Friday, June 23, 2017

Timing of India Withholding Tax on Royalty/Technical Service Fees for overseas entities– the Dichotomy continues?

Withholding Tax in India is often perceived to be a challenging matter by many overseas entities having operations/activities in India. This may be on account of various reasons like lock up of funds in India (on account of taxes withheld) where a position of non taxability of income is adopted, mismatch between the year in which taxes are withheld by the Indian payer of income vs. the year in which the income is offered to tax in India, challenges with claiming credit for taxes withheld in India in the home country. 

One of the issues on which there has been some judicial debate is the point of time when withholding tax obligation triggers for an Indian payer of income in relation to a Royalty/Technical Service fee ('Service fee') payment proposed to be made to an overseas entity.

So as to set a context to the issue which is discussed in this article, to start with, it may be relevant to make a quick note of the fact that Sections 5 and 9 of the Income-tax Act, 1961 ('IT Act') are provisions dealing with scope of incomes chargeable to tax in India in principle, whereas, Section 145 of the IT Act governs the timing of taxation of the incomes in India (i.e. based on the cash or mercantile system of accounting regularly followed). Section 195 of the IT Act deals with withholding tax obligations in relation to payments proposed to be made to non-residents which are chargeable to tax in India.

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IFRS Exposure draft: Sales proceeds during testing of fixed asset to be recognised as other income

The International Accounting Standards Board (IASB) has proposed narrow-scope amendments to International Accounting Standards (IAS) 16 Property, Plant and Equipment. IAS 16 provides principles for recognition and measurement (initial & subsequent) of items of Property, Plant and Equipment (PPE) as assets. The proposed amendments include modification to the definition of directly attributable costs as cited in the para 17 of IAS 16.

As per clause (e) of para 17, directly attributable costs include costs of functionality testing of assets after deducting the net sale proceeds from items produced while bringing the asset to the location & condition necessary for it to be capable of operating in the manner as intended by the management.

Now, IASB has proposed amendments to the above component of directly attributable cost. As per the amendment, the net sale proceeds from such items produced should not be deducted from the costs of functionality testing of assets. To establish principle for treatment of such sale proceeds, a new para 20A has been proposed to be added to IAS 16.

According to the proposed new para 20A, the proceeds from selling such items produced while bringing the asset to that location & condition and production costs of such items should be recognised to profit or loss as per respective IAS/IFRS (International Financial Reporting Standards).

The above amendments have been proposed to reduce diversity in application of para 17 of IAS 16. These amendments would be applied both prospectively and retrospectively. An entity shall apply these amendments retrospectively only to the items property, plant & equipment brought to use as intended by the management only in the year in which the entity first applies these amendments. The Exposure Draft of proposed amendments would be open for public comment until October 19, 2017.

Not Really a Seamless Credit Mechanism – The Story of ‘Blocked Credits’

A seamless credit flow is the bedrock of an efficacious GST mechanism whereby cascading effect of taxes is eliminated through a chain of tax credits allowed for set off against output tax liability at each stage. With the introduction of GST regime in India, expectations were high on seamless availability of Input Tax Credits ('ITCs) on various business expenses such as employee insurance, business travel, rent-a-cab etc., that are
currently 'blocked' under the 'existing law'. Strangely enough, expectations were belied as these ITCs continue to be 'blocked' under the imminent GST regime. In brief, the taxpayer cannot avail ITCs on following important categories of expenditure under the GST regime: 

1) Motor vehicles (except for a few taxpayers like transporters, vehicle dealers etc);

2) Food & beverages and outdoor catering etc;

3) Health treatment, membership of fitness club etc;

4) Taxi/cab service, Insurance (except when required by law); and

5) Works contract services;

A perusal of the above list reveals that the situation has remained unchanged or become stricter as regards 'blocked credits' under the GST Regime.

Final notification on Sec. 10(38) brings clarity

Under the existing provisions of the Section 10(38) of the Income-tax Act ('the Act') income arising from a transfer of long-term capital asset, being equity share of a company, is exempt from tax if the sale has been undertaken on or after 1st October, 2004 and is chargeable to Securities Transactions Tax (STT).

It has been noticed that such exemption is being misused by declaring unaccounted income as exempt long-term capital gains (LTCG) after entering into sham transactions. With a view to prevent this abuse, Section 10(38) has been amended to provide that exemption shall be available only if the acquisition of share is chargeable to STT. Further, powers have been given to the CBDT to notify transactions which would be eligible for capital gains exemption even if no STT was paid on purchase of such shares. The CBDT then issued the draft notification and brought out the negative list of transactions on which such exemption would not be available. Now the CBDT has issued the final notification considering the representations of various stakeholders for entitlement to the capital gain exemption in genuine cases.

The final notification is similar to the draft notification in terms of prescribing negative list of transaction. However, relaxation has been given in interest of exemption in genuine cases.

Following three type of transactions will not enjoy capital gain exemption under Section 10(38):

a) Acquisition of listed equity share through a preferential allotment in a company whose equity shares are not frequently traded in stock exchange.

b) Acquisition of listed equity shares not through a recognized stock exchange.

c) Acquisition of equity shares of a company during the period of its delisting.

Ind AS 110: In case of mergers of subsidiaries, book values is to be taken as per standalone books

Query

A company, say P Ltd. is a parent company of two companies, say Q Ltd. & R Ltd. Q Ltd. & R Ltd. are under common control of P Ltd. In case of common control business combination, the assets, liabilities and reserves of the transferor (acquired) company is recognised at their book values in the books of the transferee(acquiree) company in accordance with Appendix C of Ind AS 103, Business Combinations.

Now, CBDT has notified new Rule 10CB which prescribes computation of interest income pursuant to secondary adjustment. Rule 10CB also provides that repatriation of excess money shall be made on or before 90 days from the:-

(A) Whether the book values should be as per the books of the companies merged or as per the consolidated books of parent company in following situations:

1. Q Ltd. merges with R Ltd.

2. Q Ltd. merges with P Ltd.

(B) Further, whether P Ltd. shall require to eliminate the effect of business combination in above two situations in the consolidated financial statement?

Response

(A)

Situation 1 : Appendix C, Business Combinations of Entities under Common Control of Ind AS 103 provides that accounting of merger of common control companies should be done as per the pooling of interest method. Under this method, assets, liabilities and reserves of the transfer or should be recognised in the books of the transferee at their carrying amounts without any adjustments except harmonisation of accounting policies of both companies in accordance with para 9 of Appendix C.

Para 11 of Appendix C states that the balance of retained earnings of the transferor is aggregated with that of the transferee. Further, the name of reserves, like general reserve, revaluation reserve etc. of the transferor should remain same in the book of transferee also in accordance with para 12 of Appendix C. Any difference between purchase consideration and share capital of the transferor is recognised as capital reserve separately from other capital reserves.

Accordingly, the book values or carrying amounts of assets, liabilities and reserves should be combined on the basis of standalone books of Q Ltd. and R Ltd., i.e. the merged companies.

Situation 2 : P Ltd. is holding company of Q Ltd. So, merger of P Ltd. with Q Ltd. will not have any effect. The assets, liabilities and reserves which were appearing in the consolidated financial statement of P Ltd. will not be part of standalone financial statement of P Ltd. Therefore, it would be appropriate to take carrying amounts of assets, liabilities and reserves of Q Ltd. as appearing in the consolidated financial statement of P Ltd.

(B)

As per para B86 of Ind AS 110, Consolidated Financial Statements, in consolidation procedure intra group assets and liabilities, equity, income, expense and cash flows relating to transactions between group companies should be eliminated in full. So, in the present case in both situations, P Ltd. should eliminate all effects of mergers in its consolidated financial statement.

Reference

Issue 2 of Ind AS Transition Facilitation Group Clarification Bulletin 9

Saturday, June 17, 2017

CBDT notifies rule for computing interest income for secondary adjustments under TP

In order to make the actual allocation of funds consistent with that of the primary transfer pricing adjustment, Finance Act, 2017 inserted Section 92CE in the Income-tax Act, 1961 to provide for secondary adjustment by attributing income to the excess money lying in the hands of the associated enterprise.

As a result of primary adjustment, if there is an increase in the total income or reduction in the loss of the assessee, excess money which is available with its AE will have to be repatriated to India and to the extent it is not repatriated, it shall be deemed to be an advance made by the assessee to the AE on which interest will have to be calculated. Now, CBDT has notified new Rule 10CB which prescribes computation of interest income pursuant to secondary adjustment. Rule 10CB also provides that repatriation of excess money shall be made on or before 90 days from the:-

1) Due date of filing of return if primary adjustment to TP has been made suo-moto by assessee;

2) Date of order of AO or appellate authority, if primary adjustment determined in the order has been accepted by assessee;

3) Due date of filing of return in case assessee had entered into Advance Pricing Agreement;

4) Due date of filing of return in case assessee opted for safe harbour rules under section 92CB;

5) Due date of filing of return in case an agreement is made under Mutual Agreement Procedure (MAP).

With regard to the rate of interest to be computed in the case of failure to repatriate the excess money with in the prescribed time limit, rule provides for separate interest rates for international transactions denominated in Indian rupee and those denominated in foreign currency. The rate of interest is on annual basis and shall be computed as follows:-

a) at one year marginal cost of fund lending rate of State Bank of India as on 1st of April of previous year plus 325 basis points in case international transaction is denominated in Indian rupees.

b) at six month London Interbank Offered Rate as on 30th September of previous year plus 300 basis points in the case international transaction is denominated in foreign currency.

Notification No. 52/2017, dated 15-06-2017

Review petition couldn’t be barred when SLP was to be dismissed: HC

Delhi High Court has held that a review petition could be maintainable before High Court after the Special Leave Petition (SLP) has been dismissed by the apex court and the aggrieved party could not be deprived of any statutory right of review. [2017] 82 taxmann.com 295 (Delhi)

Land appurtenant to building was entitled to sec. 54F relief even if no construction was done on It

Facts:

a) Assessee had sold shares and utilised long term capital gains from such sale of shares to purchase property which was comprised of land along with such building. He claimed exemption under section 54F.

b) Assessing Officer (AO) held that as per provisions of section 54F only investment in a residential house property is eligible for deduction. Land in one schedule had no residential building and therefore exemption under section 54F wasn’t available.

c) On appeal, CIT(A) allowed claim of assessee. Aggrieved-revenue filed the instant appeal before the Tribunal.

The Tribunal held in the favour of assessee as under:

1) As per Section 54F, exemption is allowable in respect of amount invested in construction of residential house property. Nothing is mentioned in Section 54F that deduction couldn’t be allowed on acquisition on land appurtenant to the building or on the land on which building is being constructed.

2) When the land was purchased and building was constructed thereon, it was not necessary that such construction should be on the entire plot of land, meaning thereby a part of the land which was appurtenant to the building and on which no construction was made, there was no denial of exemption on such investment.

3) Contention of revenue that exemption under section 54F was eligible only for construction of house wasn’t tenable. Exemption couldn’t be denied on the land appurtenant to building if all the other conditions of section 54F were satisfied. 

4) Thus, the cost of vacant land appurtenant to and forming part of the residential unit was to be considered for claim of exemption under section 54F even if no construction had been done on the appurtenant land. [2017] 82 taxmann.com 93 (Chennai)
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'Whats App’ didn’t abuse dominant position in market for instant messaging services: CCI

The Competition Commission has rejected the allegations of predatory pricing against WhatsApp in the market for instant messaging by stating that even though WhatsApp was in dominant position and it was not the only provider of consumer communication applications and consumer could be able to download other similar applications such as Viber, Snapchat, Hike, Hangouts, Chat On, etc. Therefore, allegations of predatory pricing have no substance and WhatsApp has not contravened any provisions of the Competition Act. - [2017] 82 taxmann.com 272 (CCI)

Aadhaar number must for filing tax return and linking PAN; CBDT clarifies effect of SC court verdict

Honorable Supreme Court in its landmark judgement has upheld Section 139AA of the Income Tax Act as constitutionally valid which requires quoting of the Aadhaar number in applying for PAN as well as for filing of income-tax returns.

Section 139AA(2) of the Income-tax Act provides that every person who has been allotted PAN as on the 1st day of July, 2017, and who is eligible to obtain Aadhaar, shall intimate his Aadhaar on or before a date to be notified by the Central Government. The proviso to section 139AA (2) provides that in case of non-intimation of Aadhaar, the PAN allotted to the person shall be deemed to be invalid from a date to be notified by the Central Government.

The Court also held that the “Parliament was fully competent to enact Section 139AA of the Act and its authority to make this law was not diluted by the orders of this Court.” 

CBDT clarifies the effect of the Apex Courts judgement as follows:

1) From July 1, 2017 onwards every person eligible to obtain Aadhaar must quote his Aadhaar number or Enrolment ID of Aadhaar no. for filing of income-tax returns as well as in applications for PAN;

2) Assessee’s who have been allotted PAN as on 01-07-2017, and who have Aadhaar no. or are eligible to obtain Aadhaar no., shall intimate their Aadhaar number to income-tax authorities.

3) However, for non-compliance of the above point No.(2), only a partial relief by the Court is that PAN of the person will not be cancelled for those who do not have Aadhaar and who do not wish to obtain Aadhaar number.