India – Taxation Snapshots

14 November, 2015

 

No MAT on Foreign Companies 

 

The committee headed by Justice (Retd.) A.P. Shah, constituted by Government of India (‘GoI’) had recommended that Minimum Alternate Tax (‘MAT’) should not be applicable to FPIs/Foreign Institutional Investors (‘FIIs’) for the period prior to April 1, 2015.3

 

The GoI has accepted the said recommendations4 and has issued a Press Release5 to clarify that appropriate amendments will be made to the Income-tax Act, 1961 (‘ITA’) and effective April 1, 2001, the provisions of Section 115JB will not be applicable to a foreign company if:

 

• the foreign company is a resident of a country having Double Taxation Avoidance Agreement (‘DTAA’) with India and such foreign company does not have a perma- nent establishment in India, or
• the foreign company is a resident of a country that does not have a DTAA with In- dia and such foreign company is not required to seek registration under Section 592 of the Companies Act, 1956 or Section 380 of the Companies Act, 2013.

 

Accordingly, Central Board of Direct Taxes (‘CBDT’) has issued Instruction6 to tax authori- ties directing them to keep in abeyance, for the time-being, all pending assessment proceedings and not to pursue the recovery of outstanding tax demands in the case of FIIs/ FPIs involving MAT.

 

In a related development, the Supreme Court of India (‘Supreme Court’) has also disposed of the Castleton7 appeal against the unfavorable Authority for Advance Rulings (Income-tax) (‘AAR’) ruling, relying on the Government’s undertaking that the GoI will abide by the above decision. 

 

Tax Residency Certificate (‘TRC’) Sufficient for Availment of India-Mauritius DTAA Benefits 

 

The Punjab & Haryana High Court, while setting aside the ruling passed by AAR in the case of Serco BPO,8 has held that the impugned transaction was not undertaken for tax-avoidance and further, relying on the Supreme Court judgment in the case of Azadi Bachao Andolan,9 upheld the sufficiency of TRC alone as the sine qua non for availing the capital gains tax exemption by the Mauritian seller under the India-Mauritius DTAA. 

 

Rules and FAQs Issued under the Black Money Act 

 

Subsequent to the enactment of the Black Money Act, the CBDT has issued Rules10 under the Black Money Act, which inter alia prescribe the methodology for valuation of an undisclosed foreign asset, relevant forms etc. Further, the CBDT has also issued Circulars containing FAQs/ Press Release containing clarifications,11 addressing various aspects in relation to the scope, ap- plicability and implementation of the Black Money Act, including relating to the one-time compliance window.12 

 

3  Committee on Direct Tax Matters Report on Applicability of Minimum Alternate Tax (MAT) on FIIs / FPIs for the period prior to April 1, 2015, dated August 25, 2015.

4  Press Release dated September 01, 2015, issued by Press Information Bureau, Government of India, Ministry of Finance.

5  Press Release dated September 24, 2015, issued by Press Information Bureau, Government of India, Ministry of Finance.

6  Instruction No. 9/2015/F. No. 225/237/2015-ITA-II; dated September 2, 2015.

7  Castleton Investment Ltd v. Director Of Income Tax, (International Taxation-I), Mumbai, Civil Appeal No. 4559 of 2013 vide order dated September 30, 2015. 

8  Serco BPO (P.) Ltd. v. Authority for Advance Rulings, New Delhi, [2015] 60 taxmann.com 433 (Punjab & Haryana).

9  Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1.

10  Notification No. 58/2015 /F. No. 133/33/2015-TPL, dated July 02, 2015.

11  Circular No. 13 of 2015/ F. No. 142/18/2015-TPL, dated July 06, 2015; Circular No. 15 of 2015/ F. No. 142/18/2015-TPL, dated September 03, 2015; Press Release dated September 30, 2015.

12  Circular No. 12 of 2015/ F. No. 142/18/2015-TPL, dated July 02, 2015. 

 

 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com

22 July, 2015

 

• Central Board of Direct Taxes (‘CBDT’) has issued a circular1 clarifying that declaration of dividend by foreign company outside India does not have the effect of transfer of any underly- ing assets located in India, therefore, the dividends declared and paid by a foreign company outside India in respect of shares that derive their value substantially from assets situated in India will not be deemed to be income accruing or arising in India by virtue of the provisions of Explanation 5 to section 9(1)(i) of Income – tax Act, 1961 (‘ITA’).
• In light of the Finance Minister’s response to the discussions on the Finance Bill, 2015 an- nouncing constitution of a committee headed by Justice A.P. Shah to look into, inter alia, the issue of Minimum Alternate Tax (‘MAT’) on Foreign Institutional Investors (‘FIIs’), CBDT has issued a Letter2 directing Revenue Department not to take coercive action for recovery of de- mand already raised under MAT provisions in the cases for foreign companies. Further, CBDT has also directed the Revenue Department not to issue fresh notices for reopening of cases of completed assessments unless the case is getting barred by limitation.
• The Finance Minister while introducing the Finance (No.2) Bill 2014,had made an announce- ment regarding introduction of ‘range concept’ for determination of Arm’s Length Price (‘ALP’) and use of arithmetic mean concept to apply where the number of comparables are inadequate. CBDT vide Letter3 has issued Draft Scheme of Proposed Rules (‘Draft Rules’) for computation of ALP undertaken on or after April 1, 2014. The Draft Rules propose that ‘Range’ concept will be used only in cases where the transfer pricing method used is Transactional Net Margin Method (‘TNMM’), Resale Price Method (‘RPM’) or Cost Plus Method (‘CPM’). Use of multiple year data (comprise 3 years including the current year in which transaction has been undertaken) has also been proposed only in case determination of ALP is by TNMM, RPM or CPM.
• The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘Black Money Act’) provides for a compliance window for a limited period to persons who have undisclosed foreign income and assets that they have not disclosed for the purposes of Income-tax so far. Central Board of Direct Taxes by way of press release dated July 01, 2015, has notified September 30, 2015, as the date on or before which a person may make a declaration in respect of an undisclosed asset located outside India under the compliance provisions of the Black Money Act. The last date by which a person must pay the tax and penalty in respect of the undisclosed foreign assets so declared will be December 31, 2015. Detailed features of the com- pliance window are to be notified separately. 
• The President gave assent to, and brought in the Black Money (Undisclosed Foreign In- come and Assets) and Imposition of Tax Act (‘Black Money Act’) on May 26, 2015. The Black Money Act seeks to keep in check the unaccounted/black/parallel economy that exists in India and bring such monies to account. Illegal incomes that were previously taxed under the ITA will now be taxed under this Black Money Act.

 

Taxpayers will need to declare details of any foreign assets held by them as a part of their income tax returns under ITA, and cover undisclosed assets not declared by the taxpayer in his/ her returns. Such undisclosed assets shall be valued at fair market value in the year of detection. Foreign incomes declared for relevant years to which such assets pertain will be allowed as a deduction in proportion to the cost of the asset at the time of acquisition while computing the value of the asset. No other deductions shall be allowed from the determined fair market value of such assets. 

 

 

For further information, please contact:

 

Zia Mody, Partner, AZB & Partners

zia.mody@azbpartners.com