CNK Knowledge Tracker

CNK Knowledge Tracker Be a Step Ahead Direct Tax October 2013 Contractor Nayak & Kishnadwala, Mumbai, Vadodara CNK Kaid Auditing, Dubai

Contents Domestic Tax Notification / Circulars 3 Recent judicial decisions 5 International Taxation/Transfer Pricing Notification / Circulars 10 Recent judicial decisions 13 Disclaimer and Statutory Notice 16 Contractor, Nayak & Kishnadwala 2

Domestic Tax Notifications/Circulars Tax audit report to be filed manually before Sept 30, 1 month extension for e-filing The Central Board of Direct Taxes (CBDT), on 26 September 2013, has allowed assessees to manually file the tax audit report before its jurisdictional assessing officer within the prescribed due date. The report of audit should however be furnished electronically on or before 31 October 2013. Due to recent heavy rains and floods in the State of Gujarat, the CBDT has extended the due date for filling the returns of Income for assessees in the State of Gujarat from 30 September 2013 to 14 October 2013. CBDT Instructions No 03/2013 and 04/2013 dated 5 th July, 2013 on rectifications u/s 154 and intimations u/s 143(1), CBDT Instruction No 05/2013 and 11/2013 dated 8 th July, 2013 dated 27 th August 2013 regarding credit of TDS, CBDT Instruction No 06/2013 and 12/2013 dated 10 th July 2013 and 9 th September 2013 on adjustment of refunds, CBDT Instruction No 07/2013 dated 15 th July 2013 on payment of interest u/s 244A. The Central Board of Direct Taxes (CBDT) has come up with a series of instructions following the directions issued by the Delhi High Court in case of Court On its Own Motion v. UOI and Ors. in W.P. (C) 2659/2012 dated 14.03.2013 (Refer page 21 of CNK Knowledge Tracker dated April 2013 where the above decision has been analysed). The CBDT has issued Instruction in respect of the procedure to be followed on the receipt and disposal of rectification applications filed u/s 154 of the Act. The CBDT has set out a detailed procedure on where applications should be received, the maintenance of registers and their timely disposal. The CBDT has also directed that the demand should not be enforced in cases where no intimation u/s 143(1) was sent by the field authorities in respect of returns which were processed prior to 31.03.2010. Contractor, Nayak & Kishnadwala 3

As regards the credit for TDS is concerned, the CBDT has instructed that when an assessee approaches the AO with requisite details and particulars in the form of TDS certificate as evidence against any mismatched amount as per Form 26AS, the AO will grant credit of TDS to the assessee after ascertaining whether the deductor has made payment of the TDS to the Government. The CBDT has further stated that where the report by the deductor in the TDS statement is not found available in the OLTAS database resulting in TDS mismatch, the CPC (TDS)/ AOs(TDS) shall immediately issue letters to such deductors to verify and correct these challans. If necessary, the deductors may also be asked to file correction statements. The CBDT has stated that in cases where returns have been processed by the CPC, Bengaluru and refunds have been fully or partly adjusted against the past arrears while passing or communicating the order under Section 143(I) of the Act, without following the procedure under Section 245 of the Act, the AO must issue a notice to the assessee and pass an order u/s 245 after considering the reply. It has been directed that the procedure must be carried out by 31st August, 2013 positively. As regards adjustment of refunds going forward, the CBDT has instructed that no refund should be adjusted without following the procedure prescribed in section 245 of the Act of intimating to the assessee of the proposed adjustment and considering his objections thereto. CBDT has also directed for payment of interest u/s 244A if there is a delay in issue of refund on account of incorrect demand being raised and the assessee is not at fault CBDT Instruction No 14/2013 dated 23 th September 2013 to track nonfilers of Income Tax Returns. The CBDT has laid down a Standard Operating Procedure to track non-filers of income tax returns under the Non-filers Monitoring System to ensure consistency and appropriate remedial action in such cases. Contractor, Nayak & Kishnadwala 4

Recent Judicial Decisions Business Income No disallowance under section 14A if sufficient interest free funds Commissioner of Income Tax v. UTI Bank Ltd. [2013] 215 Taxman 8(Mag.) (Gujarat High Court). The Gujarat High Court held that in case the assessee had sufficient interest free funds to meet its tax free investments, there would be no disallowance under section 14A as it could be presumed that the tax free investment were made from interest free funds and not interest-bearing borrowed funds. Disallowance under section 14A justified even if no exempt income Stream International Services P. Ltd v. ACIT [2013] 141 ITD 492 (Mumbai Trib.) Following the decision of the Special Bench in the case of Cheminvest Ltd v. ITO [2009] 121 ITD 318 (Delhi SB), the Mumbai bench of the Tribunal held that disallowance under section 14A is warranted even if there is no exempt income. While computing disallowance under section 14A using the method prescribed by Rule 8D, interest on loans for specified purposes is to be excluded ACIT v. Best & Cromton Engineering Ltd. [2013] itatonline.org (Chennai Trib.); REI Agro Ltd. v. DCIT [2013] itatonline.org (Kolkata Trib.) The Chennai and Kolkata benches of the Tribunal held that while computing disallowance under section 14A read with Rule 8D, interest on loans taken for specified purposes is to be excluded. Both benches have further held that if the loans have been taken for specified purposes and utilized towards the same, then the question of using such funds for making any investments having tax-free incomes does not arise. High incentives paid to directors only for reason that company had earned substantially high profits during the year would be considered as excessive and unreasonable and disallowed under section 40A(2) if the same was not justified Edwise Consultants (P.) Ltd. v. Additional Commissioner of Income Tax-4(3), Mumbai [2013] 143 ITD 307 (Mumbai Trib.) The Mumbai Tribunal held that the mere fact that the company had earned substantially high profits during the year was not sufficient to justify higher incentives being paid to the directors. The Tribunal further held that in the absence of sufficient justification provided Contractor, Nayak & Kishnadwala 5

by the company, such expense would be considered excessive and unreasonable and disallowed under section 40A(2). Provision for leave encashment cannot be disallowed under section 43B Eimco Elecon (India) Ltd. v. Additional Commissioner of Income-tax [2013] 33 taxmann.com 476 (Ahmedabad Trib.) The Ahmedabad Tribunal held that section 43B(f), which allows leave encashment only on the basis of payment is arbitrary and de hors of a Supreme Court decision as held by the Calcutta High Court in Exide Industries Ltd. v. Union of India [2007] 292 ITR 470, and therefore provision for leave encashment is not to be disallowed. Section 40(a) (ia) disallowance applies only to amounts payable as on 31 st March and not on amounts already paid Commissioner of Income Tax v. Vector Shipping Services (P) Ltd [2013] itatonline.org (Allahabad). The Allahabad High Court held that section 40(a)(ia) which disallows expenditure on which TDS required to be deducted has not been deducted, applies only for amounts outstanding as on 31 st March. The Allahabad High Court further held that, therefore, any amount paid during the year and not outstanding as on 31 st March would not be disallowed even if no TDS had been deducted on the same. Amount retained to ensure satisfactory performance does not amount to accrual of income Director of Income Tax (International Taxation) v. Ballast Nedam International [2013] 355 ITR 300 (Gujarat High Court) The Gujarat High Court held receipt of an amount being retention money relating to satisfactory execution of the contract does not amount to accrual of income to the assessee in the accounting year of the receipt. It was held that unless and until a debt is created in favour of the assessee which is due by somebody, it cannot be said that the assessee has acquired a right to receive the income or that income has accrued to him. A debt must come into existence and the assessee must have acquired a right to receive the payment. Irrecoverable advance given for construction of cold storage cannot be allowed as business loss Kwality Fun Foods and Restaurants (P.) Ltd. v. Deputy Commissioner of Income Tax [2013] 356 ITR 170 (Madras High Court). Relying on the Supreme Court ruling in Hasimara Industries Ltd 231 ITR 842 wherein it was held that if the assessee sustains business loss during the enlargement of the business, the same should be treated as capital investment, the Madras High Court held that when the Contractor, Nayak & Kishnadwala 6

amount advanced to a contractor for execution of work for the purpose of business becomes irrecoverable, the amount is not allowable as business loss Premium paid by a company for redeeming the debentures issued is a deductible expenditure and expenditure on restructuring a loan is revenue expenditure - Deputy Commissioner of Income Tax v. Gujarat Narmada Valley Fertilizers Co. Ltd [2013] 356 ITR 460 (Gujarat High Court). The Gujarat High Court held that the premium paid by a company for redeeming the debentures issued by it is a deductible expenditure. The High Court further held that where the company undertakes to pay more amount than what is borrowed, the liability to pay the excess amount undertaken to be paid by the company to fulfill its needs for borrowed money is an allowable expenditure. The High Court also held that expenditure on restructuring a loan is revenue expenditure. The High Court further held that when obtaining of a loan is not considered as an asset or an advantage of enduring nature, any expenditure incurred for reducing such loan burden or securing the borrowing, on more advantageous condition, cannot be seen as resulting into a benefit of enduring nature so as to be categorized as a capital expenditure Expenses incurred for temporary partition and construction for making premises is revenue expenditure - Commissioner of Income-Tax v. Armour Consultants P. Ltd [2013] 355 ITR 418 (Madras High Court). The Madras High Court held that expenses incurred by the assessee towards and lay out as well as temporary partition and construction made for making premises leased by the assessee functional was revenue expenditure. Discount under Employees Stock Option Scheme i.e. difference between market price and issue price is a deductible expenditure Biocon Ltd. v. Deputy Commissioner of Income Tax (LTU) [2013] ITA No.248/Bang/2010(ITAT Bangalore Special Bench) Special Bench of Bangalore Tribunal held that the difference (discount) between the market price of the shares and their issue price is "expenditure" in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference between a case where the company issues shares to the public at market price and pays a part of the premium to the employees for their services and another where the shares are directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By undertaking to issue shares at a discount, Contractor, Nayak & Kishnadwala 7

the company does not pay anything to its employees but incurs the obligation of issuing shares at a discounted price at a future date. This is nothing but "expenditure" u/s 37(1). Expenditure incurred for shifting of machinery is not capital in nature ACIT v. Praga Tools Ltd [2013] 23 ITR 622 (Hyderabad Tribunal). The assessee had incurred expenditure towards relocation of plant and machinery, transportation charges, hamali charges, loading and unloading charges of machinery, stores and other office material, etc. The Tribunal held that the expenditure incurred was towards shifting existing plant, machinery equipments, records, etc. and that the incurring of expenditure did not result in any benefit of enduring nature to the assessee and hence revenue in nature. Remission or cessation of liability - CIT vs. Shivali Construction Pvt. Ltd. 355 ITR 218 (Del.) The Assessing Officer treated the unclaimed unsecured loan as income of the assessee on the ground that the assessee had not been carrying out any business activity for the last many years. Further since the loans were long outstanding and there did not appear to be any obligation on the assessee to repay these loans, it implied that there was cessation of liability to pay those loans. The Delhi High Court dismissed the appeal of the revenue holding that the very first condition for invoking section 41(1) is that an allowance or deduction ought to have been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee. In the instant case, since no allowance or deduction had been made in the assessment of the assessee in any earlier year, there was no question of invoking section 41(1). Capital Gains Indexed cost of acquisition to be with reference to year in which previous owner acquired asset and not year in which assessee acquired asset Commissioner of Income Tax v. Manjula Shah [2013] 355 ITR 474 (Bombay High Court). There was a prevalent view by the tax department that in case of gifted assets, though the cost of acquisition would be the cost incurred by the previous owner, the benefit of indexation would be only from the year of receipt of the asset. The Bombay High Court held that while computing capital gains arising on transfer of a capital asset acquired by the assessee under a gift, the indexed cost of acquisition has to be Contractor, Nayak & Kishnadwala 8

computed with reference to the year in which the previous owner held the asset and not the year in which the assessee became the owner of the asset. Adjustment of Refunds Order adjusting refund without giving Intimation in writing to the assessee is not justified Cognizant Technology Solutions India P. Ltd v. Deputy Commissioner of Income Tax [2013] 356 ITR 373 (Madras High Court) The Madras High Court held that although the Deputy Commissioner was empowered to make adjustment of the refund, the adjustment could be done only in the manner as contemplated under the provisions of the Income Tax Act, 1961. It was held that since the procedure of intimating the assessee in writing before making the adjustment of refund was not followed, the order was vitiated in law and was liable to be set aside. Tax Deducted at Source Internet services payment amounted to fees for technical services and TDS u/s 194J would have to be deducted on the same Brigade Global Services (P.) Ltd. v. Income Tax Officer, Ward -1(1), Hyderabad [2013] taxmann.com 618 (Hyderabad Trib.) The Hyderabad Tribunal held that payment for internet services would be considered as payments towards fees to technical services liable to tax deduction u/s 194J. The Tribunal further held that efforts of technical personnel were involved in the availing of such internet service and therefore, due to the involvement of human skill in the provision of such services, such services would be considered as Fees for Technical Services, liable to deduction of tax at source under section 194J. Payments for utilization of credit card facilities are in the nature of bank charges and not commission Income Tax Officer (TDS) -2(1) v. Jet Airways (India) Ltd. [2013] 36 taxmann.com 379 (Mumbai Trib.) The Mumbai Tribunal held that payments to banks on utilization of credit card facilities are in the nature of bank charges and cannot be considered as commission. The Tribunal further held that such payment would, therefore, not be liable for tax deduction u/s 194H. Contractor, Nayak & Kishnadwala 9

International Taxation Pricing / Transfer Notifications/Circulars International Tax Amendment to the rules for furnishing of information for remittance to non-residents. Form 15CA and 15CB revised vide Notification No. 67/2013 [F. NO. 149/119/2012-SO (TPL)]/SO 2659(E), dated 02.09.2013. The Central Board of Direct Taxes ( CBDT ) vide notification number 67/2013 dated September 2, 2013has amended rule 37BB w.e.f. 1 st October 2013 with regards to the reporting requirement in form 15CA and Form 15CB on payments made to non-residents and or foreign companies. Pursuant to the said amendment the reporting in form 15CA is to be done only with regards to taxable remittances. The said reporting is to be done either under Part A or Part B of the said Form. No reporting is to be done in case the payments fall under specified list as given in the said amended rule 37BB. Amendment to Rule 21AB and insertion of Form 10F Vide Notification No. 57/2013 [F.No.142/16/2013-TPL] So 2331(E), Dated 1-8-2013. Under the provisions of section 90 and 90A of the Income Tax Act, 1961, a Non-Resident assessee is required to obtain a Tax Residency Certificate ( TRC ), in order to claim relief from double taxation. Rule 21AB was introduced w.e.f 1 st April 2012 pursuant to which TRC was required to incorporate several specified particulars. Since it was becoming cumbersome to obtain from government offices/ministry of finance of respective countries, all the specified details, the said rule 21AB is amended w.e.f. 1 st April 2013 whereby the requirement of incorporating these particulars in the TRC is no longer mandatory. Instead, the Rule is amended to provide that these particulars will have to be declared by the assessee in form 10F and in the TRC. Contractor, Nayak & Kishnadwala 10

Amendment in the India-Australia treaty Under the existing India Australia treaty, a foreign enterprise is deemed to have a Service Permanent Establishment ( Service PE ) in the Source country if the foreign enterprise furnished services including managerial services through employees or other personnel, for a period aggregating to more than 90 days within any 12 month period. If the services are furnished to an associated enterprise, then a single day is sufficient to create a Service PE. The treaty is amended whereby the threshold limit of 90 days is increased to 183 days. The concept of rendering of services to associated enterprises resulting in Service PE is deleted. Further, services are broadly defined so as to now also include consultancy services. Further under the existing India Australia treaty, a foreign enterprise is deemed to have a PE in the source country if it: a) carried on activities in that country in connection with the exploration for or exploitation of natural resources; or b) used substantial equipment. The treaty amends the PE definition to provide that carrying on activities, (including operation of substantial equipment),in the exploration for or on exploitation of natural resources, for more than 90 days in any 12 month period would create a PE. Further, where the activity is that of only operation of substantial equipment in the Source country PE would get triggered if the said activity is carried on for more than 183 days in any 12 month period. Under the existing India Australia treaty, the foreign enterprise would be taxed on its business profits earned in the Source country to the extent that the profits are attributable to the permanent establishment ( PE ). It also has a force of attraction rule that extends taxation rights in the Source country to profits earned through the sale of same or similar goods or by undertaking same or similar business activities as those carried out through that PE. The treaty now eliminates the force of attraction rule. The amendment with respect to the PE and business profits will be effective from financial year 2014-15. The amended treaty introduces an article on non-discrimination in the DTAA and updates and enhances the provisions relating to exchange of information and assistance in the collection of taxes which is effective from July 18, 2013 Contractor, Nayak & Kishnadwala 11

Transfer Pricing Safe Habour Rules The Central Board of Direct taxes vide Notification dated 18 th September 2013 has finalised the draft safe harbour rules ( the rules ) issued on August 14, 2013. The main intention of introducing the safe harbour rules was to reduce the number of transfer pricing litigations by incorporating the circumstances in which the income-tax authorities will accept the transfer price declared by the tax payers without separate transfer pricing scrutiny. The rules are in the nature of presumptive taxation (i.e. fixed prescribed margins) and involve lesser/simpler compliance obligations than the general transfer pricing rules. The said rules cover eligible assessee and eligible transactions which include Provision of software development services, Information technology enabled services, Knowledge process outsourcing services etc. The salient features of the said safe harbour rules are enumerated herein below: An entity can take the benefit of safe harbour rules provided it satisfies the conditions of an eligible assessee as specified in Rule 10TB and the transaction entered into by the assessee is an eligible transaction as specified in Rule 10TC. Criteria to determine an eligible assessee is specified in Rule 10TB. Once the assessee satisfies the criteria of an eligible assessee and eligible transaction, the international transaction should also be in accordance with the conditions as specified in Rule 10TD (2). For example if an eligible assessee is providing ITES services the operating profit margin should not be less than 20% where the aggregate value of the eligible transaction does not exceed Rs. 500 crores and should not be less than 22% if the aggregate value of the eligible transaction exceeds Rs. 500 crores. Activities which would be treated as Knowledge process outsourcing (KPO) services has also been defined in Rule 10TA (g). Further the rules specifically states that services provided mainly with the assistance of use of information technology requiring application of knowledge and advanced analytical and technical skills would be treated as KPO. The benefit of the safe harbour rules can be taken by filing form 3CEFA, and the said benefit can be taken for AY 2013.14 and subsequent of maximum 4 assessment years. The number of years the eligible assessee proposes to take the benefit should be specified in the said form 3CEFA. Before filing the said form 3CEFA the eligible assessee should have filed the return of income for the relevant assessment year ( if the benefit is claimed for only 1 year) or the first of the relevant assessment years before the due date of furnishing the return of income as specified in section 139(1) of the Income Tax Act. That the assessing officer / Transfer pricing officer without giving an opportunity of being heard to the assessee shall not pass the order treating the application of the assessee to be invalid. Contractor, Nayak & Kishnadwala 12

The eligible assesse can also opt out of the safe harbour provisions for the relevant assessment year by furnishing a declaration to that effect to the assessing officer. The provisions of safe harbour rules shall not apply to those eligible international transactions entered into with an associated enterprise located in any country or territory notified under section 94A of the Income Tax Act or in a no tax or low tax country or territory. Where transfer price in relation to an eligible international transaction is accepted under the safe harbour rules, the assessee shall not be entitled to invoke mutual agreement procedure under an agreement for avoidance of double taxation entered into with a country or specified territory outside India as referred to in section 90 or 90A. In case the eligible assesse does not exercise the option under safe harbour rule or the option exercised is held to be invalid, the arm s length price shall be determined in accordance with the normal transfer pricing provisions as stated in section 92C and 92CA without considering the profit margin or the rate of interest or commission as specified in Rule 10TD of the safe harbour rules. Recent Judicial Decisions International Tax Activities of a non-resident in respect of purchase of goods in India for the purpose of export, not taxable under the Income-tax Act, 1961 Commissioner of Income-tax vs. Nike Inc. [2013] 34 taxmann.com 170 (Karnataka High Court) The Karnataka High court held that the foreign company s objective of opening liaison office was to identify manufacturers in India, give them technical know-how and see that they manufacture the goods accordingly to its satisfaction and specification for exports. It was accordingly held that the transaction was to purchase goods in India for the purpose of exports and therefore no part of the income accrued or arose in India under section 9 of the Income tax Act. It was further held that since the goods manufactured had an international market and in this process if at all assessee was earning income outside India under a contract entered outside India no part of its income could be taxed in India either under section 5 or section 9 of the Income Tax Act. Contractor, Nayak & Kishnadwala 13

Managerial and consultancy services provided by a French company are made available to the Indian Company and therefore taxable as Fees for Services in spite of Most Favoured Nation clause under the India-France tax treaty - Mersen India Private Limited [2013] 353 ITR 628 (AAR-New Delhi) Under the India French Treaty Fees for technical services means payment of any kind as consideration for services of a managerial, technical or consultancy nature. Under India US treaty Fees for included services means payment of any kind to any person in consideration for rendering of any technical or consultancy services, if such services make available technical knowledge, experience, skill, know-how, or process or consist of the development and transfer of a technical plan or technical design. The make available clause under Article on fees for included services under India US treaty is more beneficial as compared to the Article on of fees for technical services under of India French treaty, and considering the fact that India French Treaty has the clause on Most Favoured Nation clause, it was argued that the said benefit of make available provisions should be available under India French Treaty. However it was held that the said benefit can be considered only for technical and consultancy services which are embraced by the India-US DTAA and not for managerial services provided by the French Company Transfer Pricing Transactions between an Indian Company and the permanent establishment in India are domestic transactions - IJM (India) Infrastructure Ltd v Assistant Commissioner of Income Tax [2013] 37 taxmann.com 200 (Mumbai Tribunal). The Mumbai Tribunal held that section 92B(2) outlines the circumstances under which a transaction between two persons would be deemed to be between associated enterprises. Such deeming fiction is in addition to the one created under section 92A(2). Though section 92B(2) is part of section 92B it is to be treated as an extension of section 92A(2) and not an extension of section 92B(1). Therefore the legal fiction created in respect of the specified transaction can be used only for the purpose of examining as to whether such transaction constitutes an international transaction under section 92B(1). In case section 92B(1) is not attracted, the fiction under section 92B(2) will not get triggered. Accordingly the Hyderabad Tribunal held that transaction between the Indian permanent establishment of a foreign company and a resident entity cannot be considered as an Contractor, Nayak & Kishnadwala 14

international transaction and that the substance over form rule under section 92B(2) of the Income-tax Act, 1961 cannot be imported unless a third party is interposed in an international transaction between two associated enterprises. Transfer pricing addition Writ petition should be exercised only if there is prima facie error in law Vodafone India Service (P.) Ltd. vs, Union of India, Ministry of Finance, New Delhi [2013] 37 taxmann.com 250 (High Court of Bombay). The income-tax department made a transfer pricing addition to the taxable income of Vodafone India Services on account of international transactions undertaken during AY 2008-09. There were mainly two transactions under purview i.e. sale of call centre business to Hutchinson Whampoa Properties India P Ltd and assignment of call options to certain India parties. Vodafone challenged the order passed by the income-tax authorities by way of a writ petition at the High Court level. On September 7, 2013 the high court dismissed the petition filed by Vodafone stating that the matter should be looked at by the Income-tax Appellate Tribunal in the first instance. The High Court observed that the option of writ petition under Article 226 of the Constitution should be exercised only in case there is a prima facie error in law. (37 taxmann.com 250) Bombay HC Contractor, Nayak & Kishnadwala 15

DISCLAIMER AND STATUTORY NOTICE This e-publication is published by Contractor Nayak & Kishnadwala, Chartered Accountants, India, solely for the purposes of providing necessary information to employees, clients and other business associates. This publication summarizes the important statutory and regulatory developments. Whilst every care has been taken in the preparation of this publication, it may contain inadvertent errors for which we shall not be held responsible. The information given in this publication provides a bird s eye view on the recent important select developments and should not be relied solely for the purpose of economic or financial decision. Each such decision would call for specific reference of the relevant statutes and consultation of an expert. This document is a proprietary material created and compiled by Contractor Nayak & Kishnadwala. All rights reserved. This newsletter or any portion thereof may not be reproduced or sold in any manner whatsoever without the consent of the publisher. This publication is not intended for advertisement and/or for solicitation of work. Contractor, Nayak & Kishnadwala 16