Taxation Updates.

Key Proposals Under The Finance Bill, 2015

 

Some key amendments to the Income-tax Act, 1961 (‘ITA’), as proposed by Finance Bill, 2015:

i. change in ‘residence’ test for companies – the concept of ‘place of effective management’ has been introduced;

ii. income from transactions in securities (other than short term capital gains arising on transactions on which securities transaction tax is not chargeable) arising to a foreign institutional investor, may be excluded from the chargeability of minimum alternate tax;

iii. in continuation of the recommendations of the Shome Committee, the Government has proposed certain amendments clarifying the provisions pertaining to taxation of indirect transfer. As an example, prescribing tests to determine when the shares/ interest in a foreign entity derive their value substantially from Indian assets, and that such indirect transfers will be taxable on a proportionate basis;

iv. implementation of the General Anti-Avoidance Rule, has been deferred, to apply to income arising on or after April 1, 2017 (Assessment Year 2018-19);

v. fund management activities by Indian fund manager of eligible foreign investment fund will not be considered to constitute a permanent establishment/ business connection of such fund subject to satisfaction of prescribed conditions;

vi. Wealth-tax Act, 1957 has been abolished with effect from assessment year 2016-17 and an additional surcharge at the rate of 2% will be levied on domestic companies and on all non-corporate taxpayers; and

vii. reduction in domestic law tax rate on royalty and ‘Fee for Technical Services’ from 25% to 10%.

 

Disallowance Under Section 40(a)(i) Of The ITA On “Net Basis”

 

In continuation of Supreme Court decision in GE India Technology¹ and earlier Central Board of Direct Taxes (‘CBDT’) Instruction No. 2/2014², the CBDT, by way of Circular No. 3/2015 has now clarified that any disallowance of expenses in the hands of payer of income to a non resident, will only be on ‘net basis’, i.e. on the proportion of sum chargeable to tax in India and not the gross sums payable.

 

Introduction Of The Undisclosed Foreign Income And Assets (Imposition of Tax) Bill, 2015

 

The Government has introduced the Undisclosed Foreign Income And Assets (Imposition of Tax) Bill, 2015 (‘Tax Bill’) in Parliament which provides that effective from April 01, 2015, the offence of holding undisclosed foreign income and assets (including financial interest in any entity) by an Indian tax resident will be dealt with stricter penalty and prosecution provisions. The Tax Bill inter alia provides for a one time compliance opportunity window wherein the assessee can voluntarily disclose such undisclosed foreign income and assets acquired prior to April 01, 2015 on or before a date to be notified by the Central Government, and avoid prosecution by paying tax at the rate of 30% on the value of such income/ assets along with equivalent amount as penalty.

 

Delhi High Court Holds Advertising, Marketing And Promotion Expense As An International Transaction For Transfer Pricing Purposes

 

In a landmark decision in the case of Sony Ericsson³, the Delhi High Court (‘Delhi HC’) has held that following the amendment to the Finance Act, 2012, advertising, marketing and promotion (‘AMP’) expenses have to be treated as international transactions, and accordingly subject to transfer pricing (‘TP’) rigors under the ITA. This finding was in concurrence with the ITAT Special Bench (‘ITAT SB’) decision in the case of L.G. Electronics⁴. However, the Delhi HC has disagreed with the ITAT SB’s use of the Bright-line method as a testing methodology for Advertising Marketing and Promotion expenses (‘AMP’), holding that it does not have any statutory mandate. Instead, the Delhi HC has held that the identification of potential comparables or comparable analysis is key to any such analysis and also that the method selected should reflect the relevant AMP transaction. Accordingly, the Delhi HC has held the ITAT SB ruling in LG as erroneous and unacceptable and remanded the matter back to ITAT SB on comparability principles.

 

CBDT Amends Advance Pricing Agreement Rules By Allowing Provision For Rollback

 

The CBDT by way of a notification⁵ dated March 14, 2015 (‘CBDT Notification’), has permitted applicants to avail of a rollback provision for a period not exceeding four previous years in respect of an international transaction under an existing Advance Pricing Agreement (‘APA’) providing for either an arm’s length price determination or the manner of determination of arm’s length price. The CBDT Notification lists conditions and procedures that the applicant has to comply with to be eligible for the benefit under the rollback provision. A significant condition affecting the rollback is that such rollback will not be permitted, if it results in a reduction of the total income or increase in the loss of the applicant.

 

End Notes:

 

1 GE India Technology Cen. (P.) Ltd. v. Commissioner of Income-tax 327 (ITR) 456

2 Instruction No. 02/2014 [F. No. 500/33/2013- FTD-] dated February 26, 2014

 

3 Sony Ericsson Mobile Communications India (P.) Ltd. v. Commissioner of Income-tax -III , [2015] 55 taxmann.com 240 (Delhi)

4 L.G. Electronics India (P.) Ltd. v. Assistant Commissioner of Income-tax, [2013] 29 taxmann.com 300 (Delhi – Trib.) (SB)

5 Notification No. 23/2015/F. No. 142/14/2014-TPL