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Share subscription above fair market value would be subject to angel tax

The Bombay High Court has recently allowed a writ, challenging a reassessment notice served on the Assessee (by the income tax department) for FY11-12 on share premium issued by it. The assessing officer, however, failed to come up with any reasonable grounds that led him to believe that income had escaped assessment during the relevant FY. 

Section 56(2)(viib) was introduced into the (Indian) Income Tax Act, 1961 (“IT Act”) as an anti-abuse provision with effect from FY12-13, according to which, if a company issues shares at a value higher than its fair market value, then it will have to pay tax (angel tax) on such incremental value. Rule 11UA of the (Indian) Income Tax Rules, 1962 (“IT Rules”) provides mechanism for computing fair market value.

Continue Reading Share subscription above fair market value would be subject to angel tax
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Salary reimbursement of seconded employees not taxable in the hands of foreign company

The Hon’ble Income Tax Appellate Tribunal (“ITAT”), Delhi has recently held that salary reimbursement of seconded employees paid to the original employer without any profit element is not taxable as fee for technical services.

This case[1] pertains to Ernst and Young LLP, USA (“EY USA”), which is set up in the US. It had sent its employees on secondment (“Seconded Personnel”) to work with various EY member firms in India (“EY India”). During the assessment proceedings, the tax officer held that the cost-to-cost reimbursement of salary of Seconded Personnel is taxable as fee for technical services (“FTS”) as per Article 12 of the India-US Double Taxation Avoidance Agreement (“DTAA”) in the hands of EY USA.

Continue Reading Salary reimbursement of seconded employees not taxable in the hands of foreign company: Delhi ITAT
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Income Tax Act

In the case of Manas Vs. Income Tax Officer[1], the Hon’ble Madras High Court (“HC”) took serious objection to the taxpayer’s attempt at misleading the Court. The taxpayer had filed a writ petition seeking quashing of the reassessment proceedings and satisfaction order passed under Section 148A of Income Tax Act, 1961 (“IT Act”).

Continue Reading Madras High Court takes taxpayer to task for mischief with costs
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Forex Benefit

Introduction

Section 48 of the Income-tax Act, 1961 (“IT Act”) provides the computation mechanism for capital gains arising to a taxpayer pursuant to the transfer of a capital asset.[1] The said provision, inter alia, permits non-resident taxpayers to account for foreign currency fluctuation while computing capital gains arising from the transfer of shares or debentures of an Indian company. However, where capital gains arise to a non-resident taxpayer pursuant to the transfer of unlisted securities or shares of a private company, section 112(1)(c)(iii) of the IT Act provides that such capital gains should be computed without giving effect to any foreign currency fluctuations. A concessional tax rate of 10% (plus applicable surcharge and cess) is available on such gains. Section 112(1)(c)(ii) of the IT Act, on the other hand, provides a higher tax rate of 20% (plus applicable surcharge and cess) on any other long-term capital gains arising to a non-resident (i.e., other than gains arising from transfer of unlisted securities or shares) while, inter alia, allowing foreign currency fluctuation benefits to such non-residents.

Continue Reading Forex Benefit Denied to Non-Resident Investor on Sale of Unlisted Shares
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Income Tax Act

Background

The Income Tax Act, 1961 (“IT Act”), allows certain taxpayers to carry forward and set off the losses incurred in a financial year (“FY”)against the income of subsequent FYs, on satisfaction of prescribed conditions. However, to ensure taxpayers do not use such beneficial provisions to escape their tax liabilities, the IT Act also includes anti-abuse provisions, which disallow carry forward or set off of such losses under specified circumstances. In this respect, section 79 of the IT Act disallows a closely held company from carrying forward and setting off its tax losses if there is a change in the beneficial ownership of shares carrying more than 49% of the voting power of the company as compared to the year in which the loss was incurred (subject to certain exceptions). This provision was introduced with the intent to curb the practice of profitable enterprises acquiring loss making undertakings for the sole reason of utilising tax losses accumulated by such undertakings to reduce their taxable business profits.

Continue Reading Section 79 cannot be invoked when there is no change in ultimate beneficial shareholding
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Tax Treaty

Corporate entities have been invoking the provisions of the India-Mauritius tax treaty and using the infamous “Mauritius route” to avoid paying capital gains tax in India for a while now. This has been a sore subject for tax authorities in India.

Continue Reading Beneficial ownership test is not required under Indo-Mauritius tax treaty
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unquoted shares

Background

In order to ensure income does not escape assessment, anti-abuse provisions under the Indian Income-tax Act, 1961 (“IT Act”) have been strengthened through multiple amendments. The Finance Act, 2017 introduced two such provisions to the IT Act, i.e., sections 56(2)(x) and 50CA, to bring under the scope of tax any notional gain that arises when shares[1] of a company are transferred for a consideration less than their the fair market value (“FMV”). This was followed by the introduction of a computation mechanism[2] to determine the FMV of the shares being transferred.

Continue Reading Shares under lock-in period valued as unquoted shares

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GST

English language and technical proficiency, coupled with the highly skilled workforce that India has to offer, has made the country a darling of most multinational companies (MNCs). For a while now, these MNCs have been outsourcing their routine as well as technical and complex business processes to their subsidiaries or third-party service providers in low-cost and efficient jurisdictions, including India. Indian entities, in turn, offer their expertise in customer care, follow ups for regular payables like credit card, life and healthcare insurance premiums, routine troubleshooting services, assisting internal departments like finance, accounting, human resources departments, etc., as well as supporting various complicated and complex issues like sophisticated high-end research and technology services, analytical and computational support services, etc. The Government has taken several steps to encourage the service sector and has come up with many benefits and incentives. However, there appears to be a new set of challenges that this sector must deal with, arising in the context of Goods and Service Tax (“GST”).

Continue Reading Refund of Unutilised ITC cannot be Denied to Supplier of Subcontracted Services

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SC delivers two landmark judgments on exemptions claimed by Charitable Institutions

The Hon’ble Supreme Court of India (“SC”) delivered two landmark decisions dealing with the conditions and entitlement of charitable institutions to claim exemption under the Income Tax Act, 1961 (“IT Act”), recently. While Ahmedabad Urban Development Authority,[1] (“AUDA”) dealt with the provisions and conditions of a charitable institution engaged in the activity of advancing an object of general public utility (“GPU”), New Noble Educational Society,[2] (“New Noble”) dealt with the issue of whether educational institutions can be engaged in other activities.

Continue Reading SC delivers two landmark judgments on exemptions claimed by Charitable Institutions