Key Amendments to Form 3CD [Effective from August 20, 2018] Nihar Jambusaria

Key Amendments to Form 3CD [Effective from August 20, 2018] Nihar Jambusaria

Key Amendments to Form 3CD. The Central Board of Direct Taxes (CBDT) via Notification No. 33/2018 dated 20th July, 2018 has amended Form 3CD with effect from August 20 th, 2018. These include 6 amendments and 9 insertions amounting to 15 changes. Since the notification is effective from August 20th, 2018, Tax Audit Report with Old 3CD can be issued upto August 20th, 2018. (Refer Avinash Gupta v. Union of India 373 ITR 137 (Delhi HC) 1. In Clause 4 : GST registration number should be furnished if assessee is liable to pay GST. This is a simple reporting requirement 2. In Clause 19 and 24 : - Section 32AD - Investment Allowance Deduction claimed and deemed profits u/s 32AD need to be reported. Section 32AD provides allowance @ 15% of the cost of any new assets acquired and installed in an undertaking or enterprise for manufacture or production of any article or thing, on or after 1st April 2015 and before 1st April, 2020 in any backward area notified on this behalf in the States of Andhra Pradesh, Bihar, Telangana or West Bengal. Deemed gains arising out of sale of asset on which allowance was claimed under section 32AD will now have to be reported in clause 24. 2

Key Amendments to Form 3CD. Clause 26: Sum payable to Indian railways for use of assets to be reported Section 43B(g) Any sum payable by the assessee to the Indian Railways for the use of railway assets can be claimed only on payment of the same before the date of filing return. This is required to be reported now. Refer Case Laws: CIT V. Swayam Shipping Services Pvt. Ltd (11 taxmann.com 137) CIT v. Reliance Engineering Associates Pvt. Ltd. (21 taxmann 539) 3. After Clause 29, Clause 29A and 29B shall be inserted : - Section 56 Clause 29A : If any amount is chargeable under the head income from other sources under section 56(2)(ix), then the nature of the income and the amount are required to be disclosed. Section 56(2)(ix) states that any sum of money received in advance in the course of negotiation for sale of capital asset shall be chargeable as IFOS if such sum is forfeited and negotiations do not result into transfer of capital assets. 3

Key Amendments to Form 3CD. Clause 29B : If any amount is chargeable under the head income from other sources under section 56(2)(x), then the nature of the income and the amount are required to be disclosed. Section 56(2)(x) states that where any person receives any sum of money without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value or receives an immovable property (i) without consideration where the Stamp Duty Value exceeds fifty thousand rupees) or (ii) for consideration less than the Stamp Duty Value by an amount exceeding fifty thousand rupees, then such amounts shall be taxable under the Head Income From Other Sources. Issues: Whether the tax auditor should accept valuation report certifying lesser than stamp duty valuation? Additional responsibility on the tax payer to justify the rationale of transactions. 4

Audit Few pointers Review the transactions and ascertain whether the provisions of section 56(2)(x) would apply. Document the valuation report obtained by the tax payer from an independent valuer (Chartered Accountant or Merchant Banker) Check whether the valuation is carried out as per the method prescribed under Rule 11UA? 5

Key Amendments to Form 3CD. 4. After Clause 30, Clause 30A shall be inserted : Disclosures regarding Secondary Adjustments (Section 92CE (1)) Section 92CE (1) states that secondary adjustment shall be made where the primary adjustment : (i) Has been made suo motu by the assessee in his return of income. (ii) Made by the AO has been accepted by the assessee. (iii) Is determined by an advance pricing agreement entered into by the assessee. (iv) Is made as per the safe harbour rules. (v) Arising out of an agreement entered into under section 90/90A for avoidance of double tax. Exclusions: Amount of primary adjustments made in any previous year does not exceed 1 crores; and Primary adjustments is made in respect of an assessment year commencing on or before 1 day of April 2016 (2) Excess money which is available with its associated enterprise, if not repatriated within the prescribed time, it shall be deemed to be advance made by the assessee to such associated enterprise and interest on such advance shall be computed in such manner as may be prescribed. 6

Rule 10CB gives the time limit for repatriation of excess money as on or before ninety days from The date of the order of the AO or the appellate authority as the case may be, where the order has been accepted by the assessee. Due date of filing of return u/s 139(1) in any other case Imputed interest p.a on excess money which is not repatriated within time shall be computed : At one year marginal cost of fund lending rate of State Bank of India as on 1 st day of April of the relevant previous year plus 325 basis points in the cases where international transaction is dominated in Indian rupees. At six months LIBOR as on 30 th September of the relevant previous year plus 300 basis points where the international transaction is denominated in foreign currency. 7

Following are the details needs to be reported. - Whether primary adjustments to transfer price has been made? YES NO Clause under which such adjustment has been made Amount (in Rs.) of Primary Adjustment Whether excess money available with AE is required to be repatriated to India u/s 92CE(2)? No further disclosure required If YES, whether it has been repatriated within the prescribed time? If NO, the amount (in Rs.) of imputed interest on such excess money 8

Illustration 1: Suo Moto Adjustments A Ltd (Indian Co.) imported goods worth Rs. 10 crores from its non-resident AE on 01/10/2017. While filing 3CEB report for AY 18-19, the assessee determined ALP at Rs. 7.5 crores and made suo-moto primary adjustment of Rs. 2.5 crores. The Tax auditor at the time of filing 3CD need to report the primary adjustment of Rs. 2.5 crores made by A Ltd. As per Rule 10CB, excess money (Rs. 2.5 crores) lying with non-resident AE is required to be repatriated within 90 days from the date of filing return of income u/s 139(1). However at the time of filing Form 3CD the time limit to repatriate the excess money within 90 days is not lapsed, the tax auditor cannot comment on the same. A note on same can be submitted. 9

Illustration 2: Advance Pricing Agreement A Ltd (Indian Co.) entered into an APA during AY 2015-16. The APA got concluded on 30st September, 2017 i.e. in AY 2018-19 The primary adjustment of Rs. 2 crores was made on account of APA. Reporting would be as follows: <<next slide>> 10

AY Due date of filing Modified Return / Original Return Date Applicability of SA Reporting Repatriation of Excess Money 2015-16 3 months from the end 2016-17 of the month in which APA was concluded (Section 92CD) 31/12/2017 No. as it pertains prior to AY 2016-17 No NA 2017-18 3 months from the end of the month in which APA was concluded (Section 92CD) 31/12/2017 Yes Yes 90 from the date of filing return. i.e. 31 st March, 2018 (Rule 10CB) 2018-19 30/11/2018 Yes Yes 90 from the date of filing return. (Rule 10CB) 11

Issues: In TAR, details whether AE is required to repatriate the excess fund is required to be reported. Issue will arise in a situation wherein few AE s jurisdictions would allow to repatriate and few would not. The TAR does not provide the option of partial repatriation. The CBDT has issued draft Notification dated 19 th June, 2018 for public comments and suggested that the time limit of 90 days from the date of return filed u/s 139(1) should be changed to 90 days from the date of conclusion of APA. 12

Issues: In case wherein the time period of 90 days, as mentioned in Rule 10CB, has not elapsed as on 31 March of the relevant financial year, the clause is not clear on the cut-off date to be considered for the purpose of reporting if the repatriation is done within the prescribed time limit. Similarly, the clause is silent on the cut-off date to be considered for the calculation of interest on excess money, if any. The tax payer needs to maintain separate interest working sheet as in TAR consolidated interest figure is required to be reported 13

Audit Few pointers Reviewing Transfer Pricing Documents. Latest Assessment Order and position adopted by the management i.e. whether management has accepted the order or preferred to file an appeal. Computation of Income. Reviewing whether Secondary adjustment made in books of account of assessee and AE on account of Primary Adjustment. Verifying proof in case where excess money is repatriated. APA and MAP status Interest working calculation. Opinion obtained by the management from an expert, if any, on any particular matter 14

Key Amendments to Form 3CD. 5. After Clause 30A, Clause 30B shall be inserted : Disclosure regarding interest deduction limitation (Section 94B(1)) Section 94B states that Where an Indian Company or PE of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible under PGBP in respect of any debt issued by a non resident, being an associated enterprise of such borrower, interest to the extent of excess interest shall not be deductible. Excess interest shall mean amount of total interest paid / payable in excess of 30% of EBITDA of the borrower or interest paid / payable whichever is less. Where interest expenditure is not wholly deducted against income under the head PGBP, amount so not deducted shall be carried forward to the following assessment year(s) and it shall be allowed as a deduction in that assessment year to the extent of maximum allowable interest expenditure. No interest expenditure shall be carried forward for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed. The provisions are not applicable to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance. The provisions are applicable to NBFC. 15

Whether assesse has incurred expenditure by way of interest or of similar nature exceeding one crore rupees? YES NO No further disclosure required Amount (in Rs.) of such expenditure EBITDA during the previous year Amount of expenditure by way of interest or similar nature which exceeds 30% of EBITDA Details of expenditure brought forward (AY and Amount) Details of expenditure carried forward (AY and Amount) 16

Key Amendments to Form 3CD. Sr. No Particular - Amount A. Interest Payable Interest payable to AE in AY 19-20 20 B. EBIDTA in AY 19-20 200 C. 30% of EBIDTA 60 D. Limitation of Interest u/s 94B(2) (lower of A. and C.) 20 E. Excess interest brought forward from AY 18-19 80 F. Excess interest of AY 18-19 which can be set off in AY 19-20 (C D) G. Excess Interest of AY 18-19 carried forward to subsequent year i.e. AY 20-21 (E F) 40 40 17

Audit Few pointers Review the documents relating to loan obtained from non-resident lenders (AE). Review the TP documents whether interest paid is at ALP? Back-up working of Interest allowed and carried forward as per section 94B. Related Party disclosures in books in case where AE has given guarantee to lenders (non AE). Review the TP documents whether guarantee commission paid is at ALP? Review whether compliance wrt Related Party transactions u/s 188 of Companies Act 2013 are complied with. 18

After Clause 30B, Clause 30C shall be inserted : Disclosures regarding General Anti Avoidance Rule As per Section 96 an impermissible avoidance arrangement means an agreement whose main purpose is to obtain a tax benefit and it Creates rights or obligations which are not ordinarily created between persons dealing at arm s length. Results in misuse or abuse of provisions of this Act. Lacks or is deemed to lack Commercial substance. Entered or carried in a manner which are not ordinarily applied for bona fide purposes It is pertinent to note that the provisions of GAAR shall not apply to an arrangement where the tax benefit in the relevant assessment year arising, in aggregate, to all the parties to the arrangement does not exceed a sum of rupees three crore 19

Consequences of impermissible avoidance arrangement. A. Disregarding, combining or recharacterising any step in, or a part or whole of, the impermissible avoidance arrangement; B. Treating the impermissible avoidance arrangement as if it had not been entered into or carried out; C. Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person; D. Deeming persons who are connected persons in relation to each other to be one and the same person for the purposes of determining tax treatment of any amount; E. Reallocating amongst the parties to the arrangement i) any accrual, or receipt, of a capital nature or revenue nature; or ii) any expenditure, deduction, relief or rebate; F. Treating i) the place of residence of any party to the arrangement; or ii) the situs of an asset or of a transaction, at a place other than the place of residence, location of the asset or location of the transaction as provided under the arrangement; G. Considering or looking through any arrangement by disregarding any corporate structure. 20

Whether assesse has entered into an impermissible avoidance agreement, as referred to in Section 96? YES NO No further disclosure required Nature of impermissible avoidance agreement. Amount of tax benefit, in aggregate, to all the parties in the agreement. 21

Issues: The Tax auditor may not have all the access and information relating to the transactions. Tax auditor may have to review past transactions in case if there is any tax benefit in current year. The provisions of GAAR are broad and ambiguous. The GAAR provisions do not apply where the overall tax benefit does not exceed INR 3 crores. However, based on revised Form 3CD, it is not clear whether reporting is required even where the aforesaid threshold limit is not exceeded 22

Audit Few pointers Review Inbound structures where the holding company is in a low-tax jurisdiction / holds IP in a low-tax jurisdiction and understand the business rationale. Review Restructuring transactions mergers, de-mergers, acquisitions, slump sales, selective buy backs, gifts of shares, conversions of LLP. Check cash repatriation structures including intergroup transactions. Review new related party relations and transactions entered into. Tax opinions involving caveats. Scheme of restructuring approved by the Court. Check for reason for reduction of ETR vis-à-vis past years. 23

Key Amendments to Form 3CD. 7. In Clause 31, Clause 31(ba), (bb), (bc), (bd) shall be inserted : Cash receipts / payments exceeding Rs 2 Lakhs (Sec 269ST) Following details are sought for reporting particulars of receipts or payment in cash or cheque or bank draft (not being account payee cheque or account payee bank draft) exceeding Rs. 2 lakhs. from a person in a day or in respect of a single transaction or in respect of transactions relating to one event or occasion from a person, during the previous year Name, address and Permanent Account Number (if available with the assesse) of the payer / payee. Nature of Transaction Amount of receipt / payment Date of receipt / payment The above particulars need not be given in case of receipt by or payment to a Government Company, a banking Company, a post office savings bank, a cooperative bank or in case of transactions referred in Section 269SS or in case of persons referred to in Notification No S.O. 2065(E) dated 3 rd July, 2017. 24

Key Amendments to Form 3CD. Notification No 57 / 2017 - S.O. 2065(E) Central Government specifies that provision of Section 269ST shall not apply to the following : (a) receipt by a business correspondent on behalf of a banking company or co-operative bank, in accordance with the guidelines issued by the Reserve Bank of India; (b) receipt by a white label automated teller machine operator from retail outlet sources on behalf of a banking company or co-operative bank, in accordance with the authorization issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007; (c) receipt from an agent by an issuer of pre-paid payment instruments, in accordance with the authorization issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007; (d) receipt by a company or institution issuing credit cards against bills raised in respect of one or more credit cards; (e) receipt which is not includible in the total income under clause (17A) of section 10 of the Income-tax Act, 1961. 25

Audit Few pointers Review the Internal Control system to check whether the tax payer has entered any cash transactions exceeding Rs 2,00,000/-. Review the bank statement to verify whether where any third party has deposited cash exceeding Rs 2,00,000 in tax payer bank account. 26

Key Amendments to Form 3CD. 8. In Clause 34b, the following shall be substituted: Disclosure requirement if assessee is required to furnish the statement of tax deducted or collected. Prior to amendment, the TAR required disclosure of transactional details of tax deduction or collected at source and TDS statements filed in respect thereof within the prescribed time. The TAR did not require disclosure of unreported transactions in TDS statements if they were furnished within due date. The disclosure of unreported transactions was required only if TDS statements were not furnished within due date. The amended TAR now requires disclosure of details/transactions which are not reported even in TDS statements which are furnished within due date Tax deduction and collection Account Number (TAN). Type of Form Due date for furnishing Date of furnishing, if furnished. List of details / transactions which are required to be reported but are not reported in the statement of tax deducted or collected. 27

Key Amendments to Form 3CD. 9. After Clause 36, Clause 36A shall be inserted : Deemed Dividend u/s 2(22)(e) Any loan or advance given by a closely held company to its substantial shareholder or a concern where such shareholder holds substantial interest shall be deemed to be dividend and upto FY 2017-18 such deemed dividend was taxable in the hands of shareholder. Details of amounts received as deemed dividend u/s 2(22)(e) Amount received as deemed dividend. Date of receipt. Therefore, this amendment requires the recipient of dividend who is liable for tax audit to disclose and not the closely held company who is paying. Note: W.e.f FY 2018-19, such deemed dividend shall be liable to DDT @ 42.87 (grossed up) + surcharge and cess and shall be exempt in the hands of shareholder u/s 10(34) 28

Key Amendments to Form 3CD. 10. After Clause 41, Clause 42, 43 and 44 shall be inserted : Clause 42 : Disclosure requirement if assessee is required to furnish statement in Form No 61 / 61A / 61B. Form No 61 : Every person referred to in Rule 114C, who has received declarations in Form 60 from parties who do not have PAN and who have entered into transactions specified in Rule 114B, shall furnish a statement in Form No. 61 containing particulars of such declaration. Form No 61A : Rule 114E specifies list of financial transaction which are required to be furnished u/s 285BA and which shall be provided in Form No 61A. Form No 61B : The statement of reportable account required to be furnished u/s 285BA(1) shall be furnished in Form No. 61B by a reporting financial institution. This information is required to fulfill obligation of automatic exchange of information under FACTA and CRS. 29

If yes, following are the details Income tax Department Reporting Entity Identification Number. Type of Form Due date for furnishing Date of furnishing, if furnished. List of details / transactions which are required to be reported but are not reported in the form. The amended TAR requires the Accountant to audit the submitted forms to identify unreported transactions. 30

Key Amendments to Form 3CD. Clause 43 : - Country-by-country reporting Section 286 of Act provides that every parent entity or Alternate reporting entity (ARE) resident in India of an international group shall furnish Country by Country Report (CBCR) Parent entity means entity which is required to consolidate all financial statements of the group companies Alternate reporting entity means entity which has been nominated by the group to undertake filing of CBCR instead of parent entity CBCR has to be filed provided Consolidated Group Revenue of the International Group > INR 5500 crores Disclosure requirement if assessee or its parent entity or Alternate Reporting Entity (ARE) is liable to furnish report u/s 286(2). If yes, following details are required to be furnished - Whether report has been furnished by the assessee or its parent entity or ARE. Name of parent entity and ARE (if applicable). Date of furnishing of report. 31

Issue: Every parent entity or the alternate reporting entity, resident in India, shall, for every reporting accounting year, in respect of the international group of which it is a constituent, furnish a report, to the prescribed authority within a period of twelve months from the end of the said reporting accounting year, in the form and manner as may be prescribed Example: Due date for filing CbCR for FY 2017-18 is 31 st March 2019. Tax Audit due date for FY 2017-18 in case where TP is applicable is 30 th November, 2018. Therefore, there may be instances that at the time of filing TAR, CbCR for FY 2017-18 may not have filed. Therefore, in such a situation, details of CbCR for FY 2016-17 needs to be reported. 32

Key Amendments to Form 3CD. Clause 44 : Break-up of total expenditure of entities registered or not under GST in the following manner : Sr. No Total amount of Expenditure incurred during the year Expenditure in respect of entities registered under GST Relating to goods or services exempt from GST Relating to entities falling under compositio n scheme Relating to Other register ed entities Total payment to registere d entities Expenditure relating to entities not registered under GST (1) (2) (3) (4) (5) (6) (7) 33

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