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1 January 2016 / Volume I / ASA The key amendments introduced in statutes, policies and procedures in respect of Direct Tax, Indirect Tax, Corporate Laws & Accounting Standards, Foreign Exchange Management Act/ Export Import Policy & Securities and Exchange Board of India related matters are summarized hereunder. CONTENTS AT A GLANCE DIRECT TAX» Penalty under section 271(1)(c) wherein additions/ disallowances made under normal provisions of the Income Tax Act, 1961 but tax is levied under MAT provisions prior to A.Y » TDS on interest on fixed deposit made on directions of the Court» Development charges paid by lessee for acquiring an industrial plot on a longterm lease is not rent and hence no tax withholding required» Issuance of corporate guarantees being in the nature of quasi capital or shareholder activity and not provision of service, does not constitute International Transaction INDIRECT TAX» Excise - Electronic payment of refund/ rebate» Grace period of 5 days for remitting of monthly Provident Fund contributions removed CORPORATE LAWS» Amendment to the Companies (Incorporation) Rules, 2014» Frequently Asked Questions (FAQs) on Corporate Social Responsibility» Establishment of Central Registration Centre (CRC)» Eligibility to be a Partner/ Designated Partner in Limited Liability Partnership FEMA AND OTHER LAWS» Extension of Credit Facilities to Overseas Step-down Subsidiaries of Indian Corporates» Master Directions by the Reserve Bank of India 1

2 DIRECT TAX 1. Penalty under section 271(1)(c) wherein additions/ disallowances made under normal provisions of the Income Tax Act, 1961 but tax is levied under MAT provisions prior to A.Y The penalty for concealment of income or furnishing inaccurate particulars of income under section 271(1)(c) of the Act is determined based on the amount of tax sought to be evaded. The Delhi HC in the case of Nalwa Sons Investment Ltd. had held that where the tax payable on income computed under normal provisions is less than the tax payable under the provisions of MAT then penalty under section 271(1)(c) of the Act could not be imposed with reference to additions or disallowances made under normal provisions. Special Leave Petition (SLP) filed by the Department against this order was dismissed by the Supreme Court. Explanation 4 to section 271(1)(c) of the Act have been substituted vide Finance Act, 2015 with prospective effect from April 01, 2016, which provide for the method of computing the amount of tax sought to be evaded in a MAT scenario. It has been clarified vide this circular that In relation to cases prior to April 01, 2016, penalty under section 271(1)(c) of the Act is not attracted with reference to additions or disallowances made under normal provisions of the Act if tax is paid or payable as per MAT provisions. No appeals to be filed on this ground and appeals already filed on this issue should be treated as withdrawn with respect to the penalty issue. In case there are certain adjustments to book profits consequent to the assessments concluded prior to April 01, 2016, the penalty leviable would depend on the nature of the adjustment. Comments: A step in the right direction by CBDT. This would prevent unnecessary litigation piling up at the appellate level on whether the substituted Explanation 4, being clarificatory in nature, should apply prospectively or retrospectively since CBDT Circulars are binding on the Department. Source: Circular No. 25/2015[F. No. 279/Misc./140/2015/ITJ] dated December 31, TDS on interest on fixed deposit made on directions of the court The CBDT has clarified that interest on fixed deposits, made in the name of the Registrar General of the Court or the depositor of the fund on the direction of the court, will not be subject to TDS till the matter is decided by the Court. However, once the court decides the ownership of the money lying in the fixed deposit, the provisions of section 194A will apply to the recipient of the income. Source: Circular No. 23/2015 [F. No. 279/Misc./140/2015-ITJ 3. Development charges paid by lessee for acquiring an industrial plot on a long-term lease is not rent and hence no tax withholding required Facts: The taxpayer, Gupta Fabex Pvt Ltd., engaged in the manufacturing of readymade garments for various brands. The Rajasthan State Industrial Development and Investment 2

3 Corporation Ltd. (RIICO) had allotted a plot to the taxpayer for the establishment of an Industry. As per the allotment letter and the lease agreement, the land was allotted to the taxpayer on lease for 99 years. The taxpayer was required to pay an amount of INR 6.05 crores (comprising of development charges payable in instalments, interest on development charges, security money and economic rent).the taxpayer paid INR 1.60 crores during the relevant assessment years (AY & ) to RIICO, the major part of which was development charges. During the course of TDS scrutiny by the Revenue Authorities, the taxpayer was asked to explain the applicability of section 194I of the Act to the payments made to RIICO as above. The AO held that lease rent paid by the taxpayer falls within the definition of Section 194I of the Act and that the taxpayer was in default for not deducting taxes on the amount paid to RIICO. The order of the AO was upheld by the CIT(A). Ruling: Only the payments which are in the nature of use of land come within the ambit of section 194I of the Act. The term use has to be interpreted keeping in mind the relationship between the landlord and the tenant. The same cannot be extended to bring within its purview exploitation of any kind with reference to the property by changing its identity for its own benefit and thereafter selling it for profit. The amount paid by the taxpayer towards development charges has no connection with the market rent of the property leased to the taxpayer. As the documents has used two different phrases, development charges and economic rent to connote different obligations, development charges cannot be construed as rent within the purview of Section 194I of the Act. The development charges along with interest were paid for acquisition of leasehold rights rather than use of land. Considering the above facts and judicial precedents, ITAT ruled that the provisions of 194I of the Act will not apply in the case of the taxpayer. Comments: There have been conflicting decisions on the issue of applicability of TDS on development charges. The Bench has considered the bunch of rulings on the subject and relied on the Supreme Court ruling in the case of Vegetable Products (88 ITR 192) to deliver a favourable judgement. This implies that on a topic where there are conflicting views by different Courts, the Supreme Court decision could relied upon for a favourable decision provided the facts are on the same footing. Source: Gupta Fabex Pvt. Ltd. v. DCIT (TDS) (ITA Nos. 647 & 648/JP/2013) 4. Issuance of corporate guarantees being in the nature of quasi capital or shareholder activity and not provision of service, does not constitute International Transaction Facts: Micro Ink Ltd., the taxpayer, was engaged in the business of ink manufacturing. The taxpayer issued corporate guarantees on behalf of its subsidiary in USA, which is also manufacturing ink for US markets using material supplied by taxpayer. The taxpayer contended that the guarantees were in the nature of quasi-capital and not in the nature of any services and no charges were recovered for it. The TPO proceeded to make an adjustment by computing the arm s length price of the corporate guarantee fees receivable. 3

4 Ruling: As per Explanation to section 92B of the Act, the expression international transaction, inter-alia, includes capital financing, including any type of long-term or short-term borrowing, lending or guarantee and provision of services covered in the residual part of the definition of international transaction, i.e., any transaction having a bearing on profits, income, losses or assets of such enterprise. Corporate guarantee cannot be compared to bank guarantee as bank guarantee is a surety that the bank or financial institution will pay off debts/ liabilities owed by an individual or business entity upon their failure to pay whereas corporate guarantee on the other hand is issued without any security or underlying assets and is given to compensate for the inadequacies in the financial position of the borrower. In the given case, corporate guarantee issued does not have a bearing on the profits, income, losses or assets; it does not constitute an international transaction. The guarantee given by the taxpayer to its subsidiary did not cost anything to the taxpayer and the latter could not have realised money by giving such guarantee. Such arrangement did not impact the profits, income, losses or assets of Taxpayer. Hence, it falls outside the ambit of international taxation under section 92B of the Act. Comments: The Bench has taken cognisance of business realities in coming to a conclusion rather than mere reliance on judicial precedents. It reiterates the principle that economics and business dynamics assume more importance in a TP analysis. Source: Micro Ink Ltd vs. ACIT TS-568-ITAT-20915(Ahd)(TP) Legends Act Income Tax Act, 1961 AO Assessing Officer CIT(A) Commissioner of Income Tax- Appeals CBDT Central Board of Direct Taxes HC High Court ITAT Income Tax Appellate Tribunal TPO Transfer Pricing Officer INDIRECT TAX 1. Excise - Electronic payment of refund/ rebate In order to speed up the process of refund/ rebates and furthering the concept of ease of doing business, the Central Board of Excise and Customs (CBEC) has prescribed the procedure of implementation of electronic payment of refund/ rebate thereby deviating from traditional practice of manual handling and dispatch of cheque. Source: Circular No. 1013/1/ 2016 Central Excise dated January 12, Grace period of 5 days for remitting of monthly provident fund contributions removed The Employees Provident Fund Organisation (EPFO) issued a circular, to remove the grace period of five days allowed for payment of provident fund contributions by employers. The employers are required to pay their contributions and administrative 4

5 charges within 15 days of the close of every month. This would be in force from February 01, Therefore, the contributions for the month of January 2016 shall be paid by February 15, Source: Circular No. WSU/9(1)2013/Settlement/35031 dated January 08, 2016 CORPORATE LAWS 1. Amendment to the Companies (Incorporation) Rules, 2014 The Ministry of Corporate Affairs ( MCA ) has notified the new amendment rules called the Companies (Incorporation) Amendment Rules, This amendment rules removes certain difficulties with respect to the choosing the name for the Company and also the approval process of proposed names. The brief of these rules are as below: While choosing the name of the Company or while approving proposed name of any Company, the name need not be in consonance with the Object or Principal Object of the Company. The proposed name can be abbreviated one. The proposed name of the Company may be approved either by Registrar of Companies or by Central Registration Centre as established by Central Government. Three opportunities are given instead of existing two opportunities for resubmission of INC-29 and this has to be completed within period of 30 days. For the purpose of above changes, the Form INC-1 has been revised. Source: Companies (Incorporation) Amendment Rules, 2016 dated January 22, Establishment of Central Registration Centre (CRC) The MCA has established Central Registration Centre who shall act as Registrar of Companies (ROC) for the purpose of processing applications for reservations of name vide Form INC-1. However, the processing and approval of name proposed in Form INC-29 - Integrated Incorporation Form, shall continue to be done by the respective jurisdiction s ROC. Source: MCA Notification [F. No. A-42011/03/2016-Ad.II] dated January 22, Frequently Asked Questions (FAQs) on Corporate Social Responsibility The MCA has notified the FAQs on Corporate Social Responsibilities (CSR) to clarify the various queries and references on CSR. Source: MCA General Circular No 01/2016 dated January 12, Eligibility to be a Partner/ Designated Partner in Limited Liability Partnership The MCA has clarified that the Hindu Undivided Family or its Karta cannot become or act as Designated Partner in Limited Liability Partnership. Source: MCA General Circular No 02/2016 dated January 15,

6 FEMA & OTHER LAWS 1. Extension of Credit Facilities to Overseas Step-down Subsidiaries of Indian Corporates The Reserve Bank of India has allowed Banks in India to extend funded and/ or nonfunded credit facilities to the overseas step-down subsidiaries of Indian companies including to those beyond the first level, to finance the projects undertaken abroad subject to the below conditions: The immediate overseas subsidiary of the Indian company must be directly controlled by the Indian parent company through any of the modes of control recognized under the Indian Accounting Standards; The Indian parent company must directly hold a minimum 51 per cent of its shareholding; All the step-down subsidiaries must be wholly owned subsidiaries of the immediate parent company or its entire shares shall be jointly held by the immediate parent company and the Indian parent company and/ or its wholly owned subsidiary. Source: RBI Notification No. BI/ /279 DBR.IBD.BC.No.68/ / dated December 31, Master Directions by the Reserve Bank of India The Reserve Bank of India has issued 17 Master Directions covering foreign exchange transactions in its bid to simplify the communication process. These Master Directions on foreign exchange consolidate the relevant A.P (DIR Series) Circulars issued so far within the ambit of the relevant regulations, amended up to date and cover different classes of transactions permitted under the rules and regulations framed under the Foreign Exchange Management Act, 1999 ( FEMA ) and chalks out the manner to conduct cross border/ forex transactions. The Master Directions will be updated suitably and simultaneously whenever there is a change in the rules/ regulations or there is a change in the policy. The existing set of Master Circulars issued on various subjects will stand withdrawn with the issue of the Master Direction on the below subjects: 1. Money Changing Activities 2. Opening and Maintenance of Rupee/ Foreign Currency Vostro Accounts of Nonresident Exchange Houses 3. External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers 4. Miscellaneous 5. Reporting under Foreign Exchange Management Act, Import of Goods and Services 7. Export of Goods and Services 8. Direct Investment by Residents in Joint Venture/ Wholly Owned Subsidiary Abroad 9. Deposits and Accounts 10. Remittance of assets 11. Acquisition and Transfer of Immovable Property under Foreign Exchange Management Act,

7 12. Establishment of Liaison/ Branch/ Project Offices in India by foreign entities 13. Insurance 14. Other Remittance Facilities 15. Liberalised Remittance Scheme (LRS) 16. Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non Resident Indians/ Persons of Indian Origin 17. Compounding of Contraventions under FEMA, Source: RBI Notifications dated January 01, 2016 Head Office Aurobindo Tower 81/1 Third Floor Adchini, Aurobindo Marg New Delhi India Tel: Fax: Offices: New Delhi, Ahmedabad, Bengaluru, Chennai, Gurgaon, Hyderabad, Kochi, Mumbai This document is meant for circulation to internal staff and clients of ASA & Associates LLP. The technical contents herein are solely meant for information and not as professional advice. We do not take responsibility for accuracy or correctness or business decisions taken without seeking professional guidance 7

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