KGS. If ethics are poor at the top, that behaviour is coped down through the organisation. Robert Noyce INTEGRITY FIRST

Transcription

1 KGS If ethics are poor at the top, that behaviour is coped down through the organisation. Robert Noyce INTEGRITY FIRST

2 Cost INDEX S. No. Topic 1. Transfer Pricing International as well as Domestic 2. Kyoto Protocol (Carbon Credit) 3. Base Erosion and Profit Shifting (BEPS) 4. Credit of EC and SHEC Can Be Used For Payment of Service Tax 5. Income Computation and Disclosure Standard (Borrowing Cost) KGS

3 Transfer pricing International as well as domestic This article aims to Transfer Pricing Concept and Meaning Meaning of International Transactions Meaning of Specified Domestic transactions Method to compute Arm s Length Price Penal provision and Time Limit for compliance

4 Transfer Pricing Concept of Transfer Pricing Commercial transactions between the different parts of the multinational groups may not be subject to the same market forces shaping relations between the two independent firms. One party transfers to another goods or services, for a price. That price is known as "transfer price". This may be arbitrary and dictated, with no relation to cost and added value, diverge from the market forces. Transfer price is, thus, a price which represents the value of good; or services between independently operating units of an organization. But, the expression "transfer pricing" generally refers to prices of transactions between associated enterprises which may take place under conditions differing from those taking place between independent enterprises. It refers to the value attached to transfers of goods, services and technology between related entities. It also refers to the value attached to transfers between unrelated parties which are controlled by a common entity. Illustration: Goods in Open Market Purchase Mr. A (IC*) For Rs 100/- Sale Mr. B (AC*) For Rs 200/- Sale Goods in Open Market for Rs 400/- *IC: Indian Company *AC: Associate Company in Foreign In the above Chain, Had A sold it direct, it would have made a profit of 300 rupees. But by routing it through B, it restricted it to 100 rupees, permitting B to appropriate the balance. The transaction between A and B is arranged and not governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on the market price (400 rupees). Thus, the effect of transfer pricing is that the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction. For instance, profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in low tax jurisdiction. As an example of this, a group which manufactures products in high tax countries may decide to sell them at a low profit to its affiliate sales company based in a tax haven country. That company would in turn sell the product at an arm's length price and the resulting (inflated) profit would be subject to little or no tax in that country. The result is revenue loss and also a drain on foreign exchange reserves. Meaning of International Transaction (Section 92 B) For the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be [deemed to be an international transaction] entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise 41 [where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not]. KGS

5 Meaning of Specified Domestic Transaction. (Section 92 ba) For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assesse means any of the following transactions, not being an international transaction, namely: (i) Any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A; (ii) Any transaction referred to in section 80A; (iii) Any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) Any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA; (v) Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or sub-section (10) of section are applicable; or (vi) Any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of five crore rupees. Transfer pricing provisions were earlier restricted to international transactions. With effect from the scope of transfer pricing provisions gets extended to specified domestic transactions (SDT) exceeding Rupees five crore in value Computation of Arm's Length Price (Section 92c) (1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely: (a) Comparable uncontrolled price method; (b) Resale price method; (c) Cost plus method; (d) profit split method; (e) Transactional net margin method; (f) Such other method as may be prescribed by the Board. Arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions (2) the most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed Computation of Income from International Transaction Having Regard to Arm's Length Price. (Section 92) (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation. for the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. KGS

6 (2A) any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price. (3) The provisions of this section shall not apply in a case where the computation of income under subsection (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into REQUIREMENT PENAL PROVISION Section Particulars Section Particulars Penalty 92D 92E Maintenance and keeping of information and document by persons entering into an international transaction or specified domestic transaction. Report from an accountant to be furnished by persons entering into international transaction or specified domestic transaction. 271AA. Penalty for failure to keep and maintain information and document, etc., in respect of certain transactions. 271G Penalty for failure to furnish information or document under section 92D 271BA. Failure to furnish a report from an Accountant under section 92E Two per cent of the value of each international transaction or specified domestic transaction. Two per cent of the value of each international transaction or specified domestic transaction. Rs 1,00,000/- Form 3CEB Report. from an accountant to be furnished under section 92E relating to international transaction(s) and specified domestic transaction(s) is required to be Filled under this Form. Time Limit: On or before 30th November of the relevant Assessment Year Penalty: Rs 1, 00,000/- International Transactions (92B) Specified Domestic Transaction (92BA) FORM 3CEB *Sections mentioned above are the sections of Income Tax Act, 1961 ** Source : KGS

7 Kyoto Protocol (Carbon Credit) This article aims to explain Kyoto Protocol Parties and their commitments The Kyoto Mechanism Carbon trading Industries wise break up of CDM Projects in India

8 Kyoto Protocol (Carbon Credit) The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change (UNFCCC), which commits its Parties by setting internationally binding emission reduction targets. Recognizing that developed countries are principally responsible for the current high levels of GHG emissions in the atmosphere as a result of more than 150 years of industrial activity, the Protocol places a heavier burden on developed nations under the principle of "common but differentiated responsibilities." The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February The detailed rules for the implementation of the Protocol were adopted at COP 7 in Marrakesh, Morocco, in 2001, and are referred to as the "Marrakesh Accords." Its first commitment period started in 2008 and ended in In Doha, Qatar, on 8 December 2012, the "Doha Amendment to the Kyoto Protocol" was adopted. The amendment includes: New commitments for Annex I Parties to the Kyoto Protocol who agreed to take on commitments in a second commitment period from 1 January 2013 to 31 December 2020; A revised list of greenhouse gases (GHG) to be reported on by Parties in the second commitment period; and Amendments to several articles of the Kyoto Protocol which specifically referenced issues pertaining to the first commitment period and which needed to be updated for the second commitment period. During the first commitment period, 37 industrialized countries and the European Community committed to reduce GHG emissions to an average of five percent against 1990 levels. During the second commitment period, Parties committed to reduce GHG emissions by at least 18 percent below 1990 levels in the eightyear period from 2013 to 2020; however, the composition of Parties in the second commitment period is different from the first. Parties and their commitments As of 2015, the UNFCC has 196 parties including all United Nations member states, as well as Niue, Cook Islands and the European Union. In addition, the Holy See and Palestine are observer states. Parties to the UNFCCC are classified as: Annex I: There are 43 Parties to the UNFCCC listed in Annex I of the Convention, including the European Union. These Parties are classified as industrialized (developed) countries and "economies in transition" Annex II: There are 24 Parties to the UNFCCC listed in Annex II of the Convention. These Parties are made up of members of the Organization for Economic Cooperation and Development (OECD). Annex II Parties are required to provide financial and technical support to the EITs and developing countries to assist them in reducing their greenhouse gas emissions and manage the impacts of climate change. Least-developed countries (LDCs): 49 Parties are LDCs, and are given special status under the treaty in view of their limited capacity to adapt to the effects of climate change. Parties are urged to take full account of the special situation of LDCs when considering funding and technology-transfer activities. Non-Annex I: These mostly developing countries. Certain groups of developing countries are recognized by the Convention as being especially vulnerable to the adverse impacts of climate change, including countries with low-lying coastal areas and those prone to desertification and drought. The Convention emphasizes activities that promise to answer the special needs and concerns of these vulnerable countries, such as investment, insurance and technology transfer. India, China, Brazil are included in this category. KGS

9 The Kyoto Mechanism Under the Protocol, countries must meet their targets primarily through national measures. However, the Protocol also offers them an additional means to meet their targets by way of three market-based mechanisms. The Kyoto mechanisms are: International Emissions Trading Emissions trading allows countries that have emission units to spare - emissions permitted them but not "used" - to sell this excess capacity to countries that are over their targets. Thus, a new commodity was created in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the "carbon market." Clean Development Mechanism (CDM) The Clean Development Mechanism (CDM) allows a country with an emission-reduction or emissionlimitation commitment under the Kyoto Protocol (Annex B Party) to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets. Joint Implementation (JI) The Joint Implementation allows a country with an emission reduction or limitation commitment under the Kyoto Protocol (Annex B Party) to earn emission reduction units (ERUs) from an emission-reduction or emission removal project in another Annex B Party, each equivalent to one tonne of CO2, which can be counted towards meeting its Kyoto target. Joint implementation offers Parties a flexible and cost-efficient means of fulfilling a part of their Kyoto commitments, while the host Party benefits from foreign investment and technology transfer. Carbon credits and Carbon trading A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas equivalent to one tonne of carbon dioxide. Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources. A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations and help them set up new technology that is eco-friendly, thereby helping developing country or its companies 'earn' credits. India, China and some other Asian countries have the advantage because they are developing countries. Any company, factories or farm owner in India can get linked to UNFCCC and know the 'standard' level of carbon emission allowed for its outfit or activity. The extent to which one is emitting less carbon (as per standard fixed by UNFCCC) it gets credited in a developing country. This is called carbon credit. These credits are bought over by the companies of developed countries, mostly Europeans because the United States has not signed the Kyoto Protocol. For example, if British Petroleum is running a plant in the United Kingdom. Say, that it is emitting more gases than the accepted norms of the UNFCCC. It can tie up with its own subsidiary in, say, India or China under the Clean Development Mechanism. It can buy the 'carbon credit' by making Indian or Chinese plant more eco-savvy with the help of technology transfer. It can tie up with any other company like Indian Oil, or anybody else, in the open market. Carbon trading in India Indian industries were able to cash in on the sudden boom in the carbon market making it a preferred location for carbon credit buyers. It is expected that India will gain at least $5 billion to $10 billion from carbon trading (Rs 22,500 crore to Rs 45,000 crore) over a period of time. Also India is one of the largest beneficiaries of the total world carbon trade through the Clean Development Mechanism claiming about 31 per cent (CDM). (Contd.) KGS

10 India s carbon market is one of the fastest growing markets in the world and has already generated approximately 30 million carbon credits, the second highest transacted volumes in the world. The carbon trading market in India is growing faster than even information technology, bio technology and BPO sectors. Nearly 850 projects with an investment of Rs 650,000 million are in the pipeline. Carbon is also now being traded on India s Multi Commodity Exchange. It is the first exchange in Asia to trade carbon credits. Carbon credit in India is traded on NCDEX only as a future contract. Futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today (the futures price). The contracts are traded on a future exchange. Examples, 1. Jindal Vijaynagar Steel has recently declared that by the next ten years it will be ready to sell $225 million worth of saved carbon. This was made possible since their steel plant uses the Corex furnace technology which prevents 15 million tonnes of carbon from being discharged into the atmosphere. 2. Powerguda village in Andhra Pradesh was selling 147 tonnes equivalent of saved carbon dioxide credits. The company has made a claim of having saved 147 MT of CO2. This was done by extracting bio-diesel from 4500 Pongamia trees in their village. 3. Handia Forest in Madhya Pradesh, it is estimated that 95 very poor rural villages would jointly earn at least US$300,000 every year from carbon payments by restoring 10,000 hectares of degraded community forests. 4. Himachal Pradesh earns Rs crore through carbon credits under bio-carbon project. Industries wise break up of CDM Projects in India There are details of 866 projects that are registered by UNFCC. However some of the projects are withdrawn/reviewed/rejected subsequently. Excluding such projects, there are 617 registered projects. Industry wise breakup is as follows: Nature of Project No of Companies Percentage (%) Energy Industries Energy Demand Manufacturing Industries Transport Fugitive Emissions from fuels Fugitive Emissions from production and consumtion of halocarbons and sculpture hexafluoride Waste Handling & Disposal Afforestation & Reforestation Agriculture Total China leads with 2198 registered CDM projects accounting for 49.64% followed by India (866 projects i.e %) and Brazil (207 projects i.e. 4.67%) respectively. Total CERs issued to registered projects, amounted to around million, of which China accounts for 60.05% followed by India at 14.68%. Indian-registered projects are expected to generate 815 million CERs by Out of this, 189 million CERs are already issued. Thus, some 626 million CERs are expected to be issued to Indian-registered companies by 2020.Unissued CERs too are at a risk although most companies do not account for unsold/unissued CERs in their balance sheet. KGS

11 Base Erosion and Profit Shifting (BEPS) This article aims to explain An initiative to avoid double tax avoidance Concept of Country by country reporting Globalisation of tax reforms

12 What is BEPS? The Organization for Economic Cooperation and Development (OECD) s Base Erosion and Profit Shifting (BEPS) initiative seeks to close gaps in international taxation for companies that allegedly avoid taxation or reduce tax burden in their home country by engaging in tax inversions (moving operations) or by migrating intangibles to lower tax jurisdictions. The OECD has issued 15 Action Items to address the main areas where they feel companies have been most aggressively accomplishing this shifting of profit addressing the digital economy, treaty abuse, transfer pricing documentation, and more. BEPS Action Item 13, in particular, aims to transform transfer pricing documentation, forcing multinational corporations to reconsider how transfer pricing details are reported to local tax authorities as well as worldwide with country-by-country reporting. The OECD issued the final recommendations on the 15 Action Items on October 5, The next steps will be to design and put in place an inclusive framework for monitoring BEPS and supporting implementation of the measures. A significant shift in the overall dynamics of international tax planning and compliance is imminent. BEPS Procedure

13 Why should my organization be concerned about BEPS? Why should the organization need it? BEPS will result in a fundamental transformation of the global tax regulatory landscape. Because the OECD is not a government, it will require the tax authorities at countries around the world to pass laws and regulations to support the BEPS Action Plan and compel companies to comply with those rules. As a result, countries will pass domestic tax laws and sign on to treaties and other multinational agreements to support the Action Items as they see fit. As this transformation occurs, consequences for non-compliance will become more costly, onerous and time consuming, and may result in media scrutiny. As robust and consistent tax documentation becomes a requirement, you will want to ensure your organization optimizes its current processes to minimize risk and maintain your reputation. Why should we should use BEPS STRATEGY? As countries pass domestic legislation in support of BEPS, changes to the international tax reporting landscape will present new challenges for multinational corporations and their advisors, requiring time, planning and resources to implement the necessary processes to ensure compliance. The best defense is to implement research and technology tools that will allow you to act early and with confidence, giving your tax department the support they need to demonstrate their position. Acting early can help alleviate increased pressures and risks on tax departments and finance operations, as MNCs will need to deliver transparent BEPS reporting to required authorities with efficiency, accuracy, and reduced risk of audit.

14 Credit of EC and SHEC can be used for payment of Service Tax This article aims to Understand its Applicability and provisions related to it

15 Credit of EC and SHEC Can Be Used For Payment of Service Tax As per the amendment made by Finance Act 2015, the rate of service tax has been increased from 12.36% to 14% w.e.f In this respect the issue which arise is that Whether the cenvat credit of education cess which is available on 31 st May 2015 and cannot be fully used for the payment of service tax liability of May 2015, can be used for the payment of Service Tax? The present issue arise on account of the fact that as per Rule 3(7)(b) of Cenvat Credit Rules 2004, the cenvat on education cess is allowed only for the payment of education cess. Thus, w.e.f. 1 st June 2015 when there is no cess payable then how such credit of unutilized education cess would be used. This situation is solved partially for manufacturer by inserting Notification 12/2015 w.e.f. 30 th April As per this notification, the balance of education cess can be utilized for payment of the duty of excise liveable under the First Schedule to the Excise Tariff Act. This notification is applicable only for manufacturer, thus, the service provider cannot take the benefit. NOW 2 VIEWS ARE POSSIBLE 1. The cenvat credit of Education cess available on 31 st May 2015 to be used for service tax liability of 14%. In this respect it is mentioned that the relevant extracts from the speech of Finance Minister during the introduction of Finance Bill 2015 is as follows: The Service Tax rate is proposed to be increased from 12% plus Education Cesses to 14%. The Education Cess and Secondary and Higher Education Cess shall be subsumed in the revised rate of Service Tax. Thus, effective increase in Service Tax rate will be from existing rate of 12.36% (inclusive of cesses) to 14%. Thus, as per the intent, the rates of cess are subsumed in the rate of service tax and 14% is the consolidated rate including the cess. Consequently, the balance cess can be used against the payment of service tax liability of 14%. 2. The cenvat credit of balance Education cess cannot be used for service tax liability of 14%. As per this view, the Cenvat Credit Rules 2004 pose restrictions on the use of cess for payment of liability of service tax. Thus, cenvat credit of balance Education cess cannot be used for service tax liability of 14% and is to be carried forward for payment of past liability (if arise in future). KGS

16 The Ministry of Finance has avoided the above dispute partially by issuing a favourable Notification No.22/2015-Central Excise (N.T.), Dated 29 th Oct 2015 for Service Providers. The notification states as follows:- Provided also that the credit of Education Cess and Secondary and Higher Education Cess paid on INPUTS OR CAPITAL GOODS received in the premises of the provider of output service on or after the 1st day of June, 2015 can be utilized for payment of service tax on any output service: Provided also that the credit of balance fifty per cent. Education Cess and Secondary and Higher Education Cess paid on capital goods received in the premises of the provider of output service in the financial year can be utilized for payment of service tax on any output service: Provided also that the credit of Education Cess and Secondary and Higher Education Cess paid on INPUT SERVICE in respect of which the invoice, bill, challan or Service Tax Certificate for Transportation of Goods by Rail (referred to in rule 9), as the case may be, is received by the provider of output service on or after the 1st day of June, 2015 can be utilized for payment of service tax on any output service. Thus, as per the notification, the credit of Education Cess and S.H.E.C paid on Input Service in respect of which the invoice, etc is received by the service provider on or after the 1st day of June, 2015 can be utilized for payment of service tax on any output service. It is pertinent to note the notification does not provide for utilization of the balance cenvat credit of education cess as on 31 st May 2015, against the payment of service tax. It is expected that the Board will issue appropriate clarification at the earliest to the stated issue. However, in order to avoid any litigation, it would be advisable to opt view 2 of the above stated view in this regard. KGS

17 ICDS (Borrowing Cost) This article aims to Understand its Applicability and provisions related to it

18 Income Computation and Disclosure Standard (Borrowing Cost) Background: The ministry of finance has issued Income Computation and Disclosure Standards for computation of Taxable income for all corporate and non-corporate assesses who follow mercantile system of accounting in relation to their income under the heads Profits and gains from business and profession and Income from other sources. These standards are applicable from financial year Numerous adjustments would be required to be made in the financial statements prepared under existing AS or Ind-AS. ICDS IX is for borrowing costs which is slightly different from the conventional Accounting Standard 16. Applicability From the period the accounting treatment will become effective Assesses both corporate and non-corporate will have to adjust their financial statements which are made in compliance with the accounting standards issued Comparison between AS- 16 and ICDS IX 1. Borrowing costs Definition of borrowing costs under accounting standard 16 is quite wide but under ICDS IX narrow definition has been given. Under AS 16, exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs are included in borrowing costs but no such inclusion has been provided in ICDS IX. 2. Qualifying Asset Qualifying asset is an asset that takes substantial period of time to get ready for its intended use. Under AS 16, Asset needs to be a qualifying asset for capitalization of interest costs but under ICDS IX interest costs may be capitalized even if the asset is not a qualifying asset(except inventories). 3. Borrowing costs on general borrowings Under ICDS IX a new formula has been prescribed for the computation of borrowing costs on general borrowings. General borrowing costs will be allocated in the ratio of the average costs of qualifying assets on the first and last day of previous year and the average of cost of total assets on the first and last day of previous year. However, under AS 16 allocation is based on weighted average of borrowing costs. Total borrowing cost for general loans capitalized = Total borrowing cost incurred for general loans X Average cost of qualifying assets Average cost of total assets

19 4. Commencement of Capitalization As per AS 16, the capitalization of borrowing costs as part of the cost of a qualifying asset should commence when all the following conditions are satisfied: (a) Expenditure for the acquisition, construction or production of a qualifying asset is being incurred; (b) Borrowing costs are being incurred; and (c) Activities that are necessary to prepare the asset for its intended use or sale are in progress. But ICDS states that capitalization should commence from the date of borrowing in case of specific borrowings and from the date of utilization of funds in case of general borrowings. 5. Suspension of Capitalization Under AS 16 Capitalization of borrowing costs should be suspended during extended periods in which active development is interrupted. But there is no such requirement in ICDS IX. 6. Income from temporary investment of funds Under ICDS, income from temporary use of funds will not be deducted from the borrowing costs to be capitalized. Rather, these will be treated as income. But as per AS 16 In determining the amount of borrowing costs eligible for capitalization during a period, any income earned on the temporary investment of those borrowings is deducted from the borrowing costs incurred. Deferred Tax The different accounting treatment of borrowing costs as well exchange differences shall give rise to deferred tax as these differences may be considered as timing differences capable of reversal in foreseeable future (i.e. over the useful life of qualifying asset). The computation of deferred tax is likely to get further complicated due to such timing differences. Conclusion The provisions of ICDS IX have far reaching consequence as far as accounting and taxation is concerned. The accounting and administrative work of the assesses may multiply as the assesses may be required to maintain two sets of fixed asset registers and also to track the borrowing cost. The ICDS IX expects to achieve the objective of consistent and rule based application and therefore make comparison easier. However, application of some of the provisions of ICDS IX may distort the true picture particularly the fixed formula for computation of borrowing cost to be capitalised. This may lead to increased litigation and consequential uncertainly. To achieve the stated goal of achieving tax certainty, the CBDT may suitably clarify on the grey areas..

20 Contact Us Contact Name Mobile Mr. Anuj Somani Mr. Bhuvnesh Maheshwari Head office: Branch Offices: Network Offices: DELHI MUMBAI BANGALORE Delite Cinema Hall GHAZIABAD BHOPAL 3 rd Floor, Gate No. 2, New Delhi, India GURGAON BUBNESHWAR SILIGURI CHENNAI CHENNAI KOLKATA Disclaimer This material and the information contained herein prepared by the authors is of a general nature and does not exhaustively deal with the subject discussed. Although the authors have put their earnest effort in providing accurate and appropriate information, the article is not intended to be relied upon as the sole basis for any decision which may affect you or your business. The authors recommend you take professional advice before acting on specific issues. KGS is neither responsible for any views, opinions and statements made by the authors nor is liable for consequences, if any, arising from actions based on such views or opinion. KGS