April 10, 2018

S. 194-H/201 TDS Liability: Law on whether relationship is that of "principal and agent" and whether payment is of the nature of "commission" explained.

Non-compliance of s. 194H attracts the rigor of s. 201 which provides for consequences of failure to deduct or pay the tax.

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL Nos. 3496-3497 OF 2018 (Arising out of S.L.P.(C) Nos.3320-3321 of 2011)

The Director, Prasar Bharati ….Appellant(s) VERSUS Commissioner of Income Tax, Thiruvananthapuram …Respondent(s) 


(i) Section 194H was inserted in the Act with effect from 01.06.2001 by replacing the earlier Section 194H. This Section deals with the payment of “commission or brokerage”.

(ii) It provides that any person other than individual or HUF, responsible for paying any income by way of “commission” (not being insurance commission as specified in Section 194D) or “brokerage” to any person shall at the time of credit of such income to the account of payee or at the time of payment of such income in cash or by cheque or draft or any other mode will deduct income tax thereon at the rate of five percent. The first proviso specifies the limit. The second proviso makes the individual or HUF liable to deduct the income tax, if they exceed the limit specified therein. The third proviso exempts payment of commission or brokerage when made to BSNL and MTNL to their public call office franchisees.

(iii) The Explanation appended to Section 194H defines the expression “commission or brokerage”. It is an inclusive definition and includes therein any payment received or receivable, directly or indirectly by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to assets, valuable article or thing not being securities. Clause (ii) defines professional services; clause (iii) defines securities; and clause (iv) provides a deeming fiction for treating any income so as to attract the rigor of the Section for ensuring its compliance.

(iv) Keeping in mind the requirements of Section 194H when we examine the transaction in question, we are of the considered view that the reasoning and the conclusion arrived at by the AO, CIT (Appeals) and the High Court appears to be just and proper and does not call for any interference.

(v) In other words, in our considered view, the High Court was right in holding that the provisions of Section 194H are applicable to the appellant because the payments made by the appellant pursuant to the agreement in question were in the nature of payment made by way of “commission” and, therefore, the appellant was under statutory obligation to deduct the income tax at the time of credit or/and payment to the payee.

(vi) The aforementioned conclusion of the High Court is clear from the undisputed facts emerging from the record of the case because we notice that the agreement itself has used the expression “commission” in all relevant clauses;

Second, there is no ambiguity in any clause and no complaint was made to this effect by the appellant;

Third, the terms of the agreement indicate that both the parties intended that the amount paid by the appellant to the agencies should be paid by way of “commission” and it was for this reason, the parties used the expression “commission” in the agreement;

Fourth, keeping in view the tenure and the nature of transaction, it is clear that the appellant was paying 15% to the agencies by way of “commission” but not under any other head;

Fifth, the transaction in question did not show that the relationship between the appellant and the accredited agencies was principal to principal rather it was principal and Agent;

Sixth, it was also clear that payment of 15% was being made by the appellant to the agencies after collecting money from them and it was for securing more advertisements for them and to earn more business from the advertisement agencies;

Seventh, there was a clause in the agreement that the tax shall be deducted at source on payment of trade discount; and

lastly, the definition of expression “commission” in the Explanation appended to Section 194H being an inclusive definition giving wide meaning to the expression “commission”, the transaction in question did fall under the definition of expression “commission” for the purpose of attracting rigor of Section 194H of the Act.

(vii) For all these reasons, we find no difficulty in holding that the payment in question was in the nature of “commission” paid by the appellant to the advertisement agencies to secure more business for the appellant.

(viii) Once it is held that the provisions of Section 194H apply to the transactions in question, it is obligatory upon the appellant to have deducted the income tax while making payment to the advertisement agencies.

(ix) The non-compliance of Section 194H by the assessee attracts the rigor of Section 201 which provides for consequences of failure to deduct or pay the tax as provided under Section 194H of the Act.

(x) In our view, the provisions of Section 201 were, therefore, rightly invoked in this case against the appellant by the assessing authority once having held that the appellant failed to comply with the provisions of Section 194H of the Act.

December 27, 2017

Booking under-construction flat amounts to ‘construction’ & not ‘purchase’ for Sec. 54 relief

IN THE ITAT MUMBAI BENCH 'B',  Mustansir I Tehsildar  v.  Income-tax Officer - 21(2)(3), Mumbai

Acquisition of new flat in an apartment under-construction is a case of construction and not purchase. Its construction could start before date of sale of earlier property, but it should be completed within three years from that date to be eligible for deduction under section 54

Section 54 of the Act provides the condition that the construction of new residential house should be completed within 3 years from the date of transfer of old residential house. According to Ld A.R, section 54 is silent about commencement of construction and hence commencement of construction can precede the date of sale of old asset. In the instant case, the assessee had booked the flat much prior to the date of old flat. We notice that the Hon'ble Karnataka High Court has held in the case of CIT v. J.R.Subramanya Bhat (supra) that commencement of construction is not relevant for the purpose of sec. 54 and it is only the completion of construction. The above said ratio was followed in the case of Asst. CIT v. Subhash Sevaram Bhavnani [2012](23 taxmann.com 94)(Ahd. Trib.). Both these cases support the contentions of the assessee. Accordingly, for the purpose of sec. 54 of the Act, we have to see whether the assessee has completed the construction within three years from the date of transfer of old asset. In the instant case, there is no dispute that the assessee took possession of the new flat within three years from the date of sale of old residential flat. Accordingly, we are of the view that the assessee has complied with the time limit prescribed u/s 54 of the Act. Since the amount invested in the new flat prior to the due date for furnishing return of income was more than the amount of capital gain, the requirements of depositing any money under capital gains account scheme does not arise in the instant case.

October 27, 2017

Outsourcing of Services by US Company to Indian Subsidiary does n’t constitute PE


Assistant Director of Income Tax-I, New Delhi …Appellant Versus M/s E-Funds IT Solution Inc. … Respondent 
The Supreme Court of India has held that Outsourcing of Services by a US company to Indian company doesn’t constitute Permanent Establishment (PE).

Distribution fee paid by Google India to Google Ireland for use of its ‘Adwords programme’ is taxable as royalty

IN THE ITAT BENGALURU BENCH 'C',  Google India (P.) Ltd.  v. Additional Commissioner of Income-tax,Range-11, Bengaluru

​Google-Ireland's Adword program is a continuous targeted advertisement campaign making available technology permitted to Google-India and permitting same to be used by advertiser; payment made by Google-India to Google-Ireland was royalty chargeable to tax in India

October,4, 2017

 Income from capital gain on a transaction which never materialized is deemed as hypothetical income
Where for want of permissions, entire transaction of development of land envisaged in JDA fell through , there will be no profit or gain which arises from transfer of a capital asset, which could be brought to tax under section 45 read with section 48- SUPREME COURT OF INDIA,  Commissioner of Income-tax  v.  Balbir Singh Maini,  CIVIL APPEAL NOS. 15619 & 15622, 15624, 15620 OF 2017 & ORS., Dated OCTOBER  4, 2017 

2) ITAT allowed depreciation claim to lessor even if asset was leased out to same co. from where it was purchased
HIGH COURT OF BOMBAY,  Commissioner of Income-tax  v. Bombay Burmah Trading Corpn. Ltd.
I.Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of (Leased assets) - Assessment year 1985-86 - Assessee company had purchased a boiler from a company, and leased out it to that very same company - Assessee claimed 100 per cent depreciation on said boiler - Assessing Officer disallowed same on ground that assessee bought and leased back asset solely for purpose of avoiding tax - It was found that lease rentals earned by assessee were subjected to tax - Further assessee even after claiming benefit of depreciation in one year had subjected itself to tax on income arising from that very transaction - Whether on facts, transaction could not be termed as dubious or colourable device, but a genuine business transaction, thus, assessee was to be allowed depreciation on boiler - Held, yes  [In favour of assessee]

II.Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Technical know-how) - Assessment year 1985-86 - Whether mere improvisation in process and technology in some areas supplemental to existing business, there being no new or fresh ventures, expenditure incurred is revenue in nature - Held, yes - Whether where under an agreement assessee company had obtained a technology which would enable assessee to update and improve its current process of manufacturing laminates, payment made towards acquisition of said technology was to be allowed as revenue expenditure - Held, yes  [In favour of assessee]

​3) SC upholds levy of DDT on dividends paid by companies having agricultural income, 

SUPREME COURT OF INDIA,  Union of India  v.  Tata Tea Co. Ltd.
When the dividend is declared to be distributed and paid to company's shareholder it is not impressed with character of source of income from which it is paid. Therefore, such dividend is not agricultural income and Parliament could not be said to have transgressed the taxing powers of state to tax agricultural income under Entry 46 of the Seventh Schedule of the Constitution and even if such transgression is there, it is only incidental and therefore, DDT is not unconstitutional

September 06, 2017

No question of law was involved if ITAT ruled that land sold by assessee was agricultural land

HIGH COURT OF MADRAS,  Commissioner of Income Tax, Chennai v.  Dr. N. Rangabashyam

Section 2(14), read with section 260A, of the Income-tax Act, 1961 - Capital gains - Capital assets (Agricultural land) - Assessment year 2012-13 - Assessee sold a certain vacant land and claimed that entire sale consideration was exempt under section 2(14), as land sold was agricultural land - Assessing Officer held that land in question was not agricultural land and levied capital gains tax on such sale - Both Commissioner (Appeals) and Tribunal duly considered definition of agricultural land as contained in Act and evidence on record and arrived at factual finding that land sold by assessee was agricultural land - Whether as per principles and tests laid down by Supreme Court in case of Hero Vinoth (MINOR) v. Seshammal [2006] 5 SCC 545, there was no question of law, let alone any substantial question of law, involved in instant appeal - Held, yes [In favour of assessee]

No addition on basis of third party statement if opportunity of cross-examination isn’t given to assessee: HC

HIGH COURT OF DELHI,  Principal Commissioner of Income-tax, Delhi-2  v. Best Infrastructure (India) (P.) Ltd.

Section 68, read with section 132, of the Income-tax Act, 1961 - Cash credit (Share capital) - Assessment years 2005-06 to 2009-10 - During search proceedings, 'T', accommodation entry provider, submitted that he had received cash from assessee and in return he had given them entry of share capital in form of a cheque - On said basis, Assessing Officer concluded that share premium and share application money were unexplained credit under section 68 - It was found that statement of 'T' was recorded at back of assessee and assessee was not allowed any opportunity to cross-examine him - Further, assessee had duly furnished declaration of director of share applicant company, share application form, certificate of incorporation from Registrar of Companies as well as income tax return of share applicant company and Assessing Officer did not make any verification about said documents - Whether, on facts, section 68 addition was not called for - Held, Yes. [In favour of assessee]

II.Section 153A of the Income-tax Act, 1961 - Search and seizure - Assessment in case of (General) - Assessment years 2005-06 to 2009-10 - Whether where during search proceeding one of directors of assessee company surrendered a certain sum as undisclosed income only for assessment year in question and not for each of six assessment years preceding year of search, said submission could not be said to be incriminating material qua each of preceding assessment years and, consequently, assumption of jurisdiction under section 153A and consequent additions made by Assessing Officer were not justified - Held, yes [In favour of assessee]

​No tax on Income from shipping remitted outside Singapore if it was taxable therein on accrual basis

IN THE ITAT HYDERABAD BENCH 'B' (SMC),  Far Shipping (Singapore) Pte. Ltd. v. Income-tax Officer, International Taxation, Nellore

​​Section 9 of the Income-tax Act, 1961, read with articles 8 and 24, of the Double Taxation Avoidance Agreement between India and Singapore - Income - Deemed to accrue or arise in India (Shipping, Inland waterways transport) - Assessment year 2014-15 - Whether it is only if income in question was taxable in Singapore on basis of receipt or remission and not by reference to full amount of income accruing, clause (1) of article 24 would apply and dependent on facts of case, exemption as per article 8 either in whole or in part would be excluded - Held, yes - Whether where as per certificate issued by Inland Revenue Authority of Singapore, entire income earned by assessee, a Singapore based shipping company, from shipping business carried out at Indian ports was not taxable at Singapore on basis of remittance but on basis of accrual, clause (1) of article 24 could not be applied to deny benefit of article 8 to assessee - Held, yes [In favour of assessee]

July07, 2017

Exemptions to Private Companies: Specific focus on Start-up companies

The Government through its Ministry of Corporate Affairs has introduced exemptions to private limited companies under various sections of the Companies Act, 2013, mainly focussing on start-up companies.

The present set of exemptions are introduced by the Ministry of Corporate Affairs in exercise of its powers under Section 462 of the Companies Act, 2013 vide Notification No. GSR 583(E) [F.NO.1/2/2014CLV], dated June 13, 2017 ("AmendmentNotification"). The Amendment Notification amends the Notification no. G.S.R. 464(E), dated June 05, 2015 ("Principal Notification") issued by the Ministry of Corporate Affairs, to the extent stated therein.

The Government of India initiated the Startup India Action Plan in the year 2016, and vide G.S.R. notification 180 (E) dated February 17, 2016 issued by the Ministry of Commerce and Industry ("DIPP First Notification") defined start-ups. The definition was further modified vide G.S.R. notification 501 (E) dated May 23, 2017 ("DIPP Second Notification"), which superseded the first notification. However, there was no definition of start-ups under the Companies Act, 2013, and, therefore, the said Act did not grant any specific exemptions/relaxations to start-ups.

June 10, 2017

Arms  Length Pricing (ALP) of guarantee commission to be measured at 0.27 per cent in case guarantee was given to bank on behalf Associate Enterprises (AE)

​IN THE ITAT HYDERABAD BENCH 'A',  Deputy Commissioner of Income-tax, Circle - 16(1), Hyderabad  v.  Lanco Infratech Ltd.

I.Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price (Comparables and adjustment/Adjustment - Interest) -  Whether where assessee advanced loans to its AE situated in Singapore, rate of interest was to be determined on basis of rate prevailing in Singapore where loan had been consumed; and not to be determined on basis of rate prevailing in India - Held, yes - Whether therefore, there was no need for any adjustment on this account, as assessee had already received interest which was more than Singapore prime lending rate - Held, yes In favour of assessee 

II.Section 92C, read with section 92B, of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price (Comparables and adjustments/Adjustments- Corporate guarantee)Assessee provided corporate guarantee to foreign banks in order to enable said banks to provide loans to its Associate Enterprises (AE) located in Singapore and Australia - It contended that corporate guarantee did not fall within scope of term 'international transaction' even after insertion of Explanation to section 92B by Finance Act, 2012 as it did not have any bearing on assessee's profits, income, losses or assets - TPO considering provision of corporate guarantee as an international transaction, applied CUP as most appropriate method and used SBI rates on loans - He applied arm's length guarantee fee at 2 per cent - Whether corporate guarantee provided by assessee would fall within scope of term 'international transaction' after insertion of Explanation to section 92B by Finance Act - Held, yes - Whether however, considering decision given in case of Asian Paints Ltd. v. Addl. CIT [2014] , TPO was to consider only 0.27 per cent as guarantee commission on amount involved - Held, yes - Whether assessee's contention that corporate guarantee fee was to be considered proportionately with period it availed, couldn't be accepted as guarantee fee was one-time fee paid at beginning and, therefore, on corporate guarantees provided during year, rate was to be applied - Held, yes, Partly in favour of assessee

III.Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price (Comparables and adjustments/Adjustments- Mobilization advances) -  Whether where assessee was not charging any interest from AEs and non-AEs for providing mobilization advances regarding an EPC contract and also not paying any interest on amounts received by it from main contractor, adjustment under TP provisions was not warranted - Held, yes, In favour of assessee

June 5, 2017

​​​Indian Cabinet approves multilateral convention to implement BEPS related measures


Signing of the Multilateral Convention will enable the application of BEPS outcomes through modification of existing tax treaties of India in a swift manner. It is also in India's interest to ensure that all its treaty partners adopt the BEPS anti-abuse outcomes. Signing of the Convention will enable curbing of revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out and where value is created.

May 18, 2017

Interest on FDs by depositing in funds borrowed for setting up power plant to be taxed as ‘income from other source’

IN THE ITAT HYDERABAD BENCH 'A',  Thermal Powertech Corporation India Ltd. v.  Deputy Commissioner of Income-tax, Central Circle 2(4), Hyderabad*

Where assessee-company formed to build, own and operate a power plant, deposited unutilised borrowed funds in short term fixed deposits during construction of power plant, interest earned on those deposits was to be taxed as income from other sources- Held Yes

Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as (Interest) - Assessment year 2012-13 - Whether where assessee company formed to build, own and operate a power plant, deposited unutilised borrowed funds in short term fixed deposits during construction of power plant, interest earned on those deposits was to be taxed as income from other sources - Held, yes

May 1, 2017

No denial of sec. 54F relief during assessment if assessee failed to utilize capital gains within 3 years, 

IN THE ITAT BANGALORE BENCH SMC 'B',Smt. Anupama Nagesh v. Income-tax Officer, Ward 7(2)(1), Bangalore

April 29, 2017

SEBI proposes to make mandatory appointment of monitoring agency for IPOs above Rs. 100 crore- 26 April 2017


Board of SEBI approved  the  appointment of Monitoring Agency where the Issue Size (Excluding Offer for sale component) is more than Rs100 Crore so as to ensure  adequate supervision of the utilization of the funds raised.  

• Mandatory appointment of Monitoring Agency where the issue size (excluding offer for sale component) is more than Rs. 100 crore. 

• Frequency of submission of Monitoring Agency Report has been enhanced from half-yearly to quarterly.

• Introduction of maximum timeline of 45 days for submission of Monitoring Agency Report from the end of the quarter in conjunction with the submission of the quarterly results.

• Mandating the disclosure of the Monitoring Agency Report on Company’s website in addition to submitting it to Stock Exchange(s) for wider dissemination. 

• Introduction of new requirement, i.e., comments of Board of Directors and Management on the findings of Monitoring Agencies

April 27, 2017

Lease rentals from letting out buildings in SEZ to be treated as business income; CBDT clarifies​

  3. The matter has been considered by the Board. Income from the Industrial Parks/SEZ established under various schemes framed and notified under section 80-IA(4)(iii) of the Income-tax Act, 1961 ('Act') is liable to be treated as income from business provided the conditions prescribed under the schemes are met.
  4. In the case of Velankani Information Systems Pvt Ltd., [2013] 35 taxmann.com 1 (Karnataka) the Hon'ble Karnataka High Court observed that any other interpretation would defeat the object of section 80-IA of the Act and government schemes for development of Industrial Parks in the country. SLPs filed in this case by the Department have been dismissed by the Hon'ble Supreme Court.
  5. In a subsequent judgment dated 30-4-2014 in ITA No. 76 & 78/2012 in the case of CIT v. Information Technology Park Ltd., [2014] 46 taxmann.com 239 (Karnataka) the Karnataka High Court has reaffirmed its earlier views. It has held that, since the assessee-company was engaged in the business of developing, operating and maintaining an Industrial Park and providing infrastructure facilities to different companies as its business, the lease rent received by the assessee from letting out buildings along with other amenities in a software technology park would be chargeable to tax under the head "Income from Business" and not under the head "Income from House Property". The judgment has been accepted by the Board.
  6. In view of the above, it is now a settled position that in the case of an undertaking which develops, develops and operates or maintains and operates an industrial park/SEZ notified in accordance with the scheme framed and notified by the Government, the income from letting out of premises/developed space along with other facilities in an industrial park/SEZ is to be charged to tax under the head 'Profits and Gains of Business'.

April 26, 2017

Resorts liable to pay luxury tax on free accommodation services provided to its members

Luxury Tax: Timeshare arrangement i.e. agreement between owners of resorts and members by which members are entitled to accommodation at resorts, charges for which are not collected

at time of residence but are included in membership fees, comes within definition of luxury and, hence, is taxable.  HIGH COURT OF KERALA,  Mahindra Holidays & Resorts

India Ltd. v. Intelligence officer.

​Section 4, read with section 17A of the Kerala Tax on Luxuries Act, 1976 - Levy and collection of luxury tax - Whether timeshare arrangement i.e. agreement between assessee and

members by which members are entitled to accommodation at resorts, charges for which are not collected at time of residence but are included in membership fees comes

within definition of luxury and, hence, is taxable - Held

April 01, 2017

Key changes in new ITR forms for AY 2017-18

​​The CBDT has notified new income-tax return forms (ITR forms) for the assessment year 2017-18. It has prescribed simplified version of ITR-1 with fewer columns. A new column has been inserted in ITR Forms to report cash deposits in banks above 2 lakhs during the demonetisation period, i.e., from November 9, 2016 to December 30, 2016.

CBDT had prescribed new 'Form ITR 4 Sugam' for taxpayers opting for presumptive taxation scheme. A new column has been prescribed to mention digital receipts as the rate of presumptive income is 6% for such receipts.

Changes in new ITR forms:-

1) Simplified one page ITR Form for Salaried class taxpayers

[ITR 1 Sahaj]

Now the Govt. has notified simplified one page form 'ITR-1 Sahaj' for individuals earning income from salary, pension, one house property and income from other sources. It has removed columns which are not frequently used by the taxpayers.

New 'ITR-1 Sahaj' has retained those deductions which are most frequently used by the taxpayers, viz, under Section 80C, 80D, 80G and 80TTA.

If any taxpayer wants to claim deduction under any other provision of chapter VI-A he can specify the relevant Section in column titled as 'Any other'. Schedules of TDS and TCS have been merged into one in order to make ITR 1 shorter and simpler.

However, new columns have been inserted to report dividend income and long-term capital gains exempt under Section 10(34) and Section 10(38) respectively.

2) Disclosure of cash deposits during demonetization

[ITR 1, 2, 3, 4, 5, 6, 7]

A new column has been introduced in all ITR Forms to report on cash deposited by taxpayers in their bank accounts during the demonetization period, i.e., from November 9, 2016 to December 30, 2016. However, taxpayer are required to fill up this column only if they have deposited Rs 2 lakh or more during the demonetization period.

3) Quoting of Aadhar Number

[ITR 1, 2, 3, 4]

The Finance Bill, 2017 as passed by Lok Sabha has introduced a new Section 139AA requiring every person to quote Aadhar number in the return of income. If any person does not possess the Aadhaar Number but he had applied for the Aadhaar card then he can quote Enrolment ID of Aadhaar application Form in the ITR.

It may be noted that firms are also required to Quote Aadhaar number of their Partner/members in new ITR 5. Further, in case of trust Aadhaar number of Author(s) / Founder(s) / Trustee(s) / Manager(s), etc., are required to be specified in new ITR 7.

4) Income taxable at special rates

[ITR 2, 3, 5, 6, 7]

Unexplained income

As per Section 115BBE any unexplained credit or investment attracts tax at 60% (plus surcharge and cess, as applicable), irrespective of the slab of income.

Now new columns have been inserted in ITR Forms under 'Schedule OS' to report such unexplained income under 'Schedule SI'.

It may be noted that any taxpayer having unexplained income cannot opt for ITR-1 Sahaj.

Dividend above Rs 10 lakhs

As per Section 115BBDA the dividend received from domestic company is taxable at rate of 10% if aggregate amount of such dividend exceeds Rs. 10 lakh. New column has been inserted in ITR Forms to declare such dividend income in 'Schedule OS'.

It may be noted that any taxpayer having dividend income above Rs 10 lakhs and covered under Section 115BBDA cannot opt for 'ITR-1 Sahaj'.

Patent income

A new column has been inserted in ITR Forms to declare royalty income from patent developed and registered in India and chargeable to tax at 10% under section 115BBF.

5) Deduction under section 80EE

[ITR 2, 3, 4]

Section 80EE allows deduction on home loan interest for first time home buyers. This deduction is over and above the Rs 2 lakhs limit covered under Section 24(b).

A new field has been provided in new ITR Forms under Schedule VI-A deductions to claim home loan interest under Section 80EE.

6) Declaration of value of assets and liabilities by Individuals/HUF earning above Rs 50 lakhs

[ITR 2, 3, 4]

During 2016, the Govt. had introduced new Schedule requiring individuals/HUFs to declare the value of assets and liabilities if their total income exceeds Rs. 50 lakhs. Taxpayers were required to mention cost of immovable property, jewellery, bullion, vehicles, shares, bank and cash balance, etc.

Now tax payers are also required to disclose address of immovable property and description of movable assets in new ITR Forms. Further, new fields have been introduced in ITR Forms for disclosure of 'Interest held in the assets of a firm or AOP as a partner or member'. Such members/partners are also required to disclose name, address, PAN of the firm or AOP.

7) Registration number of Chartered Accountant Firm

[ITR 3, 5, 6]

Now taxpayers are required to mention registration number of firm of Chartered Accountant which has done audit in ITR Forms.

8) Bifurcation of receipt/expenses from business and profession in no account case.

[ITR 3, 5]

In old ITR Forms there was no option to bifurcate income and expense of business and profession separately. All receipts were to be clubbed together and shown in ITR.

Now in new ITR forms, there is an option to show receipts from business and profession separately.

9) Deduction of additional depreciation in case of asset put to use for less than 180 days in preceding year

[ITR 3, 5, 6]

In case of purchase of an asset which is put to use for less than 180 days, additional depreciation shall be restricted to 50% for that year and remaining would be allowable in the succeeding year.

In old ITR Forms, no column was there under 'Schedule DPM' to claim unutilized 50% additional depreciation in succeeding year. Now in new ITR Forms such column has been inserted to claim unutilized 50% depreciation.

10) Segregation of digital receipts and other receipts under presumptive taxation scheme

[ITR 4]

As per the presumptive taxation scheme under Section 44AD, 8% of gross receipts or turnover will be deemed as income of the taxpayer. However, in 2017 Union Budget such limit has been proposed to be reduced to 6% for digital receipts of taxpayer.

In new ITR form, new columns have been inserted to show turnover received through digital mode. Consequently, columns have been inserted to show presumptive income at 6% and 8%.

The Finance Act 2016, had introduced the presumptive taxation scheme for professionals as well. Now new ITR 4 Form shows an option to avail such presumptive taxation scheme for professionals under Section 44ADA.

11) Details of receipts as mentioned in Form 26AS under TDS schedule

[ITR 4]

ITR 4 which is now applicable for taxpayer opting for presumptive taxation scheme has a new column under the 'Schedule TDS2' to show the receipts as mentioned in Form 26AS.

12) Disallowance for non-deducting or non-payment of Equalisation levy

[ITR 3, 5, 6]

The Finance Act, 2016 has introduced new provision to deduct 1% Equalization Levy on payment made for certain advertisement services paid to non-residents.

Any default in deduction or payment of Equalization levy would attract disallowance of Section 40(a)(ib). In new ITR Forms a new column has been inserted under 'Part A-OI' to mention such disallowance under section 40(a)(ib).

13) Disallowance of any amount payable for use of railway assets

[ITR 3, 5, 6]

Any sum payable by the assessee to the Indian Railways for the use of railway assets shall be allowed as deduction on actual payment basis as per section 43B.

A new column has been inserted under 'Part A-OI' for disallowance under section 43B in case of non-payment of such amount on or before due date of furnishing return of income.

14) New schedule to report 'receipt and payment' account of a company under liquidation

[ITR 6]

A new schedule 'Part A-OL' has been inserted in ITR 6 to furnish details of 'receipt and payment' account of company under liquidation.

15) Changes related to ITR 7

[ITR 7]

Various changes have been introduced in the new ITR 7 form. Now trust is required to furnish following additional details in new ITR 7 -

  a) Registration number and date of registration for business trusts registered with the SEBI.

  b) 'Schedule AI' to report aggregate of income referred to in section 11 and 12 excluding voluntary contribution.

  c) 'Schedule ER' to report amount applied to charitable or religious purposes (revenue account).

  d) 'Schedule EC' to report amount applied to charitable or religious purposes (capital account).

  e) 'Schedule 115TD' to report accreted income of trust under section 115TD

March 14, 2017

Brand promotion expenditure, which also gives benefit to overseas owner of brand, would be allowed

HIGH COURT OF DELHI, Principal Commissioner of Income-tax (Central)-3 v. Seagram Manufacturing (P.) Ltd.
Section 37(1) of the Income-tax Act, 1961 - Business expenditure -
Allowability of (Brand promotion) - Assessment year 2003-04 -
Assessee-company entered into an arrangement with overseas owner of brands
Assessee-company incurred advertisement and brand promotion expenses over products
These expenses also increased brand popularity of overseas owner
Assessing Officer disallowed 10 per cent of expenditure on ground that it was allocable to overseas owner

Whether as long as arrangement existed, assessee being a licencee of products was entitled to claim said expenditure as business expenditure, even though expenditure might have enhanced brand popularity of overseas owner - Held, yes [In favour of assessee]

MARCH  05, 2017

​INSTRUCTION NO.4/2017 [F.NO.225/100/2017-ITA.II]




INSTRUCTION NO.4/2017 [F.NO.225/100/2017-ITA.II], DATED 3-3-2017

Vide Instruction No. 3/2017 dated 21-2-2017, in file of even number, CBDT has issued a SOP to be followed by the Assessing Officer(s) for Online Verification of Cash Transactions pertaining to the demonetisation period. In continuation thereof, the Board hereby prescribes a Template, to be used for issue of notices under section 133(6) of the Income-tax Act, 1961 ('Act') in appropriate cases, for Online Verification of Cash Deposits. The format is enclosed herewith as Annexure.

2. Following issues may kindly be kept into consideration while issuing notices under section 133(6) of the Act, in applicable cases:

i.   Notice under section 133(6) of the Act is required to be issued, after obtaining prior approval of Pr. CIT/CIT/Pr. DIT/DIT as provided in the Act, in cases where the 'person under verification' fails to file Online response in a timely manner in spite of issue of reminder by the Assessing Officer. The approval would be taken Online once the facility in ITBA module gets operationalised;
ii.   Notice shall be generated through the ITD System only. Hence, no hand written/typed notice is required to be issued by the Assessing Officer in an individual case;
iii.   Response to notice under section 133(6) of the Act has to be furnished within the stipulated period by the 'person under verification' only through the Online mode;
iv.   It is re-iterated that verification under 'Operation Clean Money' is to be made through the Online Verification Portal only in accordance with SOP dated 21-2-2017;
v.   In case no response is furnished within the specified timeframe, Assessing Officer may form a view that 'person under verification' has no plausible explanation to offer regarding the cash deposits in his/her bank account(s) and consequentially, the case may be escalated as 'Not-Acceptable' for further action in accordance with the procedure prescribed in the SOP of CBDT vide Instruction No. 3/2017 dated 21-2-2017.

3. This may be brought to the notice of all for necessary compliance.

February 01,  2017, 

Here are ten Budget proposals that are likely to influence the realty sector going ahead:

1) Infrastructure status to Affordable Housing – boost for affordable residential sector

Impact: Union Budget 2017-18 granted the much-demanded “Infrastructure” status to affordable housing. The step is well aligned with the government agenda of ‘Housing for All by 2022’. This will allow easier access to capital for developers, at a much lower rate with a longer amortisation period. In addition, it allows developers access to viability gap funding and tax incentives. For affordable housing purpose instead of the built up area of 30 and 60 sqm, the carpet area of 30 and 60 sqm will be counted. The 30 sqm limit will apply only in case of municipal limits of 4 metropolitan cities while for the rest of the country including the peripheral areas of metros, limit of 60 sqm will apply.

2) 10 million homes to be built by 2019 for the homeless and those living in kutcha houses

Impact: To stimulate the rural housing sector in India, INR230 billion (USD3.4 billion) has been allocated under the Gramin Pradhan Mantri Awas Yojana. In line with their aim to promote affordable housing not only in cities but also in rural areas, the government intends to complete 10 million homes by 2019.

Currently, the housing sector is active mostly in Tier-I and Tier-II cities in India; however, the scheme will not only provide necessary housing to the poor but also promote the residential sector in rural areas.

3) Tax breather for notional rent income on unsold unoccupied completed projects

Impact: At present, houses that are unoccupied after getting completion certificates are subject to tax on notional rental income. Builders for whom constructed buildings are stock-in-trade, the rule will be applicable only after one year of receiving the completion certificate. The law will provide some breathing time for developers to liquidate their inventory.

4) Holding period for immovable assets reduced from 3 years to 2 years and indexation to be shifted from 1.4.1981 to 1.4.2001

Impact: This is a significant step regarding capital gains taxation provisions on land as well as buildings. Reduction in the holding period and amendment in the base year indexation will considerably reduce capital gains tax providing tax relief for several asset holders.
It is likely to increase the government’s tax base through immovable property and encourage the mobility of capital assets. With the proposed taxation provisions, property holders are more likely to engage in the sale of real estate, thereby giving a much-needed fillip to the sector.

5) National Housing Bank (NHB) will refinance individual housing loans of about INR200 billion (USD3 billion) in 2017-18

Impact: The demonetisation drive towards the end of 2016 has resulted in surplus cash within the banks; thereby allowing major banks across the country to lower their lending rates.

6) Increase in investment in infrastructure and development projects

Impact: Following the announcement of several major infrastructure projects in 2016, the union budget disclosed one of the biggest budget allocations for the infrastructure sector. About INR1310 billion (USD19.4) billion) has been allocated for railways and INR64.9 billion (USD0.9 billion) for highways which includes 2,000 kms of coastal roads, facilitating better connectivity between major port cities such as Mumbai, Chennai, Kochi and other cities and small towns.

7) Capital gains tax liability changed for Joint Development Agreement (JDA) signed for development of property

Impact: If a Joint Development Agreement is signed for the development of property, then the capital gains tax will only be paid in the year of completion of the project. Apart from several other measures to reduce capital gains tax, this step will provide tax relief not only to the landowner but also the builder/promoter, thereby decreasing their liability.

8) No cash transaction above INR0.3 million (USD4439) permitted

Impact: As one of the extensions to the demonetisation drive, the government plans to disallow any cash transaction above INR0.3 million (USD4439). The real estate sector involved several cash transactions before the demonetisation drive. However, buyers and developers had turned cautious post-demonetisation with a notable reduction in the number of cash transactions.

9) Abolition of Foreign Investment Promotion Board (FIPB)

Impact: Over the last two years, the government has implemented several reforms to encourage Foreign Direct Investment (FDI) in India. As more than 90% of the total FDI inflows currently take place through an automatic route, the government has decided to do away with the FIPB in 2017-18.

This is in conjunction with the government’s view to further liberalise FDI norms and attract foreign investors. Under the automatic route for FDI, the foreign investors will not require any prior approval from the FIPB and will only be subject to laws defined for each sector.

10) Introduction of innovative land-pooling mechanism for development of the new state capital of Andhra Pradesh

Impact: The budget announced that the new state capital of Andhra Pradesh is being constructed by an innovative land-pooling mechanism without the use of the Land Acquisition Act. Land acquisition remained a much-debated issue and a major hurdle with respect to large-scale developments.

The new land pooling mechanism may significantly reduce land related disputes and increase the speed of development. The exemption of capital gains tax will uplift the confidence of landowners whose land is being pooled for the creation of the capital city under the government scheme. However, the exemption is only limited to those who were the owners of such land as of June 2, 2014, the date on which the state of Andhra Pradesh was reorganised

February 01,  2017

HIGH COURT OF MADRAS,  Cheruvathur Chakkutty Thampi  v. Union of India

Impounding of NRI’s passport without giving him prior notice was illegal on part of ED 

​Where petitioner's (NRI) passport was ordered to be impounded under provisions of FEMA read with Income-tax Act, but Enforcement Directorate had not taken necessary steps under section 10 of Passports Act to impound passport, mere detention of passport of petitioner at airport without following provisions contained under section 10 of Passport Act and without issuing prior notice were not legally sustainable, and, therefore, Enforcement Directorate was directed to return passport to petitioner forthwith after cancelling Look Out Circular with stringent conditions

January 25, 2017

CBDT issues final guidelines on POEM; effective from April 1, 2017

Subject: Guiding Principles for determination of Place of Effective Management (POEM) of a Company.

Section 6(3) of the Income-tax Act, 1961 (the Act), prior to its amendment by the Finance Act, 2015, provided that a company is said to be resident in India in any previous year, if it is an Indian company or if during that year, the control and management of its affairs is situated wholly in India. This allowed tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and management outside India. To address these concerns, the existing provisions of section 6(3) of the Act were amended vide Finance Act, 2015, with effect from 1st April, 2016 to provide that a company is said to be resident in India in any previous year, if-

  (i) it is an Indian company; or

 (ii) its place of effective management in that year is in India .

2. "Place of effective management" is defined in the Act to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

3. The Finance Act, 2016 has changed the effectivity of the said amendment to section 6(3) of the Act. Therefore, the amended provision would now be effective from 1st April 2017 and will apply to Assessment Year 2017-18 and subsequent assessment years.

4. 'Place of effective management' (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognises the concept of 'place of effective management' for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. The guiding principles to be followed for determination of POEM are enumerated in the following paragraphs.

5. For the purposes of these guidelines, -

 (a) A company shall be said to be engaged in "active business outside India" if the passive income is not more than 50% of its total income; and

   (i) less than 50% of its total assets are situated in India; and

  (ii) less than 50% of total number of employees are situated in India or are resident in India; and

 (iii) the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

Explanation: For the aforesaid purpose, -

 (A) the income shall be, -

 (a) as computed for tax purpose in accordance with the laws of the country of incorporation; or

 (b) as per books of account, where the laws of the country of incorporation does not require such a computation.

 (B) the value of assets, -

 (a) In case of an individually depreciable asset, shall be the average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the previous year; and

 (b) In case of pool of a fixed assets being treated as a block for depreciation, shall be the average of its value for tax purposes in the country of incorporation of the company at the beginning and at end of the year;

 (c) In case of any other asset, shall be its value as per books of account;

 (C) the number of employees shall be the average of the number of employees as at the beginning and at the end of the year and shall include persons, who though not employed directly by the company, perform tasks similar to those performed by the employees;

 (D) the term "pay roll" shall include the cost of salaries, wages, bonus and all other employee compensation including related pension and social costs borne by the employer.

 (b) "Head Office" of a company would be the place where the company's senior management and their direct support staff are located or, if they are located at more than one location, the place where they are primarily or predominantly located. A company's head office is not necessarily the same as the place where the majority of its employees work or where its board typically meets;

 (c) "Passive income" of a company shall be aggregate of,-

   (i) income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and

  (ii) income by way of royalty, dividend, capital gains, interest or rental income;

However, any income by way of interest shall not be considered to be passive income in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation.

 (d) "Senior Management" in respect of a company means the person or persons who are generally responsible for developing and formulating key strategies and policies for the company and for ensuring or overseeing the execution and implementation of those strategies on a regular and on-going basis. While designation may vary, these persons may include:

   (i) Managing Director or Chief Executive Officer;

  (ii) Financial Director or Chief Financial Officer;

 (iii) Chief Operating Officer; and

 (iv) The heads of various divisions or departments (for example, Chief Information or Technology Officer, Director for Sales or Marketing).

6. Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. It may be noted that an entity may have more than one place of management, but it can have only one place of effective management at any point of time. Since "residence" is to be determined for each year, POEM will also be required to be determined on year to year basis. The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India.

7. The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.

7.1 However, if on the basis of facts and circumstances it is established that the Board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person (s) resident in India, then the place of effective management shall be considered to be in India. For this purpose, merely because the Board of Directors (BOD) follows general and objective principles of global policy of the group laid down by the parent entity which may be in the field of Pay roll functions, Accounting, Human resource (HR) functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and not being specific to any entity or group of entities per se; would not constitute a case of BoD of companies standing aside.

7.2 For the purpose of determining whether the company is engaged in active business outside India, the average of the data of the previous year and two years prior to that shall be taken into account. In case the company has been in existence for a shorter period, then data of such period shall be considered. Where the accounting year for tax purposes, in accordance with laws of country of incorporation of the company, is different from the previous year, then, data of the accounting year that ends during the relevant previous year and two accounting years preceding it shall be considered.

8. In cases of companies other than those that are engaged in active business outside India referred to in para 7, the determination of POEM would be a two stage process, namely:-

  (i) First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company's business as a whole.

 (ii) Second stage would be determination of place where these decisions are in fact being made.

8.1 The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM it is the substance which would be conclusive rather than the form.

8.2 Some of the guiding principles which may be taken into account for determining the POEM are as follows:

 (a) The location where a company's Board regularly meets and makes decisions may be the company's place of effective management provided, the Board-

   (i) retains and exercises its authority to govern the company; and

  (ii) does, in substance, make the key management and commercial decisions necessary for the conduct of the company's business as a whole.

It may be mentioned that mere formal holding of board meetings at a place would by itself not be conclusive for determination of POEM being located at that place. If the key decisions by the directors are in fact being taken in a place other than the place where the formal meetings are held then such other place would be relevant for POEM. As an example this may be the case where the board meetings are held in a location distinct from the place where head office of the company is located or such location is unconnected with the place where the predominant activity of the company is being carried out.

If a board has de facto delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder, promoter, strategic or legal or financial advisor etc. and does nothing more than routinely ratifying the decisions that have been made, the company's place of effective management will ordinarily be the place where these senior managers or the other person make those decisions.

 (b) A company's board may delegate some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management. In these situations, the location where the members of the executive committee are based and where that committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered to be the company's place of effective management.

The delegation of authority may be either de jure (by means of a formal resolution or Shareholder Agreement) or de facto (based upon the actual conduct of the board and the executive committee).

 (c) The location of a company's head office will be a very important factor in the determination of the company's place of effective management because it often represents the place where key company decisions are made. The following points need to be considered for determining the location of the head office of the company:-

   •  If the company's senior management and their support staff are based in a single location and that location is held out to the public as the company's principal place of business or headquarters then that location is the place where head office is located.

   •  If the company is more decentralized (for example where various members of senior management may operate, from time to time, at offices located in the various countries)then the company's head office would be the location where these senior managers,-

  (i) are primarily or predominantly based; or

 (ii) normally return to following travel to other locations; or

(iii) meet when formulating or deciding key strategies and policies for the company as a whole.

   •  Members of the senior management may operate from different locations on a more or less permanent basis and the members may participate in various meetings via telephone or video conferencing rather than by being physically present at meetings in a particular location. In such situation the head office would normally be the location, if any, where the highest level of management (for example, the Managing Director and Financial Director) and their direct support staff are located.

   •  In situations where the senior management is so decentralised that it is not possible to determine the company's head office with a reasonable degree of certainty, the location of a company's head office would not be of much relevance in determining that company's place of effective management.

 (d) The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. Therefore physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. In such cases the place where the directors or the persons taking the decisions or majority of them usually reside may also be a relevant factor.

 (e) In case of circular resolution or round robin voting the factors like, the frequency with which it is used, the type of decisions made in that manner and where the parties involved in those decisions are located etc. are to be considered. It cannot be said that proposer of decision alone would be relevant but based on past practices and general conduct; it would be required to determine the person who has the authority and who exercises the authority to take decisions. The place of location of such person would be more important

 (f) The decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company's place of effective management. Such decisions may include sale of all or substantially all of the company's assets, the dissolution, liquidation or deregistration of the company, the modification of the rights attaching to various classes of shares or the issue of a new class of shares etc. These decisions typically affect the existence of the company itself or the rights of the shareholders as such, rather than the conduct of the company's business from a management or commercial perspective and are therefore, generally not relevant for the determination of a company's place of effective management.

However, the shareholder's involvement can, in certain situations, turn into that of effective management. This may happen through a formal arrangement by way of shareholder agreement etc. or may also happen by way of actual conduct. As an example if the shareholders limit the authority of board and senior managers of a company and thereby remove the company's real authority to make decision then the shareholder guidance transforms into usurpation and such undue influence may result in effective management being exercised by the shareholder.

Therefore, whether the shareholder involvement is crossing the line into that of effective management is one of fact and has to be determined on case-to-case basis only.

 (g) It may be clarified that day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM. The operational decisions relate to the oversight of the day-to-day business operations and activities of a company whereas the key management and commercial decision are concerned with broader strategic and policy decision. For example, a decision to open a major new manufacturing facility or to discontinue a major product line would be examples of key commercial decisions affecting the company's business as a whole. By contrast, decisions by the plant manager appointed by senior management to run that facility, concerning repairs and maintenance, the implementation of company-wide quality controls and human resources policies, would be examples of routine operational decisions. In certain situations it may happen that person responsible for operational decision is the same person who is responsible for the key management and commercial decision. In such cases it will be necessary to distinguish the two type of decisions and thereafter assess the location where the key management and commercial decisions are taken.

8.3 If the above factors do not lead to clear identification of POEM then the following secondary factors can be considered :-

  (i) Place where main and substantial activity of the company is carried out; or

 (ii) Place where the accounting records of the company are kept.

9. It needs to be emphasized that the determination of POEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on the basis of isolated facts that by itself do not establish effective management, as illustrated by the following examples:

  (i) The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

 (ii) The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

(iii) The fact that one or some of the Directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

(iv) The fact of, local management being situated in India in respect of activities carried out by a foreign company in India will not , by itself, be conclusive evidence that the conditions for establishing POEM have been satisfied.

 (v) The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

10. It is reiterated that the above principles for determining the POEM are for guidance only. No single principle will be decisive in itself. The above principles are not to be seen with reference to any particular moment in time rather activities performed over a period of time, during the previous year, need to be considered. In other words a "snapshot" approach is not to be adopted. Further, based on the facts and circumstances if it is determined that during the previous year the POEM is in India and also outside India then POEM shall be presumed to be in India if it has been mainly /predominantly in India

11. The Assessing Officer (AO) shall, before initiating any proceedings for holding a company incorporated outside India, on the basis of its POEM, as being resident in India, seek prior approval of the Principal Commissioner or the Commissioner, as the case may be.

11.1 Further, in case the AO proposes to hold a company incorporated outside India, on the basis of its POEM, as being resident in India then any such finding shall be given by the AO after seeking prior approval of the collegium of three members consisting of the Principal Commissioners or the Commissioners, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to the company before issuing any directions in the matter.

12. Illustrations:

The following are certain illustrations intended to highlight applicability of certain principles enumerated in the foregoing paragraphs of the guidelines. The facts assumed have been simplified to highlight the principle. Actual determination of POEM of a company shall depend on all relevant facts.

Example 1: Company A Co. is a sourcing entity, for an Indian multinational group, incorporated in country X and is 100% subsidiary of Indian company (B Co.). The warehouses and stock in them are the only assets of the company and are located in country X. All the employees of the company are also in country X. The average income wise breakup of the company's total income for three years is, -

  (i). 30% of income is from transaction where purchases are made from parties which are non-associated enterprises and sold to associated enterprises;

 (ii). 30% of income is from transaction where purchases are made from associated enterprises and sold to associated enterprises;

(iii). 30% of income is from transaction where purchases are made from associated enterprises and sold to non-associated enterprises; and

(iv). 10% of the income is by way of interest.

Interpretation: In this case passive income is 40% of the total income of the company. The passive income consists of, -

  (i). 30% income from the transaction where both purchase and sale is from/to associated enterprises; and

 (ii). 10% income from interest.

The A Co. satisfies the first requirement of the test of active business outside India. Since no assets or employees of A Co. are in India the other requirements of the test is also satisfied. Therefore company is engaged in active business outside India.

Example 2: The other facts remain same as that in Example 1 with the variation that A Co. has a total of 50 employees. 47 employees, managing the warehouse, storekeeping and accounts of the company, are located in country X. The Managing Director (MD), Chief Executive Officer (CEO) and sales head are resident in India. The total annual payroll expenditure on these 50 employees is of Rs. 5 crore. The annual payroll expenditure in respect of MD, CEO and sales head is of Rs. 3 crore.

Interpretation: Although the first limb of active business test is satisfied by A Co. as only 40% of its total income is passive in nature. Further, more than 50% of the employees are also situated outside India. All the assets are situated outside India. However, the payroll expenditure in respect of the MD, the CEO and the sales head being employees resident in India exceeds 50% of the total payroll expenditure. Therefore, A Co. is not engaged in active business outside India.

Example 3: The basic facts are same as in Example 1. Further facts are that all the directors of the A Co. are Indian residents. During the relevant previous year 5 meetings of the Board of Directors is held of which two were held in India and 3 outside India with two in country X and one in country Y.

Interpretation: The A Co. is engaged in active business outside India as the facts indicated in Example 1 establish. The majority of board meetings have been held outside India. Therefore, the POEM of A Co. shall be presumed to be outside India.

Example 4: The facts are same as in Example 3 but it is established by the Assessing Officer that although A Co.'s senior management team signs all the contracts, for all the contracts above Rs. 10 lakh the A Co. must submit its recommendation to B Co. and B Co. makes the decision whether or not the contract may be accepted. It is also seen that during the previous year more than 99% of the contracts are above Rs. 10 lakh and over past years also the same trend in respect of value contribution of contracts above Rs. 10 lakh is seen.

Interpretation: These facts suggest that the effective management of the A Co. may have been usurped by the parent company B Co. Therefore, POEM of A Co. may in such cases be not presumed to be outside India even though A Co. is engaged in active business outside India and majority of board meeting are held outside India.

Example 5: An Indian multinational group has a local holding company A Co. in country X. The A Co. also has 100% downstream subsidiaries B Co. and C Co. in country X and D Co. in country Y. The A Co. has income only by way of dividend and interest from investments made in its subsidiaries. The Place of Effective Management of A Co. is in India and is exercised by ultimate parent company of the group. The subsidiaries B, C and D are engaged in active business outside India. The meetings of Board of Director of B Co., C Co. and D Co. are held in country X and Y respectively.

Interpretation: Merely because the Place of Effective Management of an intermediate holding company is in India the POEM of its subsidiaries shall not be taken to be in India. Each subsidiary has to be examined separately. As indicated in the facts since companies B Co., C Co. and D Co. are independently engaged in active business outside India and majority of Board meetings of these companies are also held outside India. The POEM of B Co., C Co. and D Co. shall be presumed to be outside India.


January 14,2017

Co. developing own software products isn't comparable with a Co. rendering software development services

IN THE ITAT BENGALURU BENCH 'B',  Sharp Software Development India (P.) Ltd.  v.  Deputy Commissioner of Income-tax, Circle- 12 (3), Bengaluru

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price (Comparable and adjustments/Comparables - Illustrations) - Assessment year 2007-08 - During relevant year, assessee-company was rendering software development services to its AE - Whether in case of assessee, companies developing their own software products could not be accepted as comparables - Held, yes - Whether since turnover of assessee-company was only around Rs. 19 crores, companies having turnover in excess of Rs. 200 crores, were not acceptable as comparables - Held, yes

January 10, 2017

Sahara's estate to be re-auctioned as Sahara received higher auction price than SEBI: Apex Court

SUPREME COURT OF INDIA,  S.E.B.I.  v.  Sahara India Real Estate Corpn. Ltd.

Section 11B of the Securities And Exchange Board of India Act, 1992 - Power and functions of Board - Power to issue directions - Pursuant to order of Supreme Court seven properties of Saharas was offered for sale by SEBI - Five of those properties had been attached by Income-tax authorities under provisions of Income-tax Act - However, Court permitted auction of those properties as Income-tax Department did not oppose auction but only laid a claim to sale proceed thereof - Saharas received higher offer for one of those properties so they prayed for fresh auction of properties as according to them if a fresh sale was ordered, same would fetch much higher proposed amount than one earlier recovered by SEBI - SEBI had no objection to reauction - Whether since Income-tax Department did not oppose sale of properties in question provided their rights were suitably protected, five properties were directed to be offered by SEBI for sale afresh on stipulated conditions - Held, yes

January 1, 2017

1) India and Singapore have amended the DTAA for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income, by signing a Third Protocol today. This is in line with India’s treaty policy to prevent double non-taxation, curb revenue loss and check the menace of black money through automatic exchange of information, as reflected in India’s recently revised treaties with Mauritius and Cyprus and the joint declaration signed with Switzerland.


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