be quite stringent as the Bill is yet to be enacted and payment of disputed tax is expected by 31 March 2020 to seek relief under the Act.

Under the Sabka Vishwas (legacy Dispute Resolution) Scheme 2019, relief available as percentage of tax dues are as under:

Tax dues linked to

INR 50 lakhs or less

More than INR 50 lakhs

(a) Show cause notice (SCN) / appeal pending as on 30.06.2019

70 %

50 %

(b) SCN issued only with respect to late fee/ penalty, and tax amount is paid or NIL

Entire amount of late fee/ penalty

(c) Amount relating to arrears of tax or amount indicated in returns but not paid

60 %

40 %

(d) Enquiry/ investigation/ audit and amount quantified on or before 30.06.2019

70 %

50 %

(e) Voluntary disclosure by the declarant

No tax relief except interest & penalty

Source: https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-sabka-vishwas-scheme-noexp.pdf

As can be observed, there was relief in disputed tax amount provided under the Sabka Vishwas Scheme 2019 while under the VSV Bill, the relief provided is only for interest and penalty while 100 percent of the income-tax is required to be paid.

Clarity required on certain aspects like:

  • The manner of withdrawal of appeals filed by the Income tax authorities before High Court or Supreme Court, as in such cases there should generally be no tax arrears.
  • Where the loss as per return of income is reduced by the AO, the disputed tax is calculated on the amount of tax that would have been chargeable on income in respect of which appeal has been filed had such income been the total income. Clarity should be provided that where the loss as per return of income is reduced, then there should be no disputed tax liability and the lower loss should be allowed to be carried forward for set-off to subsequent years without any charge to interest or penalty in subsequent years. 
  • Whether refund of remaining 75 percent or 70 percent as the case may be of the declared disputed interest or disputed penalty, would be granted, where the entire amount of disputed interest or disputed penalty is paid before enactment of the VSV Bill.
  • Withdrawal of litigation on specific grounds as against the entire appeal for an assessment year.
  • Effect of appeals withdrawn for the earlier years on the assessment of the future assessment years.

28 January 2020

ITAT held that no deemed income arose on issue of shares at a premium as per DCF valuation

Taxpayer has an option to do valuation of shares either on DCF method or NAV and AO cannot determine the own value.

The Tribunal held that no income arose under section 56(2)(viib) of the Act, on rights issue of unquoted equity shares at a premium by the taxpayer to its holding company, as the shares were issued at fair market value arrived as per the prescribed discounted cash flow valuation methodology.

Facts of the case:

Vodafone M-Pesa Ltd.1 (taxpayer) is in the business of mobile wallet business. During assessment year 2015-16, the taxpayer had issued shares of face value Rs.10 each at a premium of Rs.14.70 per share, and accordingly had received share premium of Rs.148,78,54,000. As per Section 56(2)(viib) of the Income tax Act, 1961 (the Act) read with Rule 11UA of the Income tax Rules, 1962 (the Rules), valuation of unquoted shares can be arrived at either by taking the net asset value (NAV) or discounted cash flow (DCF) method, at the option of the taxpayer. The taxpayer had relied on valuation report provided by independent valuer calculating the value of shares as per DCF method.

During the assessment proceedings, AO asked the taxpayer for the working of premium and valuation report as per Rule 11UA of the Income tax Rules, 1962 (the Rules). AO observed that valuation report was prepared by adopting DCF method based on the information and projections provided by the management of the taxpayer without the valuer independently enquiring into the projections or the claim made by the taxpayer. Further, the AO noted that the projection of sales and operating expenses have been made by the taxpayer without any rationale. Based on the actual sales, the AO observed that the projections were nowhere near the actual state of affairs and accordingly rejected the report submitted by the taxpayer. The AO himself calculated the fair market value of the equity shares based on NAV at Rs.4.15 per share and accordingly the excess amount received of Rs.20.55 per share was taxed under section 56(2)(viib) of the Act.

An appeal was preferred by the taxpayer before the first appellate authority the Commissioner of Income-tax (Appeals) [the CIT(A)].

Decision of the CIT(A):

The CIT(A) accepted the contentions of the taxpayer that the fair market value could be calculated either through NAV or DCF method and the taxpayer can adopt higher of valuation and it need not be NAV valuation only. However, the CIT(A) rejected the valuation report submitted by the taxpayer as being erroneous and accepted the DCF valuation only to the extent of actual performance in the subsequent years and accordingly partly allowed the appeal.

The CIT(A) further stated that there will always be some element of subjectivity in forecast data provided and the actual results will always differ from the forecasts. It is the general experience that in the same line of business some companies do extraordinarily well and others fail because their marketing strategy was not good or their competitors were better. If we accept the reasons given by the AO, no new company or company with a new idea would ever be able to choose DCF method for determination of fair market value of its shares because there would be insufficient or no background data and projections would always be questionable. Clearly, this is not the intention of the legislature or else they would have prescribed that only companies with certain years of business behind them would be allowed to use DCF method for determination of fair market value of their shares. The CIT(A) adopted the fair market value of equity shares at 40 percent of the projected DCF value, as the actual sales were approximately 40 percent of the projected sales. Accordingly excess amount was taxed under section 56(2)(viib) of the Act.

Aggrieved by the order, taxpayer and the income-tax department preferred an appeal before the Tribunal.

Decision of the Tribunal:

The Tribunal upheld the order of CIT(A) and rejected the appeal filed by the income-tax department and held that the taxpayer has an option to choose the valuation methodology.

Further the Tribunal acknowledged that valuation of shares is itself a projection of future events or activities and has to be done with some accuracy. However no person in the world can project with 100 percent accuracy. The Tribunal acknowledged that tax laws in more than one place, depend on the skills of the professionals like merchant banker only to value the valuation of shares or other volatile securities and it is left to the wisdom of valuer to accept or reject or to carry out independent investigation of the projections provided by the taxpayer. The Tribunal rejected the method adopted by the CIT(A), as trying to evaluate the accuracy of the valuation at the time of assessment or on factual data in subsequent years is not proper since the actuals are based on so many factors subsequent to the date of valuation.

Further Tribunal has relied on the co-ordinate bench decision in Cinestaan Entertainment (P.) Ltd.2 wherein it was held that “Rule 11UA provides two valuation methodologies for valuation of shares at the option of taxpayer; one is asset based NAV method and other is DCF method based on future projections which depend on various factors and projections made by the Management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U”.

Observation:

The Tribunal observes that the legislative intent of introducing section 56(2)(viib) of the Act is anti-tax abuse measure to deter the generation and use of unaccounted money, by increasing the onus of proof on closely-held companies for funds received from shareholders and is not applicable to genuine business transactions. 

 

1TS-831-ITAT-2019(Mum). I.T.A. No. 1073/Mum/2019 and I.T.A. No. 2032/Mum/2019

2[2019] 106 taxmann.com 300 (Delhi - Trib.)

23 January 2020

Tax is deductible at source on year-end provisions created for ascertained liabilities

Tax is required to be deducted if payee is identified, methodology to calculate amount is available and there is a liability to pay due to existing contract/ customs.

The Delhi Income-tax Appellate Tribunal (the ITAT / the Tribunal) held in the case of Inter Globe Aviation Ltd1 (the Company) for the AY 2010-11 and 2011-12, that tax should be deducted under section 194C of the Income-Tax Act, 1961 (the Act) on passenger service fee payments and on the provision for expenses created at year-end for ascertained liabilities. However, the Tribunal held that tax is not required to be deducted on credit card gateway facility fee.

Facts of the case:

TDS on passenger service fee

  • The Company collects passenger service fees (PSF) from the customers in the ticket and pays it to Airport Owner/ operator.
  • There are two components of PSF of security and facilitation. Security component is utilised for expenditure in respect of aviation security force deployed at the airport and facilitation is for services provided to the passenger at the airport.
  • No tax was deducted at source by the Company on payment of the security component of PSF as the payment was made to the Central Industrial Security Force (CISF), a government undertaking which is a central armed police force in India. Tax was deducted at source on facilitation component paid to the airport.
  • According to the tax officer (TO), tax should have been deducted on both components u/s 194J of the Act. The Company was treated as “assessee in default‟ in terms of section 201 of the Act.
  • The first appellate authority [CIT(A)] held that tax should have been deducted u/s 194C of the Act on the total payment.

TDS on Provision for ascertained liabilities

  • The Company had created provisions for ascertained expenses at year-end on which tax was not deducted at source. Tax is deducted by the Company on receipt of bills in the next year when the provisions are reversed.
  • The Company submitted that no tax is required to be deducted as they are not responsible for making payments since the parties are not identified.
  • Both the TO and CIT(A) held that tax is required to be deducted at the time of creating the provision for expenses. The TO held the Company as “assessee in default‟ in terms of section 201 of the Act.

TDS on Provision for credit card gateway facility fee

  • For online booking of tickets by passengers using credit cards, the Company has entered into an agreement with various banks and other entities to avail credit card gateway services under a non-exclusive agreement.
  • Amount of airfare paid by the passenger through credit card is received by banks and the banks deduct their service fee and pay balance amount to the Company.
  • The TO passed an order stating that the Company should have deducted tax under section 194H of the Act on such service fees deducted by the banks.
  • The CIT(A) allowed the Company’s appeal and held that banks actually made that payment to the appellant after retaining their fees and the liability to deduct tax, if any, was that of the bank and not the Appellant.

Decision of Delhi ITAT:

TDS on Passenger service Fee

  • The ITAT relied on various judicial precedents and held that the payment of PSF fees are not in the nature of fees for technical services and so TDS under section 194J of the Act is not applicable, nor is it in the nature of rent and so the provisions of section 194I of the Act does not apply.
  • The ITAT held that the security services are to be provided by the airport owners and operators and that the Company does not pay any amount directly to the CISF.
  • The ITAT thus upheld the CIT(A) order and held that tax under section 194C of the Act should be deducted at source on the payment of PSF to airport owners/operators in India.
  • The ITAT, relying on various court decisions that the first proviso under section 201 of the Act applies retrospectively, directed the Company to submit requisite details as per Rule 31ACB, that the recipient has offered this payment in its return of income, in which case the Company should not be an assessee in default of the tax amount and the tax officer to verify the documents in accordance with law.

TDS on Provision for ascertained liabilities

  • The ITAT held that tax should be deducted at source on the year-end provision for expenses, as the same were ascertained liability.
  • The ITAT held that amount of expenditure can be determined if the recipient is identified, methodology to calculate amount is ascertained and there is a corresponding liability arising out of a contract or custom.
  • Even though there is a lag in receiving bills from service providers, it does not absolve the liability of deduction of tax at source.
  • The Company did not make provisions on ad hoc basis but the provision was made under specified head on certain basis thereby ascertaining the amount.
  • The ITAT also held that benefit of the proviso to section 201 of Act should be granted to the Company and directed the Company to fulfill requisite conditions to avail the benefit.

TDS on Provision on credit card gateway facility fee

  • ITAT had referred to the central government notification dated 31 December 2012 under section 197A of the Act, whereby no deduction of tax were notified on specified payment inter alia including payments with respect to the credit card commission for transaction between the merchant establishment and the bank (other than foreign banks).
  • Even though the notification is prospective in nature, it lays down the principle that tax is not required to be deducted on credit card commission.
  • The ITAT relied on decision in the case of Spicejet Ltd wherein it was held that tax was not required to be deducted on charges retained by bank and credit card agencies out of the same consideration of ticket booked through credit/debit cards.
  • Hence, the ITAT held that Company was not an ‘assessee in default’ and dismissed Revenue’s appeal.

Observations:

The ITAT with respect to year-end provision for expenses observed that the expenses cannot be said to be accrued if any ingredient of ascertained liability is not satisfied.

The Central Government has issued a notification No. 47/2016 dated 17 June 2016 in supersession of the Notification No S.O. 3069 (E) dated 31 December 2012 but the relief on credit card / debit charges continue.

1ITA No.5347/Del/2012 (Assessment Year: 2010-11) ITA No.4449/Del/2013 (Assessment Year: 2011-12)

2ITA number 6103/del/2015 for assessment year 2012–13

17 January 2020

Capital Gains on buyback of equity shares by subsidiary company taxable u/s 46A as not covered as exempt transfer u/s 47(iv) of the Act

Buyback of equity shares by subsidiary company u/s 46A does not gets covered u/s 47(iv) and conditions u/s 47(iv) should be fulfilled by the holding company or its nominees.

The Bangalore Tribunal has held that capital gains arising on buyback of shares by the subsidiary company is taxable under section 46A of the Act, as section 45 and Section 46A of the Income tax Act, 1961 operate in different fields and are independent. Section 45 covers actual capital gains on transfer of capital asset while section 46A deals with deemed capital gains on buyback of shares. Section 47(iv) of the Act relating to transactions not regarded as taxable transfer is not applicable as (i) the subsidiary company was not wholly owned by the parent company or its nominees and (ii) Section 47 (iv) is regarding non applicability of section 45 to a transfer of a capital asset by a company to its subsidiary company and regarding buyback of shares.

Facts of the case:

Acciona Wind Energy Private Limited (taxpayer) is a company incorporated in India with M/s Acciona Energia International S.A. Spain holding 99.99 percent of the equity share capital and Acciona Energia S.A Spain holding remaining 0.01 percent of the equity share capital of the taxpayer. During the financial year relevant to the assessment year 2014-15, the taxpayer bought back equity shares from the holding company at a price in excess of the issue price and did not withhold tax on the payment of consideration to the foreign parent company.

The Tax Officer passed orders under section 201(1) and 201(1A) of the Act for the default in withholding tax and consequent interest thereon. The CIT(A) held that taxpayer is in default for failing to withhold taxes on buyback of shares by the subsidiary company. Section 46A of the Income tax Act, 1961 (the Act) is a charging provision for gains arising from buyback of shares and would prevail over the general provision of Section 45 of the Act. Section 47 of the Act is limited in its application only to section 45 of the Act and does not apply to buyback of shares to which Section 46A of the Act applies.

Decision of ITAT:

Whether the condition mentioned under section 47(iv) is fulfilled

The Tribunal discussed that Section 47(iv) of the Income tax Act does not require that parent company should hold the entire share capital of the subsidiary company in its own name as it requires that shares should be held by the parent company and its nominees. Further as per Companies Act, 2013, it is legally impossible to hold whole share capital of subsidiary company by a single holding company. The Tribunal distinguished the decision in the case of Papilion Investments (P.) Ltd2  relied upon by the taxpayer as in that case, the second shareholder was the director of the Company and held shares jointly with the company. However, in the present case two separate foreign companies hold the shares of the taxpayer, with the second shareholder not being the nominee of the other shareholder. Accordingly, the Tribunal held that the conditions of Section 47(iv) are not fulfilled.

Whether Section 47(iv) should apply to buyback transaction covered under section 46A?

The Tribunal discussed that Section 45 of the Act is the section regarding profits or gains arising from transfer of the capital asset. Section 46A of the Act was inserted by the Finance Act, 1999 w.e.f 1 April 2000 to enjoin that any consideration received by the shareholder or holder of other specified securities from any company on purchase of its own shares or specified securities held by such shareholder. The difference between the cost of acquisition and the value of consideration received by the shareholder is deemed to be capital gains. There is no requirement of transfer of any capital asset in case of buyback of shares. There is no mention of the term “Transfer” in Section 46A of the Act. Section 47(iv) of the Act is regarding non-applicability of Section 45 of the Act to a transfer of capital asset by a company to its subsidiary company, if the parent company or its nominees hold the whole of share capital.

Further, the Tribunal discussed the following judicial precedents:

Cadell Wvg. Mill Co. (P.) Ltd.3  relied upon by the taxpayer, was rejected as the issues involved were different and was for the assessment year 1990-91 i.e., before introduction of section 46A of the Act from the financial year 2000-01.

Goldman Sachs4  relied upon by the tax department. The Tribunal observed that this judgment is an authority regarding applicability of section 46A in respect of receipt by shareholder on account of buy back of shares from the concerned company but observed that there was no argument or decision about applicability of section 47 (iv) of the Act in that decision.

The Tribunal held that Section 46A is specifically applicable to buyback of shares and Section 45 and Section 46A operate in different fields and should be read independently, accordingly the Tribunal upheld the order of CIT(A) applying section 46A of the Act to the facts of the case.

Comments:

The Authority for Advance Ruling (AAR) in Re RST5 and in Armstrong World Industries Mauritius Multiconsult Ltd., In re6  had similarly ruled that the proposed transaction of buyback of shares by subsidiary company is not exempt by virtue of section 47(iv) of the Act.
The shareholder of the taxpayer is from Spain. However, relief under the provisions of the India Spain Double Taxation Avoidance Agreement (DTAA) have not been discussed in the ITAT order, likely, as the gains for the alienation of shares, forms part of a participation of at least 10 percent of the capital stock of the Indian company.

Section 115QA of the Act has been introduced, whereby with effect from 1 June 2013, tax should be payable by the domestic company on the income distributed for buyback of shares.

 

1Order dated 20.12.2019 in ITA Nos. 1783 and 1784/Bang/2018 for AY 2014-15

2206 taxman 142

3116 Taxmann 77 (Bom)

470 taxmann.com 46 (Mumbai – Trib.)

5AAR 1067 of 2011

6A.A.R. NO. 1044 of 2011

14 January 2020

Payments towards up-linking, bandwith and broadcasting charges subject to TDS under section 194C

Payments on account of up-linking charges and broadcasting charges is purely contractual in nature and does not amount to providing technical services.

The Calcutta High Court held that payments made to multi-system operators on account of up-linking charges & down-linking charges, bandwidth and air-time charges is purely contractual in nature and does not amount to providing technical services, accordingly withholding tax under section 194C and not under section 194J of the Income tax Act, 1961 should be applicable.

Facts of the case:

Media World Wide Pvt. Ltd.1 (taxpayer) is in the business of media broadcasting and telecasting. It had entered into an up-linking service agreement with Multi System Operators for up-linking, bandwidth services and air-time service charges. While making the payment, taxpayer deducted tax at source in accordance with Section 194C of the Income tax Act, 1961 (the Act) which deals with withholding tax on payment to contractor for carrying out any work. A survey was conducted in the office premises of the taxpayer and all document and records called for were provided by the taxpayer to the Assessing officer (AO). Subseqnetly the AO passed the order that the payments to Multi System Operators towards up-linking, bandwidth and air-time charges are covered by Section 194J of the Act since such payments were in nature of fees for professional and technical services and taxpayer was held responsible for short deduction of tax and so penalty was imposed under the Act.

An appeal was preferred by the tax payer before the CIT(A) wherein CIT(A) held that such services provided by multi-system operators were related to broadcasting and telecasting and specficially covered by the definition of ‘work’ in explanation (iv) to Section 194C of the Act.

Income-tax Department preferred second appeal before the Tribunal wherein Tribunal held that the case is covered in favour of taxpayer relying on the decision in M/s Sristi Television2 wherein it has been held that tax on payments towards broadcasting to multi-system operators is deductible under Section 194C of the Act.

The Income-tax department challenged the Tribunal order to the High Court.

Decision of High Court:

The Calcutta High Court noted the following various provisions of the tax law:

  • Explanation (iv) of Section 194C of the Act provides that ‘work’ shall include broadcasting and telecasting including production of programmes for such broadcasting and telecasting.
  • Section 194J and Explanation 2 to Section 9(1)(vii) of the Act provides that fees for technical services’ means any consideration (including any lump sum consideration) for rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘salaries’.

The High Court agreed with the submission of learned senior counsel for the taxpayer that ‘technical services’ referred to in Section 9(1)(vii) contemplates rendering of a service’ to the payer of the fee. Mere collection of a ‘fee’ for use of a standard facility which is available to everybody against payment of a fee, does not amount to the provider of the facility receiving fee for technical services.

Further High Court has discussed following judicial precedents:

  • Bharti Cellular Ltd.3 wherein it has been held that the word ‘technical’ would take colour from the words ‘managerial’ and ‘consultancy’, between which it is sandwiched. Since the words ‘managerial’ and ‘consultancy’ involve a personal element, even the expression ‘technical services’ has to be understood as a service which predominantly involves a personal element.
  • ESTEL Communication (P) Ltd.4 wherein it has been held that provision of section 9(1)(vii) does not apply to mere payment for internet bandwidth even if the use of internet facility may require sophisticated equipment as it does not mean that technical services were being rendered by the payee. It was a simple case of purchase of internet bandwidth by the assessee.
  • Skycell Communications Ltd. & Ors.5 wherein it has been held installation and operation of sophisticated equipment with a view to earning income by allowing customers to avail of the benefit by use of such equipment does not result in providing technical service.
  • DE Beers India Minerals (P) Ltd.6 wherein it has been held that in the context of Section 9(1)(vii) of the Act that the technical or consultancy service rendered should be of such a nature that it makes available to the recipient technical knowledge, know-how and the like. Further it service should be that could derive an enduring benefit and utilize the knowledge and know-how on his own in future without the aid of the service provider.
  • UTV Entertainment Television Ltd.7 wherein it has been held that when services were rendered as part of a contract accepting placement fees or carriage fees, they were similar to services rendered against payment of standard fees paid for broadcasting of channels on any frequency. The High Court upheld the Commissioner’s finding that if the contract was executed for broadcasting and telecasting the channels of the assessee, the payment was covered by Section 194C of the Act. When placement charges were paid by the assessee to the cable operators and multi-system operators for placing the signals on a preferred bandwidth, it was a part of work of broadcasting and telecasting covered by Sub-clause (b) of Clause (iv) of the Explanation 2 to Section 194C.
  • Kotak Securities Ltd.8 wherein the Supreme Court has been held that if it is only separate, exclusive or customized service rendered by human effort that would come within the ambit of the expression ‘technical services’. In the absence of such distinguishing feature, service, though rendered, would be merely in the nature of a facility offered or available which would not be covered by Section 194J of the Act.

The High Court has held that in the instant case payment towards up-linking and broadcasting programmes in electronic media is purely contractual in nature and taxpayer has right to avail the benefit only so long as the contract subsists. The said payments do not amount to providing ‘technical services’ and hence section 194J is not attracted. Further held that definition of work includes broadcasting and telecasting and therefore, Section 194C would apply to the facts of the case.

Additionally, the High Court held that imposition of penalty by the tax officer was not defensible as the relevant records of the tax deductee were produced and the Commissioner has observed that the deductee companies have paid the entire tax amount payable after claiming tax credit for the tax deducted at source. The High Court relied on the decision of Supreme court in the case of Hindustan Coca Cola Beverages Pvt. Ltd.9 wherein it has been noted that Circular no.275/201/95-IT (B) dated January 29, 1997 declares that no payment visualized under Section 201(1) of the Act should be enforced after the tax deductor has satisfied the Officer-in-Charge of TDS that taxes due have been paid by the deductee companies.

Observation:

The High Court has elucidate the difference between standard facility provided and technical services rendered. Relying on judicial precedents, the Court has explained payments that could be covered as services for carrying out work under section 194C vis-à-vis services that could be fees for technical services covered under section 194J.

The High Court took into consideration that the service provider companies with which the taxpayer entered into agreements held licence from the Central Ministry pursuant to which they had created a platform for Up-linking and broadcasting of programmes in the electronic media. It was all mechanized and automated. Anybody desirous of taking advantage of such a platform can do so against payment of the prescribed fee. No ‘technical service’, in the High Court’s opinion, was provided by such service providers and the payments they receive cannot be termed as ‘fee for technical services’.

The High Court also took into consideration that, ‘in the modern world, every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. It would be absurd to suggest that every provider of every instrument or facility used by a person can be regarded as providing technical service. Collection of a ‘fee’ for use of a standard facility that is provided to all those willing to pay for it would not amount to receipt of fee for technical services.’

 

1 [TS-7-HC-2020(CAL)] ITA no. 23 of 2015 (Calcutta HC)

2 ITA Nos.1297/KOL/2012 & 276/KOL/2013

3 (2009) 319 ITR 139

4 (2009) 318 ITR 185

5 (2001) 119 Tax Mann 496

6 (2012) 21 Tax Mann 214

7 (2017) 399 ITR 443

8 (2016) 383 ITR 1

(2007) 293 ITR 226 (SC)

10 January 2020

High Court held front-end fee is interest and so deductible over the loan period, and unrealised foreign exchange gains is taxable income

Front-end fee being interest deductible by spread over the loan period. Unrealised foreign exchange gains at year-end taxable as mercantile system of accounting followed.

The Kolkatta High Court in Kesoram Limited1 (the taxpayer) held that front-end fees paid on loan availed is interest and so it is deductible over the loan period, and unrealised foreign exchange gains at year-end is taxable income as the taxpayer follows mercantile system of accounting.

Facts of the case:

Front-end Fees

  • The taxpayer had paid Rs. 61,69,000 as front-end fees to obtain new loan. Such expenses were claimed for the AY 2004-05 by the taxpayer under section 35D of the Income-tax Act, 1961 (the Act) over a period of 10 years.
  • According to the tax officer, this expenditure could be claimed once and could not be spread over a period of ten years under Section 35D. This expense, according to them was not one which would fall within the conditions stipulated in Section 35D(1) and (2) of the said Act.
  • The Tribunal followed its earlier year’s order and dismissed the tax department’s appeal, which was challenged before the High Court.

Unrealised foreign exchange gain

  • The taxpayer had claimed the year-end unrealised foreign exchange gains as not taxable being notional gains. The tax officer added Rs. 7,20,12,49 on account of unrealised foreign exchange gain since the taxpayer was following the mercantile system of accounting and they could not avoid the said amount being assessed as its income during the relevant financial year.
  • The Commissioner of Income Tax, Appeals deleted the addition.
  • The Tribunal had upheld the decision of Commissioner of Income Tax, Appeals and dismissed the tax department’s appeal, which was challenged before the High Court.

Decision of High Court:

Front-end fees

  • The High Court was of the opinion that the facts of this case were very similar to those before the Supreme Court in Madras Industrial Investment Corpn Ltd. vs CIT2. The Supreme Court had held that discount on issue of debentures was allowable as deduction over the tenure of the debentures. The High Court observed that the front-end fee is part of interest under Section 2(28A) of the said Act and such expenditure was revenue and not capital in nature. So according to the Supreme Court decision, the taxpayer is entitled to amortize it.
  • As the Tribunal had merely followed its order in the preceding year, the High Court set aside
    the order of the Tribunal with a direction to re-determine the issue by considering Madras
    Industrial Investment Corpn. Ltd. (supra)
    and determine the allowable revenue expenses of
    the taxpayer for the relevant assessment year.

Unrealised foreign exchange gains

  • The learned Senior Advocate appearing for the taxpayer conceded that the ground was in favour of the Revenue in view of the Supreme Court decision in the case of CIT v. Woodward Governor India (P.) Ltd3.
  • The Supreme Court had held that “valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under Section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the central government has made Accounting Standard-11 mandatory, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet, is an item of expenditure under Section 37(1) of the 1961 Act and allowable as deduction.
  • Thus, the unrealised foreign exchange gain as at year-end credited to the profit and loss account as per the mercantile system of accounting followed by the taxpayer, should be taxable.

Observation:

The High Court has relied on the Supreme Court judgements for both grounds of appeal. The decision should be relevant for the principles of accrual under the Indian Accounting Standards (IND AS) adopted by Indian companies and the Income Computation and Disclosure Standards (ICDS) provided under the Income-tax Act, 1961.

 

1 Commissioner of Income-tax, Kolkata II v. Kesoram Industries Ltd. [2019] 112 taxmann.com 356 (Calcutta)

2 Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340

3 CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326

8 January 2020

Cost of underlying shares on redemption of GDR and long-term capital loss on STT paid shares not to be ignored

On conversion of GDRs into shares, weighted average price cannot be adopted as cost of shares and LTCL on sale of shares subject to STT can be carried forward without setting off against LTCG on sale of shares subject to STT and claim exempt u/s 10(38).

The Mumbai Tribunal, in the case of a non-resident taxpayer, held that weighted average price of the share prevailing on the stock exchange should not be considered for cost of acquisition of shares on redemption of Global Depository Receipts (GDRs). Further the Tribunal held that long-term capital loss (LTCL) on sale of shares subjected to Securities Transaction Tax (STT) can be carried forward and is not to be set-off against long-term capital gains exempt from tax under section 10(38) of the Income tax Act, 1961.

Facts of the case:

Nomura India Investment Fund Mother Fund1 (taxpayer or Nomura) is an approved sub-account of the Master Trust Bank of Japan Limited, a Foreign Institutional Investor (FII) registered with the Securities and Exchange Board of India (SEBI). During financial year 1 April 2006 to 31 March 2007, relevant to the assessment year 2007-08, the taxpayer redeemed Global Depository receipts (GDRs) into the underlying equity shares. As per para 7(3) of the Issue of Foreign Currency Convertible Bonds And Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993, on redemption, the cost of acquisition of the shares underlying the GDR shall be reckoned as the cost on the date on which the Overseas Depositary Bank advises the Domestic Custodian Bank for redemption. The price of the ordinary shares of the issuing company prevailing on the Bombay Stock Exchange or on the National Stock Exchange on the date of the advice of redemption shall be taken as the cost of acquisition of the underlying ordinary shares. In the instant case, the date of cancellation of the GDR and release of the underlying equity shares was a public holiday and so the taxpayer took the opening share price prevailing on the stock exchange on the immediately next working day.

Due to fluctuating prices on the next working day, the Assessing Officer considered the weighted average price of shares as cost of acquisition and accordingly the short-term capital loss was reduced substantially.

Further taxpayer had earned long-term capital gain (LTCG) on sale of shares subject to STT and claimed exemption under Section 10(38) of the Income tax Act, 1961, without setting off long-term capital loss on sale of shares subject to STT. However, the Assessing Officer considered the term income as used in Section 10(38) of the Act, as entire receipt arising from transfer of long-term capital asset which includes loss and did not allow carry forward of long-term capital loss.

An appeal was preferred by the taxpayer before the CIT(A). However they did not succeed.

Decision of ITAT:

Cost of Acquisition of Shares on redemption of GDRs

The ITAT observed that there is no specific provision in the Act providing for determination of cost of acquisition of underlying shares on redemption of GDRs. Sec.55(2)(ac) provided some insight on the matter. Provision to Section 55(2)(ac) provides that where the capital assets are listed on any recognised stock exchange as on January 31, 2018, the highest price of the share quoted on the said date should be considered as fair market value and where there is no trading of capital asset on the said date, the highest price of such asset on said exchange on a date immediately preceding the date shall be considered as the fair market value.

ITAT observed that ideally the closing price prevailing on the stock exchange on the date immediately preceding the date of advice (being a public holiday) should have been considered for the purpose of calculating the cost of acquisition of the shares. However as the dispute was only with regard to the price of shares and not the date, the ITAT did not indulge in that issue.

ITAT held that in absence of any specific mandate either in the statute or in the Scheme, weighted average price towards cost of shares cannot be adopted. Accordingly based on the facts and circumstances, opening price of the share on next working day, which is close to the closing price on the day prior to the holiday, is the most appropriate price.

Setting off of LTCL on sale of shares subject to STT against LTCG on sale of shares subject to STT

ITAT observed that on reading section 10(38) of the Act, the exemption is in respect of income derived from sale of shares where STT has been paid. Therefore, it cannot be said that capital gain on sale of shares is generally exempt. Only on fulfillment of certain conditions, gains derived from sale of shares is exempt u/s 10(38) of the Act. Thus, the income derived from sale of shares is not exempt itself.

ITAT has relied on co-ordinate bench ruling in Raptakos Brett & Co. Ltd2 , United Investments3 , Somnath Vaijanath Sakre4 and Raptakos Brett & Co. Ltd (HC)and held that long-term capital loss arising on sale of shares cannot be set off against long-term capital gains on sale of shares subjected to STT and claimed exempted under Section 10(38) of the Act. The ITAT also held that the said loss was allowed to be carried forward to subsequent years.

Observation:

The Mumbai Tribunal in The Master Trust Bank of Japan Ltd., as trustee of Black Rock India Equity Fund6  has held that, “Therefore, the average market price adopted as the “prevailing price” on the date of conversion of GDRs into equity shares as the ‘cost of acquisition’ is reasonable and justifiable in the absence of any other circular/Rule vis-à-vis Scheme under which GDRs are issued and redeemed into ordinary shares of the company.” This decision of the Tribunal was followed by the Mumbai Tribunal in M/s. LG Asian Plus Ltd7.

Apparently from the Tribunal order in Nomura, it appears that these decisions of the Mumbai Tribunal have not been referred.

The Mumbai ITAT has been consistent with recent judicial precedents that long-term capital loss arising on sale of shares subject to STT, cannot be ignored or set-off against long-term capital gains on sale of shares subject to STT, which are exempt under Section 10(38) of the Act. However, the Central Board of Direct Taxes vide the FAQ (F. No. 370149/20/2018-TPL) dated 4 February 2018 on the Finance Bill 2018 had clarified as under:

Q 23. What will be the treatment of long-term capital loss arising from transfer made between 1st February, 2018 and 31st March, 2018?
Ans 23. As the exemption from long-term capital gains under clause (38) of section 10 will be available for transfer made between 1st February, 2018 and 31st March, 2018, the long-term capital loss arising during this period will not be allowed to be set-off or carried forward.
Q 24. What will be the treatment of long-term capital loss arising from transfer made on or after 1st April, 2018?
Ans 24. Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains.”

 

1ITA 8140/Mum/2010

2[2015] 58 taxmann.com 115 (Mumbai - Trib.)

3ITA No. 511/Kol/2017 for A.Y. 2013-14 order dated 01.07.2019

4ITA No.2986/Pun/2016 for A.Y. 2012-13, order dated 08.03.2019

5[Income Tax Appeal no. 357 of 2016 dated 09.10.2018

6I.T.A. No.7793/M/2011 (2013) for the AY 2008-09 vide order dated 10 May 2013

7ITA No. 7921/M/2010) for the A.Y. 2007-08 vide order dated 31 July 2015

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