Vinodh & Muthu Chartered Accountants Newsletter MAY 2016
2 Dear Readers, Welcome to our newsletter. VMCA brings you the significant developments in taxation during the month of May 2016. We hope this edition is useful and provides some insight in tax arena. Effective June 2016 Corporate Tax International Tax Volume 1.2 May 2016
Effective June 2016 3 Equalisation levy Krishi Kalyan Cess Tax Collected at Source Tax Deducted at Source Advance Tax Others
Effective June 2016 4 Equalisation Levy Equalisation Levy introduced in Finance Act, 2016 shall come into force from 1 st June 2016. Equalisation Levy to be levied at 6% on the consideration of any specified service received / receivable by a non-resident from: a resident carrying on business or profession in India a non-resident having a permanent establishment in India (service not effectively connected with such PE) Specified services has been defined to mean online advertising or any provision for digital advertising space or any other facility or service for the purpose of online advertisement, or any other service as may be notified by the Central Government. Levy is not chargeable where consideration does not exceed 1 Lakh Equalisation levy shall be deducted and remitted before 7th of every month Annual statement to be electronically furnished on or before 30 th June of the immediately succeeding year Equalisation Levy Rules notified includes forms for furnishing annual statement and for filing appeal before appellate authorities Krishi Kalyan Cess Krishi Kalyan Cess ( KKC ) at 0.50% of value of all taxable services from 1 st June 2016. Reverse Charge Levy of KKC under reverse charge mechanism for services, where the service recipient is liable to pay service tax Exempt Services Exemption for levy of KKC where the services are not subject to service tax Abatement Grant of abatement from levy of KKC equal to abatement available for service tax Rebate For the purpose of rebate, KKC has been included in the list of Service Tax and Cess Refund Grant refund of KKC paid on input services used for specified purposes CENVAT Credit CENVAT credit of KKC paid on input services can be utilized only for payment of KKC on output services Amends Rules 6 of Service Tax Rules to provide for composition rate of KKC as applicable to service tax
Effective June 2016 5 Tax Collected at Source w.e.f. 1 st June Section 206C is amended to provide that the seller shall collect the tax at the rate of 1% of sale value from the purchaser on Sale of motor vehicle of the value exceeding ten lakh rupees (Where amount is received by cash, cheque or any other mode); or Sale in cash of bullion exceeding two lakh rupees or jewellery exceeding five lakh rupees; or Sale in cash of any goods (other than bullion and jewellery), or providing of any services (other than payments on which tax is deducted at source under Chapter XVII-B) exceeding two lakh rupees. (Amount of consideration is received in cash or partly in cash). Tax Deducted at Source Changes in threshold limit and rates: Section Limit (in Rs.) Rate 192A - Payment to an employee by EPF 50,000 No change 194BB Winnings from Horse Race 10,000 No change 194C Payment to Contractors 1,00,000 No change 194LA Payment on compulsory acquisition 2,50,000 No change 194D Insurance Commission 15,000 5% 194G Commission on sale of lottery ticket 15,000 5% 194H Commission or brokerage 15,000 5% 194DA Payment of Life Insurance Policy No change 1% 194EE Payment of NSS Deposits No change 10% Form 15G / 15H has been enabled for rental payments Section 206AA shall not apply to a non-resident / foreign company subject to such conditions as may be prescribed
Effective June 2016 6 Advance Tax Uniform advance tax mechanism is introduced effective from FY 2016-17: Quarter Due date Payable I On or before 15 th June 15% II On or before 15 th September 45% III On or before 15 th December 75% IV On or before 15th March 100% From FY 2016-17, Assessee in respect of an eligible business u/s 44AD are also required to pay 100% of tax due on such income before 15 th March. Others Section 133C empowers the prescribed income-tax authority to issue notice calling for information and documents for the purpose of verification of information in its possession. This section has been amended (with effect from June 1, 2016) to further provide that the information and documents so obtained by the prescribed income-tax authority may be scrutinized and the outcome of such scrutiny may be made available to the Assessing Officer for further necessary action, if any. Income Declaration Scheme, 2016 The window is open from 1 st June Persons who have not paid full taxes in the past gets an opportunity to come forward and declare the undisclosed income and pay tax, surcharge and penalty totalling in all to 45% of such undisclosed income declared. The Direct Tax Dispute Resolution Scheme, 2016 The declarant under the scheme be required to pay tax at the applicable rate plus interest upto the date of assessment. However, in case of disputed tax exceeding Rs. 10 lakhs, 25% of the minimum penalty leviable shall also be required to be paid. In case of pending appeal against a penalty order, 25% of minimum penalty leviable shall be payable along with the tax and interest payable on account of assessment or reassessment.
Corporate Tax 7 Recent Case Laws Fiduciary Shares & Stock Private Limited [Mumbai ITAT ITA No. 321/MUM/2013]: Disallowance under section 14A r.w. Rule 8D cannot be made in respect of shares held as stock-in-trade Loss incurred in share trading business by a company whose principal business is share trading is not speculative in nature Cooper Corporation Private Limited [TS- 265-ITAT-2016 (Pune)]: Mark-to-Market loss is neither a notional or contingent loss Foreign exchange fluctuation loss has a direct nexus with savings in interest costs and no new capital asset was brought into existence Reliance Industries Limited [Mumbai ITAT] Purchase of a license to use shelf/shrinkwrapped software is purchase of a product and not a copyright The retrospective insertion of Explanation 4 to s. 9(1)(vi) to include software in the definition of royalty does not apply to DTAAs Circulars CIT (A) E-Filing [Circular No. 20/2016]: E-Appeals due to be filed by 15 th May 2016 can be filed up to 15 th June 2016 Bad Debts [Circular No. 12/2016]: Bad debts claims to be allowed even if debt not established to be irrecoverable
International Tax 8 Nortel Networks India International Inc. [HC Delhi] Adobe Systems Incorporated [HC Delhi] L Oreal India Private Limited [ITAT - Mumbai] India Mauritius Treaty Presence of fellow subsidiary of a nonresident does not mean that the non-resident has a business connection or permanent establishment ( PE ) in India Even if the subsidiary of a foreign company is considered as its PE, only such income as is attributable in terms of paragraphs 1 and 2 of Article 7 can be brought to tax. The TPO has to prove that the real intention of the assessee in incurring AMP expenses was to benefit the AEs and not to promote its own business. In the absence of the AO/ TPO showing that there is a formal/ informal agreement to share the AMP expenditure, the adjustment cannot be made. Right to tax capital gains arising from sale or transfer of shares of an Indian company acquired by a Mauritian tax resident (w.e.f. 1 st April 2017). Gains arising during the transitory period will be subjected to tax at 50% of the domestic tax rates as applicable. Transitory Period - 1 April 2017 to 31 March 2019 in respect of shares acquired on or after 1 April 2017.
International Tax 9 Nortel Networks India International Inc. [TS-241-HC-2016(DEL)] Facts: Nortel Networks India International Inc. ( Appellant ) is part of Nortel Group which is leading supplier of telecom equipment. Appellant is a step down subsidiary of Nortel Networks Limited (Canada) ( Nortel Canada ). Nortel Canada also has a liaison office ( LO ) and in addition an indirect subsidiary in India, Nortel Networks India Pvt. Ltd. ( Nortel India ). Nortel India entered into three contracts with Reliance. On the same date, Nortel India assigned the equipment contract to Appellant. Reliance and Nortel Canada were also parties to the assignment contract. Nortel Canada guaranteed the performance of the equipment contract by the Appellant. In terms of assignment contract, Reliance placed purchase orders and made payments directly to the Appellant. The equipment supplied by Appellant were manufactured by Nortel Canada and Nortel Ireland. Assessment Proceedings: AO asserted that Appellant purchased equipment from Nortel Group and supplied to Reliance at almost half of the price. AO concluded that Appellant did not have any financial or technical ability to perform the equipment contract. There was no difference between LO and Nortel India and both were operating from the same premises and were providing services to the group companies including Appellant. AO further held that contracts with Reliance has been artificially divided into three separate contracts. From above, AO was of the view that Appellant had been incorporated solely to evade taxes arising out of supply contract in India and that it s a shadow company of Nortel Group. On these basis, AO concluded that Nortel India and LO constituted Appellant s PE in India (both fixed place as well as dependent agent PE. AO further rejected the accounts submitted by Appellant as unaudited and estimated the taxable income at a gross profit margin of 42.60% (in line with global accounts of Nortel Group). He allowed certain expenditures in line with similarly placed nonresident companies. Appellate Authorities: In addition to concurring with AO s views, the Commissioner of Income-tax (Appeals) [CIT(A) ] stressed upon that Appellant was incorporated just before the date of assignment contract and that Nortel India had not only acted as service provider of the Appellant but also as a sales outlet providing after sales service.. On aforesaid basis, CIT(A) held that the Appellant had (a) fixed place of business; (b) a fixed place of management; (c) s sales outlet; (d) an installation PE; (e) a service PE and (f) a dependent agent PE CIT(A) directed the AO to allow expenses relatable to the PE and reduced the attribution to 50% of the profits of Appellant s estimated profit. The ITAT concurred with lower authorities and confirmed the CIT(A) s order.
International Tax 10 Nortel Networks India International Inc. [TS-241-HC-2016(DEL)] Appellant s View: Equipment contract was a separate one and was performed by Appellant independently It was entered with Nortel India since Reliance insisted upon of having an Indian Company as point of contact. Purchase orders were placed directly by Reliance on the Appellant and the payments for the supply were also made directly by Reliance to the Appellant. The Equipment Contract only obliged the Appellant to deliver the equipment overseas and no part of the Appellant's activities were to be performed in India. No expatriate employee of the Appellant had visited India in connection with the Equipment Contract since the equipment was manufactured and supplied from overseas and there was no requirement to depute personnel to India. Nortel India was an independent Assessee and any income attributable to Nortel India was liable to be assessed in its hands and not in the hands of the Appellant. No material or evidence on record which would suggest that any fixed place in India had been made available to the Assessee for execution of its activities. Relying on Apex court decision in Morgan Stanley and Co. Inc. [292 ITR 416] and E- Funds IT Solutions and Ors. [364 ITR 256], the Appellant argued that subsidiary of foreign Company could not be construed as its PE. Delhi High Court [ HC ] : HC concurred with AO s view that Appellant was a shadow company of Nortel Canada and both the companies were essentially a singular entity. Relying on the Supreme Court ruling in Ishikawajima-Harima Heavy Industries [288 ITR 408], the HC held that even in cases of turnkey contracts, it was not necessary to consider the entire contract as an integrated one for tax purposes. Thus, the amount paid for supply of equipment from overseas would not be chargeable to tax under the Act. Neither the taxpayer nor the Nortel Canada performed any installation or commissioning activity in India. Hence does not have an installation PE in India. The HC held that there was no material on record, either to hold that the Nortel India habitually conclude contracts, or that it maintained stocks in India for regularly delivering goods on behalf of the Appellant or Nortel Canada. Hence does not have a Dependent Agent PE in India Income from installation, commissioning and testing activities as well as any function performed by expatriate employees of the group companies seconded to Nortel India would be subject to tax in the hands of Nortel India and the same cannot be considered as income of the Appellant. HC held that, the Appellant's income from supply of equipment was not chargeable to tax in India, the question relating to attribution of any part of such income to activities in India does not arise. In view of our conclusion that the Assessee does not have a PE in India, the question of attribution of any income to the alleged PE also does not arise.
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