Interest on Continuing Debit Balance– Notional or Real!

Introduction

Over the years since the introduction of the Indian Transfer pricing regulations, the transfer pricing audits based on the experience and learnings gained have seen numerous interpretations of the provisions, thereby leading to transfer pricing adjustments. The Indian transfer pricing litigation scenario has seen the trend of adjustments shifting from mere dispute on comparable companies to larger issues such as location savings, management cross charges, intangibles, share valuations, business restructuring, etc.

One such issue being the continuing debit balance in the financials of multinational companies(MNC). Globally due to the financial exigencies, the MNCs often commercially require to defer the payables / receivables. The continuing debit balance / receivables have been treated by the tax authorities as an international transaction and thereby sought to impute arm's length interest on receivables outstanding from the associated enterprise (AE) that were not realized within the credit period.

The Section 92B of the Indian transfer pricing regulations provides the coverage of the transactions that could be treated as international transaction. Vide Finance Act 2012, a clarificatory Explanation was inserted with retrospective effect from 1 April 2002. By virtue of the said Explanation, inter alia the expression 'international transaction' included capital financing such as any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type o

Changes in the Finance Bill 2016 as passed by the Lok Sabha

On May 5, 2016, the Lok Sabha passed the Finance Bill, 2016. The Bill which was presented originally in the Lok Sabha on February 29, 2016 has not been passed in its original shape. Various changes have been made in the Bill. New amendments have been proposed. Some earlier proposed amendments have been removed, so on and so forth. A snippet of some changes made in the Finance Bill, 2016 as passed by the Lok Sabha viz-a-viz the Finance Bill, 2016 presented originally in the Lok Sabha are presented hereunder.

1. The Finance Bill, 2016 as passed by the Lok Sabha inserted a new clause to provide that unlisted shares of company would be treated as short-term capital asset if it is held for a period of 24 months or less immediately preceding the date of its transfer.

2. The Finance Bill, 2016 proposed a new section 80-IAC to provide 100 percent deduction for 3 assessment years to an ‘eligible Start-up’. The ‘eligible start-up’ is defined to mean a ‘company’ engaged in an eligible business. The Finance Bill, 2016 as passed by the Lok Sabha extends the definition of ‘eligible start-up’ to include ‘LLP’.

3. The Finance Bill, 2016 had proposed an additional tax of 10% if amount of dividend received by a taxpayer exceeds Rs. 10 Lakhs. The Finance Bill, 2016 as passed by the Lok Sabha provided that aggregate amount of dividend (i.e., dividend paid or declared or distributed by one or more domestic companies) shall be considered for the limit of Rs.10 lakhs.

4. The Finance Bill, 2016 proposed that every seller of a motor vehicle shall collect TCS at the rate of 1% of value of motor car if such value exceeds ten lakh rupees. Such tax was proposed to be collected from the buyer under section 206C at the time of debiting the amount receivable or at the time of receipt, whichever happened earlier. The Finance Bill, 2016 as passed by the Lok Sabha provides that tax shall be collected under Section 206C only at the time of receipt of consideration.

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Service tax can be levied on freight even if same is included in custom value of imported goods

Service Tax : There is no law that 'if customs duty is chargeable, Service Tax is not leviable on same component'; hence, service tax may be levied on imported service, even if customs duty was already paid thereon by inclusion in customs value

Service Tax : Expenditure or costs incurred by C&F Agent i.e., freight, insurance, loading, unloading, handling charges etc. are excluded from value, only if conditions enumerated in rule 5(2) of Service Tax Valuation Rules, 2006 are satisfied.

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An agricultural land couldn't be treated as non-agricultural land just because it was situated near a highway

Facts

a)    The assessee sold a land and claimed the same to be an agricultural land not being a capital asset within the meaning of section 2(14) of the Income-tax Act (‘Act’).

b)    The Assessing Officer (AO) opined that since the land was situated near a highway, it could not be considered as an agricultural land. Therefore, assessee was liable to pay tax on capital gain arising from sale of such land.

c)    CIT(A) reversed the order of the AO. Aggrieved by the order of the CIT(A), revenue filed the instant appeal before the tribunal.

The tribunal held in favour of assessee as under-

1)    The term 'agricultural land' is not expressly defined under the Act. In the case of CWT v. Officer-in-Charge (Court of Wards) [1976] 105 ITR 133 (SC), the Supreme Court held that the agricultural land must be a land which could be said to be either actually used or ordinarily used or meant to be used for agricultural purpose.

AS 18: Names of KMP having control over entity should be disclosed even if there is no transaction with them

Query

A Managing Director (MD) (Mr. A) of a company (B Ltd) has 21% voting power in the company. Key Management Personnel (KMP) include MD of a company as per the definition given in AS 18, 'Related Party Disclosures'. So, Mr. A is a related party of B Ltd. As per an agreement between Mr. A and B Ltd., he has the power to direct financial and operating policies of A Ltd. So, he has control over B Ltd. as per the definition of 'Control' given in AS 18. During the year there were no transactions between Mr. A and B Ltd. In the financial statement B Ltd. has not made any disclosure in respect of Mr. A. The management of B Ltd. is of view that disclosure is not required if there is no transaction with related party (i.e., Mr. A).

Is contention of B Ltd. correct?

Answer

No.

Para 21 of AS 18 requires that name of the related party and nature of the related party relationship where control exists should be disclosed irrespective of whether or not there have been transactions between the related parties.

In this case Mr. A is a related party of B Ltd. having control over it. So, with reference to Para 21 of AS 18 as mentioned above, B Ltd. should disclose the name of Mr. A and nature of relationship with him in the financial statement.

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No disallowance under sections 40(a)(ia) and 43B if assessee-trust was enjoying exemption under section 11

Issue

Whether disallowance under sections 40(a)(ia) and 43B could be made in a case of trust enjoying exemption under section 11 of the Income-tax Act (‘Act’)?

The tribunal held as under-

1)    Sections 11, 12 and13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled.

2)    Sections 40(a)(ia) and 43B fall under Chapter IV-D of the Act. The said Chapter deals with computation of profits and gains from business or profession. The profits and gains from business or profession are computed under section 28. Section 29 provides the manner of computation of income under the head "profits and gains of business or profession", which states that the income referred to in section 28 shall be computed in accordance with the provisions of sections28 to 43D.

Comments on the Draft Rule for giving Foreign Tax Credit

1. Introduction:

Finance Act 2015, inserted, w.e.f. 01.06.2015, clause (ha) in sub-section 2 of Section 295. It enables the Board, subject to the control of Central Government, by a notification in the Gazette of India, to make rules specifying the procedure for grant of relief, deduction of any Income tax paid in any country or specified territory outside India u/s 90, or Section 90A or Section 91, against the income-tax payable under the Act. Accordingly, the Board has, in accordance with the recommendation made by the Committee constituted by it, vide LETTER [F.NO.142/24/2015-TPL], DATED 18-4-2016, announced Draft Rules for granting relief or deduction under section 90/90A/91 of the Income-tax Act, 1961.

2. Salient features of Draft Rule:

The salient features of the Rules are:

i.

For the purpose of giving credit, Foreign tax means-

(a)		Tax covered in the Double Taxation Avoidance Agreement entered into by India with a country in terms of Section 90/90A.
(b)		Tax, being in the nature of Income tax referred to in clause (iv) of the Explanation to section 91, payable under the laws in force in a country, with which India does not have Double Taxation Avoidance Agreement.

No more ‘self-declaration’ - Employees now required to give declaration in a new form

Presently, employees who wanted to claim tax deductions are required to file self-declarations of tax savings/deductions to employer  along with the evidences  of such tax savings for every financial  year.  Employer  was  liable  to  deduct tax  at  sources  on  the  estimated income  of employees a  er considering such self-declarations of tax savings.

Now the CBDT has notified new form no. 12BB for such purposes. Employees are now required to submit evidences/particulars of tax savings to employer in Form no. 12BB.

The CBDT has also notified  revised due dates  for filing of quarterly  TDS returns  by persons (other than government). Due dates  for filing TDS return for the quarter ended 30th June, 30th September, 31st December and 31st March has been extended to 31st July, 31st October, 31st January and 31st May respectively  (old dates  were 15th July, 15th October, 15th January and 15th May respectively).

Cl ick h ere to vie w Fo rm n o. 12B B and amen ded Ru l es

Principal of unjust enrichment couldn't be applied to deny refund even if tax amount was written off in P&L account

Merely because amount of tax paid is shown as expenditure, it cannot be concluded that incidence of duty was passed onto buyers; hence, doctrine of unjust enrichment would not apply to deny refunds merely because tax amount was written off in Profit & Loss Account

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Demand stayed by ITAT as huge sum was locked up with dept. in relation to disputed tax liability of earlier years

IT/ILT: Where demand was raised on account of transfer pricing adjustment, disallowance of claim u/s 80-IA and disallowance of long term capital loss, in view of fact Tribunal had already granted stay with reference to similar demand raised for earlier assessment years and that huge sums of assessee stood lock up in disputed tax liability of earlier years, stay was to be granted.

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