Workshop on section 10AA and 35AD. 5 May 2016

Transcription

1 Workshop on section 10AA and 35AD 5 May 2016

2 Section 10AA Oeriew of the section Tax holiday for export profits units set up in Special Economic Zone ( SEZ ) Commencement should be after 1 April 2006 Other conditions: a letter of approal by the Deelopment Commissioner to set a unit in a Special Economic Zone Persons coered - manufacturer of article or thing or - proider of any serices Period of 15 years beginning with the assessment year releant to the preious year in which the Unit begins to manufacture or produce article or things First 5 years 100 Next 5 years 50 Last 5 years Percentage of deduction Not exceeding 50% per cent of the profit as is debited to the P&L A/c of the preious year in respect of which the deduction is to be allowed and credited to Special Economic Zone Re-inestment Resere Account not set up by splitting up, or the reconstruction, of a business already in existence not set up by the transfer to the specified business of machinery or plant preiously used for any purpose No deduction under section 35AD should be claimed Maintain separate books of accounts and proides Form 56F (CA certificate)

3 Section 10AA- Newly formed unit Key characteristics of newly established undertaking enumerating from judicial precedents*: Fresh capital inestment in new unit; Substantial new set of employees; Separate and distinct identity; Substantial new contracts; Original undertaking or business does not cease to function; *Textile Machinery Corporation Ltd CIT (107 ITR 195), Satish U Pai (T) CIT (119 ITR 877), ITO DSM Soft (P) Ltd (115 TTJ 469) (Chennai Tribunal), Chenab Information Technologies ITO (2008-(025)-SOT-0432-TBOM) Substantial addition to nature and type of serice being rendered by new unit;

4 Section 10AA- Recent deelopments The Central Board of Direct Taxes (CBDT) had issued Circular No. 12/2014, dated 18 July 2014, clarifying that transfer or redeployment of existing technical manpower from an existing unit to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, proided the number of technical manpower so transferred does not exceed 20 per cent of the total technical manpower actually engaged in deeloping software at any point of time in the gien year in the new unit. Howeer the CBDT ide circular dated 8 October 2014 has superseded its earlier circular. The new circular clarifies that the transfer or re-deployment of technical manpower from existing unit to a new unit located in SEZ, in the first year of commencement of business, shall not be construed as splitting up or reconstruction of an existing business, proided the number of technical manpower so transferred as at the end of the financial year does not exceed 50 per cent of the total technical manpower actually engaged in deelopment of software or IT enabled products in the new unit. Finance Minister's budget speech for Budget 2016 has proposed that exemption under Section 10AA shall be aailable only for units which commence operations before 31 March 2020.

5 Section 10AA- Case study 1 The Taxpayer is engaged in manufacture of tax year in a SEZ. During the first year, tax purchased new plant and machinery to set up the SEZ unit Subsequently, in the releant tax year it purchased second hand platter machine worth RS 20 crore to meet additional requirement of one of its customer. The Tax Authority disallowed the Taxpayer s claim for deduction under section 10AA on the ground that the alue of second hand plant and machinery exceeded 20% of the total alue of plant and machinery deployed during the releant tax year. Query Whether second hand machineries acquired subsequent to the alid formation of the undertaking in the same year will impact taxpayer's claim of deduction though the alue of the same may exceed 20% tolerance limit in the year in which the deduction is claimed?

6 2) Whether the answer to the aboe would change if A Ltd transfers the SEZ unit by way of slump sale Section 10AA- Case study 2 A Ltd is engaged in the manufacture of article x and has its manufacturing unit at SEZ and exports the same A Ltd has claimed the deduction under section 10AA of the Act for the first three years During the releant tax year, A Ltd has been amalgamated into B Ltd, an another entity set up in SEZ Query 1) Whether deduction under section 10AA of the Act will be aailable in the hands of B ltd for balance period

7 Section 10AA- Case study 3 P Co, India ( P Co ) is a wholly owned subsidiary of P LLC, USA, part of the A Group. I Co, India ( I Co ) is part of the Global A Group. P Co was incorporated with the objectie of proiding support serices to P LLC. The new entity (ie, P Co) has been formed for commercial reasons in light of US regulations which mandate certain specified actiities currently carried on by I Co to be cared out into a new entity. P Co has obtained the SEZ unit approal and is currently in the process of setting-up the new SEZ unit at Loc A. P Co has estimated an initial capital outlay of INR 50 crores for setting-up the facility. The new SEZ unit will hae 400 employees approximately all of whom will be transferred from I Co (I Co presently has about 4000 employees). In parallel, I Co would recruit new employees for its software deelopment actiities. Query

8 Section 10AA- Other Issues Whether sharing of employees between existing and new unit would hae any potential tax impact on existing tax holiday benefits being enjoyed? What alue is to be considered for the purpose of determining the 20 percent criteria in relation to transfer of plant and machinery ie whether book alue, written down alue ( WDV ) or fair market alue ( FMV ) to be considered? Whether the sale proceeds should be recognized within the specified period as per the FEMA regulations for the purpose of tax holiday claim under section 10AA?

9 Section 35AD- Oeriew of the section Deduction of 150% of capital expenditure on specified business Deduction aailable from the year in which the specified business is commenced for certain specified business, if commenced on or after 1 April 2012 Capital expenditure incurred prior to commencement can be claimed in the year commencement Specified Business means (i) (ii) (iii) (i) a cold chain facility Warehousing facility for storage of agricultural produce Laying and operating cross country natural gas or crude or petroleum oil pipeline Hotel two star or aboe category Capital expenditure excludes land or goodwill or financial instruments () Hospitals minimum 100 beds for patients Other conditions: not set up by splitting up, or the reconstruction, of a business already in existence not set up by the transfer to the specified business of machinery or plant preiously used for any purpose Depreciation should not be claimed on the said expenditure Maintain separate books of accounts (i) (ii) (iii) (ix) (x) (xi) (xii) (xiii) Scheme of slump redeelopment or rehabilitation Affordable housing project Production of fertilizer Inland container depot or freight station Bee king and production of honey bee Warehousing for sugar Slurry pipeline for iron ore Semi conductor fabrication manufacturing unit

10 Section 35AD- Deelopments The Central Board of Direct Taxes (CBDT or the Board) has issued Notification No. 1/2012 dated 2 January 2012 (the Notification) prescribing the rules and conditions subject to which the taxpayer engaged in deeloping and building a housing project under a scheme for affordable housing would be eligible for claim under Section 35AD Application in Form 3CN should be made. Conditions as per the circular All the conditions should be satisfied: Prior sanction of the competent authority (authority under the Scheme of Affordable Housing in Partnership framed by the Ministry of Housing and Urban Poerty Alleiation, Goernment of India) The date of commencement of operations of the project shall be on or after the l April 2011 The project shall be on a plot of land which has a minimum area of one acre; At least thirty per cent, of the total allocable rentable area of the project shall comprise of affordable housing units of Economically Weaker Section (EWS) category; At least sixty per cent of the total allocable rentable area of the project shall comprise of affordable housing units of EWS and Lower Income Group (LIG) categories; At least ninety per cent of the total allocable rentable area of the project shall comprise of affordable housing units of EWS, LIG and Middle Income Group (MIG) categories;

11 Section 35AD- Case study - 1 A Ltd is engaged in one of the specified businesses. During the year, A Ltd purchased certain capital equipments for set up of its facility. Howeer, the same is not capitalized during the year gien that the plant is under construction and hence the same is in CWIP During Year 2, A Ltd demerged the undertaking (which has specified business) to B Ltd. B Ltd subsequently incurred incremental expenditure on setting up the plant. Query Whether B Ltd, on commencement of operations would be eligible for deduction under section 35AD for the capital assets lying in CWIP?

12 Section 35AD- Case study -2 A Co is engaged in the business of milk procurement which inoles trading in milk which requires storage of milk in refrigerated condition. The company is also inoled in the business of agriculture and cow sheds. The Company also has a cold chain facility used captiely for milk trading business? Whether A Co would be eligible for deduction under section 35AD on capital expenditure on captie unit engaged in cold chain facility?

13 Section 35AD- Case study - 3 I Co is engaged in the business of operating and maintaining warehouses for agricultural produce through 400 leased warehouses. I Co has claimed and has been allowed deduction S.80-IB(11A) for past six assessment years in respect of income earned from operation of leased warehouses on the basis that the actiity qualifies as integrated business of handling, storage and transportation of food grains. During FY , I Co completed construction of two new warehouses owned by it. I Co maintains separate accounts in respect of business operations undertaken from leased warehouses and owned warehouses. produce. Query

14 Section 35AD- Other Issues Whether loss from unit carrying specified business can be set off against other units? Whether an entity which has specified business can claim a deduction for the new actiity started after 1 April 2012? Whether deduction under section 35AD of the Act is aailable for computing book profits of an LLP for the purpose of Alternate Minimum Tax ( AMT )? Whether deduction under section 35AD is aailable for leased asset? Whether deduction is aailable for foreign exchange loss on capital assets imported (eligible for capitalization under section 43A)?