For Bombay Chartered Accountants Society “Recent Important Issues In Corporate Taxation including Domestic Transfer Pricing” 12 June 2013 Rajan Vora. Issues in Corporate taxation - Outline. Budget Impact Implications of increase in tax rate of royalty and FTS – Sec 115A
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“Recent Important Issues In Corporate Taxation including Domestic Transfer Pricing”
12 June 2013
“Another case is the distribution of profits by a subsidiary to a foreign parent company in the form of royalty. Besides, the rate of tax on royalty in the Income-tax Act is lower than the rates provided in a number of Double Tax Avoidance Agreements. This is an anomaly that must be corrected. Hence, I propose to increase the rate of tax on payments by way of royalty and fees for technical services to non-residents from 10 percent to 25 percent. However, the applicable rate will be the rate of tax stipulated in the DTAA.”
* This is without considering impact of MFN Clause
Trigger event is credit or payment of consideration on or after 1 June, 2013 – may apply to payment of balance installments, even where purchase of property accomplished prior to June 2013
Applicability of provisions of section 203A- obtaining TAN
Section 115 QA –
Any amount of distributed income on buy-back of shares ( not listed in a recognized stock exchange) in accordance with section 77A of the Companies Act, 1956 from a shareholder:
Amendment is to supersede some of the favourable decisions and is seen as back door fast forwarding of GAAR. Amendment is not in sync with Shome Committee recommendation on the treatment to be accorded to buy-back.
Consider following cases :
1 By doing this, many lands have been exempted from definition of ‘capital assets’)
Amendment under Wealth Tax Act
Supreme Court decision in case of Smifs Securities Ltd [348 ITR 302]
In this case, SC was concerned with claim of depreciation on goodwill made by the amalgamated company. As part of amalgamation, the taxpayer had paid excess value over net assets of the amalgamating company. Such excess was claimed to be consideration towards reputation which the amalgamating company enjoyed in order to retain existing clientele.
Basing itself on the factual finding of the ITAT that taxpayer had acquired a capital asset in the form of ‘goodwill’ pursuant to amalgamation,
the SC in a brief order observed that “the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 to S. 32 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act.”
Medical Council of India (MCI ) had issued Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (Regulations) in April 2002 laying down code of medical ethics to be followed by medical practitioners and framed rules for medical practitioners
The aforesaid Regulations were amended in December 2009 to further provide guidelines for professional conduct, etiquette and ethics for medical practitioners
The CBDT noticed that some pharmaceutical and allied health sector industries were providing freebees to medical practitioners and their professional associations in violation of
the Regulations and, therefore, instructed the Tax Authority through the Circular no 5/2012 dated 5 August 2012 that claim for any expense in providing freebees in violation of Regulations as amended from 10 December 2009 is not admissible as business expense deduction under the provisions of Act
Entitlement of depreciation in case of finance lease transaction
Essentially two conditions have to be satisfied for grant of depreciation allowance
on any plant or machinery:
It should be owned by the assessee.
It should be used for the purpose of business
As regards condition (ii), it is now well settled that if taxpayer is engaged in business of leasing, the asset given on lease can be regarded as used for purpose of taxpayer s leasing business (Refer CIT v. Shaan Finance Private Limited (1998) 231 ITR 308 (SC) and I.C.D.S. v. CIT (2013) 350 ITR 527 (SC)).
The controversy effectively, therefore, surrounds whether lessor in a finance lease
can be regarded as owner of the leased asset for tax purposes.
Whether any penal action u/s 271(1) (c) can be brought against the assessee as a result of any retrospective amendment in law
Yahoo India Pvt. Ltd (ITA (LOD) No. 2014 of 2012, dt 8 March, 2013) – Bombay High Court
In this case, the tax authority treaty the payments made by assessee for uploading and display of banner advertisement on its website portal as royalty income u/s 9(1) (vi) of the Act and accordingly, disallowed the same for non-deduction of tax at source u/s 40a(i).
Further, penalty u/ 271(1) (c) for concealment or furnishing of inaccurate particulars of income was also imposed upon the assessee.
The Tribunal deleted the disallowance and also the penalty.
On appeal by the tax authority before the High Court, the Revenue sought to justify the disallowance and penalty by placing reliance on Explanation 5 introduced to Sec 9 of the Act by the Finance Act, 2012 with retrospective effect from 1st June, 1976 to tax royalty income.
Dismissing tax authority's appeal, Bombay HC held that the very fact that the law has been amended with retrospective effect clearly shows that the issue was debatable and in the absence of any failure to disclose material facts necessary for the purpose of assessment, the deletion of penalty levied under Section 271(1)(c) of the Act cannot be faulted.
Legislation introduced with effect from 1 April 2001
Considering the need of hour the Finance Minister in his Budget Speech of 2001 explained the rationale for introducing Transfer Pricing Regulations
“The presence of mutlinational enterprise in India and theirability to allocate profits in different jurisdictions by controlling prices in intra group transactionshas made the issue of transfer pricing a matter of serious concern”
The legislative intent behind the introduction of detailed transfer pricing provisions was later discussed by CBDT in its Circular No 14 / 2001 as
“The basic intention underlying the new transfer pricing regulations is to
prevent shifting out of profits by manipulating prices charged or paid
in international transactions, thereby eroding the Country’s tax base”
Under the pre- amended provisions:
Section 40A(2)- Expenses or payments not deductible in certain circumstances.
The existing provisions of clause (a) of sub-section (2) of the aforesaid section 40A provides that
Relevant extracts of the Departmental Circular - Circular NO. 6-P, Dated 6-7-1968 and circular NO. 4-P[LXXVI-65], dated 7-6-1968
Under the pre- amended provisions:
Section 80IA- Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc
Objective behind applying and extending of scope of transfer pricing regulations to domestic transactions:
Fair market value
Arm’s Length Price
SDT : Significant Transactions which may be impacted
Until now, Section 92C was specifically applicable only to international transactions, and has now been extended to also include specified domestic transactions. However, Rule 10B and 10AB currently deal only with situations involving international transactions, and are yet to be amended in order to give practical effect to the amendment to Section 92C
- Instead of interest @ 18%, A1 Ltd gives interest free loan to A2 Ltd. Thus A2 Ltd does not pay any interest to A1 Ltd.
- A2 Ltd has used interest free loan received from A1 Ltd in its undertaking which is entitled to profit linked tax holiday under s 10AA (SEZ Unit). Similarly if A1 Ltd has given interest free loan out of borrowed funds – there is direct linkage. What would be the impact under section 36(1)(iii) and SDT provisions?
3) Canapplication of Domestic TP provisions lead to notional taxation of any income of the taxpayer (for instance, provision of bank guarantee by Indian parent company for credit facilities availed by its domestic subsidiary) However treated, it is less than ALP or charging of less than fair price (or treated as less than ALP) to other related party (where no deduction under section 10A etc or 80IA/80IB etc is claimed or charging price to Related Party by units eligible for income linked incentive deduction?
6) Whether common overhead costs like interest, administration, HR, accounting, etc incurred by HO needs to be allocated to qualifying units, in view of Domestic TP provisions? If yes, whether the actual expenditure can be allocated? If done so, will TP provisions apply or whether a FMV needs to be imputed by fictionally deeming HO as unrelated arms’ length service provider?
7) Whether taxpayer can avail DRP route if adjustments are made in respect of SDT?
8) Type of transactions covered under section 40A(2)(b), cases for payments made by a company:
Case 1 – To a Director Mr. A (Professional not holding any shares) or any relative of the Director (Mr C) of the taxpayer – Section 40A(2)(b)(ii), whether payments made to relative of director is covered?
Case 2 - To an individual who has substantial interest in the business or profession of the taxpayer or relative of such individual – Section 40A(2)(b)(iii), whether payments made to Mr A and Mr C, who are relative of Mr D, (who has substantial interest) in the taxpayer company?
Case 3 – To any other company carrying on business in which the first mentioned company has substantial interest – Section 40A(2)(b)(iv), in case where A Ltd has substantial interest in taxpayer company and A Ltd has substantial interest in B Ltd. Whether payments made to B Ltd by taxpayer company would be covered?
Case 4 – If A Ltd is holding company of ‘B’ Ltd and ‘B’ Ltd is holding company of ‘C’ Ltd, will transaction between ‘C’ Ltd and ‘A’ Ltd be covered by SDT?
Maintenance of robust and contemporaneous documentation.
In this connection, Section 92D , read with Rule 10D of the Income Tax Rules, 1962 (the Rules) prescribes stringent documentation requirements on the part of the taxpayer, to justify the arm’s length nature of transactions.
It is interesting to note that although Section 92D has been mended to include specified domestic transactions, a similar amendment has not yet been made to Rule 10D.
On a strict conjoint reading of Section 92D and Rule 10D, it appears that the taxpayer subjected to transfer pricing regulations in respect of specified domestic transactions is required to maintain sufficient documentation to prove the arm’s length nature of such transactions. However, the documentation does not necessarily need to be in line with Rule 10D requirements.
The relevant Section (Section 92E) has been amended to include specified domestic transactions, however, the relevant Rule (Rule 10E), and the format of the accountant’s report (Form 3CEB) are yet to be amended.
In the absence of clarity regarding Form 3CEB, it is not clear whether separate accountant’s reports (Form 3CEBs) will need to be filed for international transactions and specified domestic transactions, or a single Form 3CEB will include both these categories of transactions
APA - Provision of bilateral / multilateral APA mechanisms in addition to unilateral APA’s. – Implementation holds the key
Domestic Transfer Pricing - Clarity on Transactions to be covered under SDT and application of MAM
Formulate position on rollbacks - taxpayers must have assurance that past closed years will not be reopened for audit based on the transfer pricing agreed in the APA
Benefits of MAP as available with US and UK to be extended to other countries.
Guidance on Compensating adjustments and Correlative relief, secondary adjustments, and set offs