The Union Budget -An Analysis Analysis of important Amendments proposed in the Finance Bill, 2012 DIRECT TAXES

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1 Disclaimer :- Utmost care has been taken to compile this circular, however the firm shall not be responsible for any error or omission that may have cropped up during its compilation. The views expressed in this circular are the personal views of the contributors. The contents in this circular should not be construed as legal or professional advise. Neither the contributors nor the firm is responsible for any decision taken by the readers on the basis of contents of this circular. The Union Budget -An Analysis Analysis of important Amendments proposed in the Finance Bill, 2012 DIRECT TAXES - All amendments proposed in The Finance Bill, 2012 would be effective from A.Y unless specifically mentioned otherwise. - In this booklet all proposals of The Finance Bill, 2012 are referred to as if the amendments have been actually made. 1. Vodafone aftermath Amendments-Effects- Sections 2(14), 2(47), 9(1)(i) : - The Supreme Court, recently in January 2012, in the landmark decision of Vodafone, had set at rest the raging controversy and laid down that capital gains on transfer of shares of foreign company, between two non-residents, in a complex corporate company, between two nonresidents, in a complex corporate structure, indirectly transferring shares and the control of the Indian operating companies, is not taxable in India and accordingly there was no obligation on Vodafone [ Payer] to deduct tax at source. Inter alia, on the following grounds : - (a) (b) (c) In the context of international holding structures having commercial substance, the form of the transactions have to be respected. There is no transfer of any capital assets situated in India, as contemplated in sections 9(1)(i). The plain language of the provision of the Income-tax act, 1961, do not support the revenue that such an offshore transaction could be taxed in India in India, then there should be clear provisions in the law. The Court has also held that under such circumstances, the Vodafone also cannot be treated as Representative Assesses under section 163 in the said transaction. Accordingly, various retrospective amendments have been made to effectively overrule the aforesaid decision of SC. Broadly Following specific provisions are made which are branded as clarificatory in nature : - (i) In section 9(1)(i) it is provided that the expression through shall mean and included by means of, in consequence of or by reason of. Page 1 of 39

2 (ii) (iii) (iv) (v) Explanation 5 to section 9(1)(i) has been inserted to provide that an asset or a capital assets being any share or interest in a company or entity registered or incorporated outside India shall be deemed o be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Explanations has been added to section 2(14) to clarify that property includes any rights of managements or control or any other rights whatsoever. Explanation 2 has been inserted below section 2(47) to to provide (substantially widening the definition) that transfers therein, or creating any interest in any asset or any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or share of a company registered or incorporated outside India. Explanation 2 to section 195(1) has been inserted to provide that obligation to comply with sub-section (1) and to make deduction there under applies and extents to all persons, resident or non-resident, whether or not the nonresident has:- (a) a residence or place of business or business connection in India; or (b) any other presence in any manner whatsoever in India. These amendments have been made retrospectively from the A.Y Apart from the other effects (intended or not) these retrospective changes due to aftermath of SC s judgments. would have far reaching impact in many such pending cases before various judicial forums. The effect of these so called clarificatory amendments will not necessarily confine to only offshore transactions. 2. TAX RATES : - (i) Rates for Individuals, HUFs, AOPs and BOIs : - The Threshold limit of basic exemption has been raised marginally and certain changes made in the slabs rates of income liable to tax. The new threshold limits, slab rates and tax savings are as under: Income Slab Resident senior citizens (60 years and above but below 80 years) Resident senior citizens (80 years and above) Others Tax Rate Savings Rs Tax Rate Savings Rs Tax Rate Savings Rs Up to Rs.200,000 Nil Nil Nil Nil Nil 2,060 Rs 200,001 to 250,000 Nil Nil Nil Nil 10% 2,060 Rs 250,001 to Rs 10% Nil Nil Nil 10% 2, ,000 Rs 500,001 to Rs 20% Nil 20% Nil 20% 2, ,00 Rs 800,000 to 1,000,000 20% Up to 20,600 20% Up to 20,600 20% Up to 22,660 Page 2 of 39

3 Above Rs 1,000,000 30% 20,600 30% 20,600 30% 22,600 Additional surcharge called Education Cess and Secondary and Higher Education Cess remain unaltered. The Gender distinction for the basic exemption has been done away with. (ii) Rates for Firms, Companies and Co-operative societies There are no changes in the rates of income-tax, surcharge or cess for firms, companies and co-operative societies. 3. Tax Deducted at source - Rates 2% of tax will continue to apply while deducting tax at source only from payments made to foreign companies in cases of income exceeding Rs 1 crore. The Education Cess and Secondary and Higher education cess will continue to be considered in determining tax deducted at source only from payments made to foreign companies, non-residents and salaried employees. In all other cases, cess will not be considered. 4. Income deemed to Accrue or Arise in India- Royalties section 9(1)(vi) Explanation 2 to section 9(1)(vi) defines royalty to, inter alia, mean consideration received or receivable for transfer of all or any right in respect of certain rights, property or information. In the recent past many controversies have arisen about the true meaning, characterization, scopes and taxability of payments relating to royalties which include (i) whether consideration for use of computer software is royalty or not; (ii) whether the right, property or information has to be used directly by the payer or is to be located in India or control or possession of it has to be with the payer (iii) the meaning of the term processed etc. Various conflicting judicial pronouncements have bee rendered in respect of the same. In view of the above, the following amendments are made (effectively to confirm the stand of the revenue in this regard) retrospectively w.e.f : (i) (ii) (iii) Explantion 4 to section 9(1)(vi) has inserted to clarify that the consideration for use or right to use of computer software is royalty and that transfer of all or any rights in respect of nay right, property or information as mentioned in Explanation 2, includes transfer transfer of all or any right for rights for use or rights to use a computer software (including granting of a licence) irrespective of medium through which such right is transferred. Explanation 5 to section 9(1)(vi) has been inserted to clarify that royalty includes consideration in respect of any right, property or information, whether or not (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. Explanation 6 to section 9(1) (vi) has been inserted to clarify that the term process includes transmission by satellite ( including up-linking, amplification, conversion for down-linking of any signal ), cable optic fibre or by any other similar technology, whether or not such process is secret. Page 3 of 39

4 5. EXEMPTION TO CHARITABLE ORGANISATIONS CARRYING ON COMMERCIAL ACTIVITY ORGANISATION CARRING ON COMMERCIAL ACTIVITY- SECTION 10(23C), 13 AND 143 Section 11 and 12 exempt income of charitable trust or institution registered under section 12AA of the Act, if its income is applied for charitable purposes in India. Similarly, section 10(23c)(iv) and 10(23c)(v) also provide exemption to approved charitable trusts, funds or institutions. The term charitable purpose is defined in section 2(15) and the said definition was amended w.e.f. A.Y to provide that advancement of an object of general public utility will not be considered a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any services in relation to any tread, commerce or business, for a cess or fee or any other consideration. Amended provision does not apply if the aggregate value of the receipts from such activities is Rs. 25lakh or less. By virtue of insertion of section 13(8) and proviso to section 10(23c), it is now expressly provided, retrospective effect from A.Y , that no exemption will be available in the previous year where the trust or institution carries on any commercial activity as mentioned above, having such receipt in excess of the limits of Rs.25lakh. However, such excess in one year will not alter the very nature of the trust or institution and will not result in cancellation of registration or withdrawal of approval for exemption. As such the exemption would be denied only for the year in which the trust or institution has above limits of Rs. 25 lakh. 6. EXEMPTION TO VENTURE CAPITAL COMPANIES (VCC) AND VENTURE CAPITAL FUNDS (VCF) SECTION 10 (23FB) AND 115U Section 10 (23FB) provide that a VCC or VCF registered with Securities Exchange Board of India (SEBI) and deriving income from investment in a Venture Capital Undertaking (VCU) is exempt from tax. VCU is presently defined to means such domestic company whose which is engaged in any one of the nine specified business, VCC and VCF registered with SEBI are granted a pass trough status and the income in the hands of the investment is taxed in like manner and to the same extent as if the investment was directly made by the investor in the VCU. The sectoral restriction that the VCU should be engaged in only the nine specified business is now removed. The definition of VCU is now amended to cover any undertaking referred to in securities and Exchange Board of India (Venture Capital Funds) Regulations, As such VCC and VCF will be exempt from tax irrespective of the nature of business carried out by the VCU, as long as it satisfies the conditions imposed by SEBI. Presently, the income from the VCU through the VCC/VCF is taxed on receipt basis in the hands of the investor and hence could result in deferral of taxation till the income is distributed to the investor. It is now provided that the income accruing to VCC VCF will be taxable in the hands of the investor on accrual basis. The specific existing exclusion from applicability of TDS and DDT provision applicable to income paid by VCC/VCF has been withdrawn. 7. ADDITIONAL DEPRECIAT ION SECTION 32(1) (iia) An assessee engaged in the business of manufacture or production of any article or production of any article or thing is entitled to additional depreciation of 20% of the actual Page 4 of 39

5 coast of new plant and machinery in the year of acquisition. This benefit is extended to an assessee engaged in the business of generation or generation and distribution of power. 8. EXPENDITURE ON SCIENTIFIC RECERCH SECTION 35(2AB) Benefit of weighted 200% of expenditure on approved in house research and development by a company engaged in the business of biotechnology or in the manufacture of specified article or thing is extended from 31 st March, 2012 to 31 st March, INVESTMENT LINKED DEDCTION TO SPECIFIED BUSINESSES- SECTION 35AD Investment linked deduction of 100% of capital expenditure (other than expenditure incurred for land, goodwill or financial instrument) is allowed for specified businesses. Three new businesses have been specified namely viz. setting up and operation an inland container depot or freight station, warehousing facility for storage of sugar and beekeeping and production of honey and beeswax commencing operation on or after 1 st April, Deduction is now enhanced to 150% of capital expenditure incurred on or after 1 st April, 2012 in respect of certain specified businesses commencing operation on or after 1 st April, 2012 viz. cold chain facility, warehousing for agriculture produce, hospital with at least 100 bead, notified affordable housing project and production of fertilizer. Retrospective amendment has been made w.e.f. 1 st April, 2011 to allow investment linked deduction of 100% to the hotel is by a person other than the assessee. 10. EXPENDITURE ON AGRICULTURAL EXTENSION PROJECT AND SKILL DEVELOPMENT PROJECT-SECTION 35CCC AND 35CCD Weighted deduction of 150% will be allowed in respect of expenditure incurred for agricultural project or expenditure (other than cost of any land or building) incurred on skill development project notified by the Board in accordance with prescribed guidelines. 11. ASSESSEE IN DEFAULT FOR TDS AND DISALLOWANCE OF EXPENSES- SECTION 201 &40(a)(ia) Any person who fails to deduct tax (wholly or partly )as per the provision of the Act shall not be an assessee in default under section 201 of the deductee furnishes his return of income by including the said income in his return and pays tax due on income declared by him in such return of income and furnishes a certificate from an Accountant certifying this fact in the prescribed from. It is further provided that such person who is not deemed to be an assessee in default, shall be liable to pay 1% from the date on which such tax is deductible till the date of furnishing the date on which such tax is deductible till the date of furnishing the date on which such tax is deductible till the date of furnishing the return by the deductee. This amendment is effective from 1 st july,2012. In such cases, the disallowance under section 40(a)(ia) will also no be made in the case of payer. 12. LIMITS AND DUE DATE FOR TAX AUDITS-SECTION 44AB The threshold limits for the purpose of tax audits have been enhanced from Rs.60lakh to Rs. 1crore for assesses carrying on business and from Rs.15lakh to Rs. 25lakh for professionals. Page 5 of 39

6 Specified date for obtaining and furnishing the Tax Audit Report referred to in section 44AB has been amended from 1 st April, 2012 to mean the due date of filing the return of income as per section 139(1) instead of 30 th September. Thus, the specified date has been now synchronized with due date of filing the return of income. 13. SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS OF BUSINESS ON PRESUMPTIVE BASIS-SECTION 44AD With the increase in the thrashold limit of tax audit for businesses, the limit for turnover for computing tax on presumptive tax provision are made not applicable to person carrying on profession, person earning income in the nature of commission or brokerage or person carrying on any agency business. 14. AMALGAMATION OF SUBSIDIARY WITH HOLDING COMPANY-SECTION 2(19AA) AND 47(VII) Clause (vii) of section 47 provides that transfer of shares by a shareholder in a scheme of amalgamation shall not be regarded as a transfer for the purpose of section 45. One of the conditions for applicability of this cause is that shareholders are allotted shares in the amalgamated company is amalgamating with the holding company itself is the shareholders, it will not be necessary to issue share to it. A similar amendment is made to the definition of damerger u/s 2(19AA) to provide an exception to the allotment of shares on proportionate basis where the resulting company itself is a shareholder of the demerged company. 15. COST OF ACQUISITION IN SECTION CASE OF SUCCESSION OF A FIRM OR A PROPRIETARY CONCERN- SECTION 49(1)(iii) Clause (xiii) and (xiv) of section 47 provide that transfer of assets as a result of succession of a firm or proprietary concern by a company is not regarded as a transfer for the purposes of section 45. Retrospective amendment is made w.e.f. A. Y to provide that in such cases, cost of acquisition of assets in the hands of the company shall be the cost to the previous owner i.e. the firm or the proprietary concern, as the case may be. 16. FAIR MARKET VALUE TO BE THE FULL VALUE OF CONSIDERATION WHERE CONSIDRATION CANNOT BE DETERNINED SECTION 50D In certain cases (e.g. Dana Corporation 321 ITR 178 [AAR ]) it has been held that where consideration cannot be ascertained or determined, the machinery section fails and the transfer does not result into taxable Capital Gains. A new section 50D has been inserted to provide that, in such a case, the fair market value on the date of transfer of the asset, shall be taken to be the full value of the consideration for computing the capital gain. 17. CAPITAL GAIN ON SALE OF AGREECULTURE LAND BY HUF SECTION 54B Section 54B provide for exemption from capital gains tax when agricultural land which is otherwise a capital asset is sold. There was a controversy as to whether this benefits is available to HUF. It has now been specifically extended to sale of agricultural land by an HUF subject to the conditions contained in the section. 18. CAPITAL GAIN ON TRANSFER OF RESIDENTIAL PROPERTY IF INVESTED IN SHARES OF CERTAIN COMPANY SECTION 54GB A new section 54GB has been inserted to provide for exemption of capital gain to an individual and HUF on transfer of residential property (being house or plot of land ), if the net Page 6 of 39

7 consideration is utilized for subscribing to equity shares of an income and the company in turn invest the amount received in acquiring certain new plant and machinery, within one year from the date of subscription to the shares. If the whole of net consideration is not invested, Proportionate exemption is available. Eligible company has been defined, to be a company incorporated during the previous year, in which the capital gain arises up to the due date for filling of the return. The company should be a small and medium enterprise, engaged should hold more than 50 % share capital or voting power in the company. The section provides for taxation of capital gain which was earlier exempted if the assessee transfer his shareholding in the eligible company within a period of five years from the date of acquisition or the said company does not invest the amount in new plant and machinery within the specified period or transfers the plant and machinery acquired within a period of five years from the date of acquired within a period of five years from the date of acquisition. 19. RECEIPT OF PROPERTY BY HUF FROM ITS MEMBER NOT TO BE TREATED AS INCOME SECTION 56(2) (vii) Under section 56(2) (vii) if an individual or HUF receives money, immovable property or certain movable property, the same is treated as income unless it is received from a specified relative. The definition as income unless has now been incorporation in clause (vii) itself, and it has also been provided that relative for the purpose of HUF shall mean its members will not be taxed as income. This provision has been retrospectively amended w. e.f. 1 st October, RECEIPT OF SHARE PREMIUM BY A COMPANY TREATED AS INCOME SECTION 56(2)(viib) Under new clause (viib) of section 56(2), where a closely held company issues shares to a resident for amount exceeding the face value of the shares, then the amount received in excess of the fair market value of the shares is deemed to be the income of the company. The fair market value for this purpose is the higher of the value arrived at on the basis of the company to the satisfaction the value based on the value of the tangible and intangible assets and various types of commercial rights. The provision does not apply to amounts received by a venture capital undertaking from a venture capital fund or a venture capital company. 21. SHARE MONEY RECEIVED BY A COMPANY ONUS TO PROVE GENUINENESS SECTION 68 Section 68 provides for taxation of cash credits. The section now provides that in case of a closely held company, share capital, share premium or any such amount by whatever name called, the explanation offered for the credit will not be considered to be satisfactory, unless the person ( being a resident) in whose name the amount is credited also offers explanation about the source and nature of the amount credited. Further, such explanation should be found to be satisfactory by the assessing officer. In the event of failure to do so, the entire amount credited will be taxed at the rate of 30% plus applicable Surcharge and Education cess. The provision does not apply to amount received from venture capital fund or a venture capital company. Page 7 of 39

8 22. REDUCTION IN LIMITS OF LIFE INSURANCE PREMIUM SECTION 10(10D) AND 80C Presently, any sum received under a life insurance policy, including bonus, but excluding amounts received under Keyman insurance policy, is exempt, provided the premium amount does not exceeds 20 per cent of the actual capital sum assured in any year during the policy period. Now, this limits is reduced to 10 per cent of the is case of an insurance policy issues on or after 1 st April, 2012 shall be available only to the extent of 10 per cent of the actual capital sum assured. Actual capital sum assured is also defined to mean the minimum amount assured under the policy on happening of the insured event at any time during the term of the policy, and excluding the value of any premiums agreed to be returned and benefit of bonus or otherwise over and above the sum actually assured. This is done to ensure that life insurance products are not designed to circumvent the prescribed limits by varying the capital sum assured from year to year. 23. AMOUNT ON PREVENTIVE HEALTH CHECK UP SECTION 80D An amount of up to Rs. 5,000 spent on amount of preventive health check up of self, spouse, dependent children, parents shall now be eligible for deduction under section 80D. The amount can be paid in cash also. However, the overall qualifying limit under the section remains unchanged. 24. REDUCTION IN AGE LIMITS OF SENIOR CITIZEN SECTION 80D AND 80DDB With effects from A.Y , the qualifying age of senior citizen, being a resident individual, was reduced from 65 years to 60 years, only for the purposes of threshold exemption. Now, a similar amendment has been made under section 80D in respect of higher deduction of mediclaim of Rs. 20,000 where the premium is paid on health of senior citizen, and in section 80DDB in respect of higher deduction of Rs. 60,000 on amount spent on medical treatments of a specified disease, etc. of a senior citizen, making the effective age of senior citizen uniform across all the provisions of the Income-tax Act, w.e.f. A.Y PAYMENT ABOVE Rs. 10,000 SECTION 80G AND 80GGA Presently, deduction in respect of donation to charitable trusts is available under section 80G in respects of any donation being a sum of money. Similarly, under section 80GGA deduction is available in respect of donation for scientific research, rural development, etc. Currently there is no restriction for mode of cash also. Now it is provided that any such payment exceeding Rs. 10,000 shall only be allowed as deduction if such sum is paid in any mode other than cash. 26. DEDUCTION IN RESPECT OF INTEREST ON SAVINGS BANK ACCOUNTS SECTION 80TTA The extinct section 80L has partially been revived in form of section 80TTA by granting deduction up to Rs. 10,000 to an individual or a HUF in respect of savings accounts interest with a scheduled bank or a co-operative bank or post office. Interest on term/time deposits will not qualify for such deduction. In cases where the aforesaid income is derived from any deposits in a savings accounts held by, or on behalf of firm or payers whose income is not in excess of Rs. 5 lakh and who have only salary income up to Rs. 5 lakh and such interest up to Rs. 10,000 will not be required to their return of income. Page 8 of 39

9 28. DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) SECTIONS 90 & 90A Provision of General Anti-Avoidance Rule (GAAR) would apply to an assessee even if they are not beneficial to him. The amendment therefore provides for treaty override in case of GAAR. Action taken under GAAR cannot be contested by taking benefit of the provisions of a DTAA. This is in line with similar provisions made by other countries which have brought in GAAR in their domestic tax laws. Of course, this position may be contested by the affected parties. For the purpose of obtaining tax treaty benefit, it would now be necessary for a non resident assessee to finish a certificate (containing prescribed particulars) of his being resident of that country, obtained by him from the Government of that country. Terms not defined in the Act or in the treaty would get their meaning from the notifications issued by the Government it is clarified that any meaning assigned through notification for terms not defined in an agreement would be effective from the date of coming into force of the relevant DTAA (and not from the date of the notification). 29. Definition of International Transaction & intangible property section 92 B The present definition of international transaction has been expanded by bringing in many more transactions effect from 1 st April, The main transactions that are covered now include purchase, sale, transfer or lease of various kinds of tangible and intangible properties, various mode of capital (debt) Financing, guarantees, provision of services like R & D and marketing services etc. and business restructuring or reorganization transactions. Business restructuring transactions include all transactions, whether having a bearing on profit or loss or not, at the time of the transaction or at any future date. This has been done in light or recent judicial precedents which held that transfer pricing provisions cannot apply in a case where there is no impact on profit or loss income. The term Intangible property has also been clarified by including various types of intangible properties related to marketing,technology, artistic,data processing,engineering, customer, contract, human capital location goodwill and any similar item which derives its value from intellectual content rather than physical attributes. 30. Domestic Transfer Pricing sections 92,92BA,92C,92CA,92D & 92E Currently there are provisions In the Income tax act which empower the assessing officer (AO) to disallow unreasonable expenditure incurred between related parties (Section 40 A) or recompute the income of assessees availing profit linked deductions if there are transactions with related parties (section 40A) or recompute the income of assessee (section 80A,80-IA,similar chapter VI-A deductions or section 10AA). These transactions are presently benchmarked against fair market value. Following the observations of the supreme court in CIT vs. glaxo smithkline asia (P) Ltd. ([2010]195 Taxman 35), the government has extended transfer pricing provisions to the specified domestic transactions by amendment of section 92. As per the amendment, any allowance or expenditure or interest or allocation of any cost or expense or any income in relation to any specified domestic transaction shall be computed having regard to the arm s length price (ALP). Amendments are also made in section 92 for covering mutual cost allocation or contribution agreements or arrangement between associated enterprises. The amended provision will not result in reduction of taxable income or increase in losses. Page 9 of 39

10 Transfer Pricing provisions will now apply also to specified domestic transactions as mentioned in section 92BA, i.e. transactions between persons mentioned in section 40A and transactions between the separate business of an assessee and those between the assessee and its close connections as specified in section 80A and under sub sections 8 and 10 of section 80-IA and similar provisions and other prescribed transactions. For the purpose of this section definition of Associated Enterprise under Section 92A ( as applicable to international transaction ) is not applicable but the definition of related parties in section 40A(2) will be applicable. Appeal against the order of the Transfer Pricing Officer can be filed with CIT ( Appeals ) or Dispute Resolution Panel ( DRP ), as in the case of other transfer pricing adjustment matters. Further, only those cases where the aggregate of such transactions entered into by the assessee in the previous year a sum of Rs. 5 crore, are covered. 31. ADVANCE PRICING AGREEMENT (APA) SECTIONS 92CC AND 92CD The provisions relating to APAs are being introduced w.e.f. 1 st July, The important aspects are given below. The CBDT, with approval of the Central Government, may enter into an agreement with any person, determining the arm s length price, or specifying the manner in which arm s length price is to be determined. The manner of determination may include the prescribed methods or any other methods with adjustments or variations, as required.. The agreement will be valid for a maximum period of five consecutive previous years The agreement will be binding ( in relation to that transaction ) both on the assessee and the Commissioner and the Income Tax authorities subordinate to him. The agreement shall not be binding if there is a change in law or facts. The CBDT may, with approval of the Central Government, declare an agreement to be void ab initio if it finds that the agreement has been obtained by fraud or misrepresentation of facts. Once so declared, the provisions of the Act will apply as if the agreement was never entered into. Where an agreement has been entered into by an assessee, a tax return which pertains to a previous year covered under the agreement and is already filed, the assessee shall file a modified tax return under section 139 in accordance with and limited to the agreement. Once the modified return is filed, the Assessing Officer will assess, reassess or recompute the income, irrespective of whether assessment or reassessment proceedings are over or not, in accordance with the agreement. Where the proceedings are over, the reassessment proceedings are to be completed within one year from the end of the financial year in which the modified tax return is filed, and where the proceedings are pending, the period of limitation for completion of these proceedings would be extended by 12 months. 32. APPLICATION OF = 5% MARGIN FOR DETERMINING ALP SECTION 92C Page 10 of 39

11 As per first proviso to section 92C(2), where more than one price is determined by the most appropriate method, an arithmetical mean of the price s has to be considered as the ALP. The second proviso provided that where this ALP did not exceed the actual price by a margin of = 5%, the actual price would be considered as the ALP. This + 5% margin was replaced by such percentage to be notified by the government. This power of the Government to notify the differential margin is now restricted to = 3% of the actual price w.e.f. A.Y Controversy arose as to whether the ALP is to be taken as the actual price or the ALP as determined where the difference is within the = 5%. It was sought to be clarified earlier that the amendment applies from 1 st October, This has now been further clarified by way of explanation to second proviso of section 92C(2). It has also been clarified by retrospective amendment w.e.f. 1 st April, 2002 that if variation between ALP and actual price is more than 5%, the benefit of 5% will not be available. By inserting sub-clause it has been provided that the Assessing Officer (AO) shall not reopen assessments completed before 1 st April, TAX INCENTIVE FOR FUNDING OF INFRASTRUCTURE BUSINESS SECTIONS 115A & 194LC Any interest paid by an Indian company engaged in certain specified infrastructure business such as construction of dam, operation of aircraft, manufacture or production of fertilizers, construction of port including inland port, etc. to a non resident or a foreign company in respect of borrowing made in foreign currency from sources outside India between 1 st July, 2012 and 1 st July, 2015, under an agreement approved by the Central Government, shall be taxable at the rate of 5 % ( plus applicable surcharge and cess ). New section 194LC is also inserted providing for 5% ( plus applicable surcharge and cess ) in case of such interest credited / paid to a non resident or a foreign company. 34. GENERAL ANTI-AVOIDANCE RULE (GARR) CHAPTER X-A SECTIONS 95 TO 102 i) GAAR provisions are introduced in the Income tax Act. These new provisions apply notwithstanding anything contained in any other provisions of the Act. Essentially, GAAR empowers the Tax Department to declare an arrangement entered into by an assessee to be an Impermissible Avoidance Arrangement (IAA) and the consequence thereof could be denial of tax benefit either under the provisions of the Act or under DTAA. ii) iii) Note only an arrangement, but also any step in or a part of any arrangement may also be declared as IAA. The word arrangement is defined to mean any step in or part of or the whole of any transaction, operation, scheme, agreement or understanding whether enforceable or not and it also includes alienation of any property in such transaction, operation, scheme, agreement or understanding. Page 11 of 39

12 iv) The term Impermissible Avoidence Arragement is defined to mean an arrangement whose main purpose or one of the main purpose is to obtain tax benefit. Besides, the main purpose of tax benefit for a transaction to be declared as IAA, at least one of the following conditions is required to satisfied, namely :- a) the arrangement creates rights / obligations that are not normally between arms length parties ; b) it results directly or indirectly in any misuse or abuse of the provisions of the Act ; c) it lacks commercial substance d) the means or manner employed is not ordinary for bona fide purposes. v) The term tax benefit is defined to mean reduction, avoidance, deferral of tax or increase in refund or nay other amount under the Act. such reduction, avoidance, deferral of tax or increase of refund may be as result of the provision of the Act or the DTAA. The term also includes an increase in loss or reductin in total income. vi) vii) Any arrangement that result in tax benefit is presumed to be an arrangement, the main purpose of which is to obtain tax benefit and the onus is on the person obtaining tax benefit to prove that it is not so. Such statutory presumption is also made in cases, where the main purpose of the whole arrangement is not to obtain tax benefit but the main purpose of a step in or part of the arrangement is to obtain tax benefit. An arrangement is deemed to lack commercial substance if the substance or effect of the arrangement is inconsistent with the form of its individual steps or parts.the arrangement is deemed to lack commercial substance also under the following situation :- a) It involves round trip financing. The term round trip financing means transfer of funds among parties without substantial commercial purpose ; b) If it involves an accommodating party. The Term accommodation party means a party whose main purpose of participating is to obtain tax benefit for the assessee ; c) If it involves elements that have the effect of setting off or canceling each other ; d) If it involves transaction that is conducted through one or more persons such that is location, source, ownership or control of funds is disguised, viii) It is also provided that in deciding as to whether an arrangement lacks commercial substance or not, the period or time for which the arrangement exists or the fact the taxes have been paid or there exists an exit route in the arrangement made are irrelevant factors. Page 12 of 39

13 ix) Once an arrangement is declared as an IAA, the consequence could be denial of tax benefit either under the provisions of the Act or under the DTAA. Such denial could be in any manner including by way of disregarding a step, combining a step, re-characterizing a step, disregarding an accommondating party, treating accommodating party or any other party as one person, piercing the corporate veil, treating equity as debt, treating capital as revenue and vice versa, etc. x) The CBDT is empowered to issue guidelines and prescribe the condition and the manner in accordance with which the provisions of GAAR can be invoked. 35. MECHANISM FOR APPLICATION OF GAAR SECTION 14BA If the Assessing officer, in the course of assessment proceedings, considers it necessary to declare any arrangement as IAA and to determine the consequence thereof, then he is required to make a reference to the commissioner of Income Tax (CIT). On receipt of such reference, if the CIT is of the opinion that the provisions of GAAR are required to be invoked, then he shall issue a notice to the assesee to submit his objection and offer an opportunity of hearing to he assessee. If the assesee does not furnish any objection, the CIT may issue direction to the Assessing Officer whether or not the arrangement should be regarded and an IAA. If the assesee files his objections, then, after giving him a hearing, if the CIT is satisfied then he would direct the assessing officer not to invoke GAAR. If, on the other hand if the CIT is not satisfied then he will make a reference to Approving Panel which would consist of three members being the Income-tax Authority of the rank of Commissioner or above. The Approving Panel Shall Provide and Opportunity of hearing to the Assesee and the Assessing officer and thereafter, pass necessary order either declaring the arrangement as an IAA or otherwise. The Approving Panel has to dispose of the reference within a period of six months from the end of the month in which the Reference was received from the Commissioner. The directions issued by the Approving Panel shall be binding on the Assessing Officer who shall complete the proceedings in accordance with such directions. The Final Order in case any consequence of GAAR is determined, shall be passed by AO only after approval by Commissioner and, thereafter, First Appeal against such order shall lie to the Appellate Tribunal. Unfortunately, most of the valid recommendations made by the Standing Committee on Finance (15 th Lok Sabha) on the far reaching provisions of GAAR proposed in the Direct Taxes Code Bill,2010,have almost been ignored. 36. TAX ON NON-RESIDENT SPORTSMEN OR SPORTS ASSOCIATIONS- SECTIONS 115BBA & 194E Section 115BBA has been amended to include income arising to a non-citizen, nonresident entertainer (such as theatre, radio or television artists and musicians ) from performance in India which is 20% of gross receipts. The rate of tax in case of non-citizen,non-resident sportsmen and non-resident sports associations under this section is also raised from 10% to 20% of the gross receipts. 20% The rate of TDS in corresponding section 194E has accordingly been increased to Page 13 of 39

14 37. TAX ON DIVIDENDS RECEIVED FROM FOREIGN COMPANIES SECTION 115BBD The benefit of lower tax rate of 15% fro dividends received by an Indian company from a foreign company (in which it has shareholding of 26% or more ) is extended for one more year i.e. A.Y TAXATION OF CASH CREDITS,UNEXPLANINED MONEY,INVESTMENTS,ETC.- SECTION 115BBE Unexplained amounts treated as income under sections 68,69,69A,69B,69C and 69D of the Act will now be taxed at a flat rate of 30% (plus surcharge and cess as applicable ) without granting any deduction of expenditure or allowance there against/the benefit of threshold exemption and lower slab rates for individuals and HUFs will not be available to such amounts. 39. MINIMUM ALTERNATE TAX (MAT) ON COMPANIES SECTION 115JB In order to compute the tax liability under MAT, every company is required to prepare its accounts as per schedule VI of the Companies Act,1956.However,under section 211 of the Companies Act, certain companies, e.g. Insurance, Banking or Electricity company are allowed to prepare their accounts in accordance with their respective Regulatory Acts. Section 115JB is amended to provide that in such cases, the profit & loss account prepared in accordance with their respective Regulatory Acts shall form the basis for computing the book profit under section 115JB. Book profit for the purpose of MAT is computed by making certain adjustments to the profit as computed under Schedule VI of the Companies Act. Book profit will now be increased by the amount standing in the revaluation reserve relating to revalued asset which has been retired or disposed of, if the same has not been credited to the profit & loss account.this amendment is in order to cover the situation where revaluation reserve is taken directly to general reserve on disposal of the asset resulting in the gain not being subjected to MAT. In view of the omission of part III in the Revised Schedule VI of the Companies Act,1956,the reference to part III has also been omitted from section 115JB. Though the revised Schedule VI is applicable from Financial Year ,this amendment is made w.e.f. A.Y ALTERNATE MINIMUM TAX (AMT) ON ALL PERSONS OTHER THAN COMPANIES-SECTIONS 115JC,115JD,115JE,115JEE AND 115JF Last year a new Chapter XII-BA was inserted to provide for levy of AMT on Limited Liability Partnerships (LLP).AMT was payable when tax payable by LLP on the total income computed in accordance with other provisions of the Act (regular Income-tax) was less than 18.5% of the Adjusted Total Income The provisions of AMT are now extended to all other non-corporate entitles. AMT will not be applicable to an individual or a Hindu Undivided Family or an association of persons or a body of individuals, or an artificial juridical person, if the adjusted total income of such person does not exceed Rs.20 lakh. Page 14 of 39

15 The meaning of the term Adjusted Total Income hitherto was total income as computed under the normal provisions of the Act as increased by the deduction under section 10AA and deduction in respect of certain incomes under provisions of part C of Chapter VI-A. The same is now amended to provide that deduction granted under section 80p will not be added back in computing the Adjusted Total Income. This means co-operative societies claiming deduction under section 80p will not be subjected to AMT. Consequential amendments are also made to sections 140A,234A,234B and 234C to provide that AMT credit will be considered in computing the self-assessment tax under section 140A and in calculating the interest liability under sections 234A,234B & 234C. 41. TAX ON DISTRIBUTED PROFITS OF DOMESTIC COMPANIES SECTION 115-O Presently dividend distributable by a company is liable for DDT, is to be reduced by dividends received from its subsidiary which has paid DDT on such dividend only if it is not a subsidiary of any other company i.e. only in case of a tow tier corporate structure. To remove the cascading effect in a multi-tier corporate structure, effective 1 st July.2012,the condition of the domestic company not being a subsidiary of any other company has been withdrawn. Hence any domestic company receiving dividend from any subsidiary company and declaring dividend in the same year will be allowed to reduce the amount of such dividend for determining the liability of DDT if the subsidiary has paid DDT payable by it. 42. FURNISHING RETURN OF INCOME BY PERSON HOLDING ASSETS OUTSIDE INDIA-SECTION 139 Any resident who is otherwise not required to furnish a return of income, will now be required to furnish a return before the specified due date, if he has any asset located outside India including any financial interest in any entity, or has signing authority in any account located outside India. This amendment is effective from A.Y DUE DATE FOR FURNISHING RETURNS IN CASE OF ASSESSEES HAVING TO FURNISH TRANSFER PRICING REPORT- SECTION 139 Presently, the due date of furnishing the return of income is 30 th November only in the case of companies required to file a transfer Pricing report under section 92E.Section 139 now provides that the due date of furnishing return of income will be 30 th November for any assessee who is required to furnish a Transfer pricing report under section 92E.This amendment is effective from A.Y PROCESSING OF RETURN UNDER SECTON 143(1) NOT REQUIRED IN SERUTINY CASES-SECTION 143(1D) Presently, every return is required to be processed under section 143(1) irrespective whether the case has been selected for scrutiny or not and the refund, if any, is to be issued. It is now provided that in respect of a return being selected for scrutiny assessment under section 143 (2), it will not be necessary to process the return under section 143 (1). This amendment is effective from 1 st July, REFERENCE TO DISPUTE RESOLUTION PANEL (DRP)-SECTION 144C Explanation has been inserted retrospectively w.e.f. 1 st April,2009 to clarify that the power of DRP to enhance the variation proposed in the draft order of the Assessing Officer Page 15 of 39

16 and includes the power to consider any matter arising out of the assessment proceedings relating to draft order irrespective of whether it has been raised by the assessee or not. Time limit for completion of assessments provided in section 144C will override the time limits provided in sections 153 and 153B. In this connection also refer to para REASSESSMENTS SECTION 147 & 149 Section 147 provides for reassessment in respect of income escaping assessment. It is now provided that if a person is found to have any asset located outside India or a financial interest in any entity outside India, income shall be deemed to have escaped assessment. In such a case, it is now provided in section 149 that the time limit for issue of reopening notice under section 148 will be sixteen years from the end of the relevant assessment year instead of the earlier limit of six years. The said limit of sixteen years shall apply whether or not an assessment had been made under se4ction 143 (3)/147, for which the present time limit is four years, under specified circumstances. It is now also provided that where a person has failed to furnish the Transfer Pricing report under section 92E in respect of any international transaction, income shall be deemed to have escaped assessment. These amendments will be effective from 1 st July,2012. However, it has been clarified that the above provisions will also apply to any assessment year beginning on or before 1 st April,2012. Similar amendments have been made in the Wealth-tax Act. 47. EXTENSION OF TIME TIMIT FOR COMPLETION OF ASSESSMENT PROCEEDING-SECTIONS 153 AND 153B At present the time limit for completion of assessment proceedings is 21 months or 33 months (in a case where a reference is made to the Transfer Pricing Officer ) from the end of the relevant assessment year. It is now provided that the time limit will be extended by 3 months i.e. the new time limit for completion of assessment proceedings is 24 months or 36 months (in a case where a reference is made to the Transfer Pricing Officer). The new time limit of 2 years is applicable for assessment proceedings relating to A.Y and onwards (excluding assessment proceedings where a reference is made to the TPO) and the time limit of 3 years is applicable for assessment proceedings relating to A.Y and onwards where a reference is made to the TPO. There is a similar extension of the time limit by 3 months for completion of proceedings in cases of reassessment, fresh assessment, assessment after search and requisition and Wealth-tax amendments. Further, while considering the above time limits, certain provisions have also been made to exclude the period involved in the exchange of information proceedings and GAAR proceedings. Similar amendments have been made in the Wealth-tax Act. In cases involving APA for time limit of completion of assessment/reassessment also refer para ASSESSMENT IN CASE OF SEARCH OR REQUSITION SECTIONS 153A AND 153C Page 16 of 39

17 Sections 153A and 153C of the Act lay down the procedure for assessment/reassessment in case of search or requisition. Presently, the notice for filing of returns of income and assessment thereof has to be for six assessment years preceding the previous year in which the search was conducted or requisition made. It is now provided that the Central Government can notify cases or class of cases where the Assessing Officer shall not be required to issue notice for initiation of assessment/reassessment proceedings for six preceding assessment years and proceedings may only be taken up for the assessment year relevant to the year of search or requisition. These amendments are effective from 1 st July, INTIMATION ON PROCESSING OF STATEMENT OF TDS RECTIFICATION AND APPEAL SECTIONS 154, 156 AND 246A A statement of tax deduction at source is processed under section 200A and an intimation is sent to the deductor as provided under section 200A(1). Presently, there is no provision for rectification or appeal against the said intimation. It is now provided that any mistake apparent from the record in the intimation issued under section 200A shall be rectifiable under section 154. It is also provided that the intimation issued under section 200A shall also be deemed to be a notice of demand under section 156 and an appeal will lie to the Commissioner of Income Tax (Appeals) under section 246A. These amendments are effective from 1 st July, TDS ON INTEREST ON SECURITIES SECTION 193 The limit of Rs 2,500 for non-deduction of tax at source from interest on debentures issued by a listed company has been increased from Rs 2,500 to Rs 5,000 and has been extended to debentures issued by unlisted companies as well as interest paid to resident HUF. The separate exemption provided for interest paid on listed securities held in demat form continues. The amendment is effective from 1 st July, TDS ON FEES FOR PROFESSIONAL OR TECHNICAL SERVICES SECTION 194J The scope of section 194J is widened w.e.f 1 st July, 2012 to include any fees/commission/remuneration by whatever name called, paid/payable to a director of a company, other than salary income. 52. TDS ON PAYMENT OF COMPENSATION ON COMPULSORY ACQUISITION OF CERTAIN IMMOVABLE PROPERTY SECTION 194LA The threshold limit for the applicability of this section has been increased from Rs 1 lakh to Rs 2 lakh w.e.f 1 st July, TDS ON PAYMENT ON TRANSFER OF CERTAIN IMMOVABLE PROPERTY OTHER THAN AGRICULTURAL LAND SECTION 194LAA New provision is made to provide that the purchaser of an immovable property (other than agricultural land ) is required to deduct tax at source at the rate of 1% of the consideration paid/payable. The tax is to be deducted at the time of payment or at the time of credit, whichever is earlier. Tax is not required to be deducted if the consideration paid/payable is less than Rs 50 lakh, if the property is situated in a specific area, or Rs 20 Page 17 of 39