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S.R. Patnaik

Head and Partner in the Tax Practice at the Delhi NCR office of Cyril Amarchand Mangaldas. Mr. Patnaik specialises in various aspects of direct tax, such as international tax, transfer pricing, corporate tax etc. He can be reached at sr.patnaik@cyrilshroff.com

CBDT NOTIFIES RELAXATION IN FAIR VALUATION NORMS- ARE THEY ENOUGH

Income-tax Act, 1961 (“IT Act”) provides for certain anti-avoidance provisions, like Section 56(2)(x) and Section 50CA, which seek to impose tax on certain assets, that were received or transferred for an inadequate consideration. Section 56(2)(x) of the IT Act stipulates that where certain assets, including shares and securities are received for a value which is less than their fair market value (“FMV”), then the difference between the FMV and actual consideration paid would be subject to tax in the hands of the recipient under the ‘other incomes’ head. Similarly, in the hands of the seller / transferor, Section 50CA provides for deeming the FMV of unquoted shares as the sale consideration for computing the capital gains arising from the transfer of such shares at a value which is less than the FMV.
Continue Reading CBDT NOTIFIES RELAXATION IN FAIR VALUATION NORMS- ARE THEY ENOUGH?

Provisions for taxing dividend income, receive yet another upgrade

The Finance Bill, 2020 (the “Bill”) was recently passed by the Lok Sabha (Lower house of the Parliament) on March 23, 2020, with more than 50 amendments to the Bill. The Bill has now received the presidential assent and has become an Act (“Finance Act”).  The new provisions proposed by the Bill, for taxing dividends have also been amended to expand the scope of certain benefits and to provide more clarity surrounding the applicability of these provisions. Through this blog, we would like to discuss changes pertaining to taxation of dividends.

Deduction for dividends received from foreign companies and business trust

As per the erstwhile section 115-O of the Income-tax Act,1961 (“IT Act”), distribution of dividends by a domestic company was subject to an additional income tax, called Dividend Distribution Tax (“DDT”), in the hands of the company at an effective rate of 20.56% (inclusive of the applicable surcharge and cess). Such tax was treated as the final tax on dividends and the dividends were generally exempt from any further incidence of tax in the hands of the investors. Further, in order to reduce the cascading effect of DDT, domestic companies while computing the amount of dividends on which DDT is paid were allowed a deduction for dividends received from its subsidiary (i.e. where the company holds more than 50% of the shareholding of the subsidiary), provided DDT was paid by the subsidiary during the same financial year. Similar deduction was also available on account of dividends received from a foreign company on which tax was payable by the domestic company under section 115BBD of the IT Act, provided the domestic company held at least 26% equity shareholding in the foreign company.
Continue Reading Provisions for taxing dividend income, receive yet another upgrade

Revenue Recognition Policy of Telecom Companies Attains Finality

The Indian telecommunications sector has experienced unprecedented growth in recent years due to the significant increase in the subscriber base, with an increasing percentage of them looking for pre-paid connections. The sector now reaches out to every nook and corner of the country. What is even more praiseworthy is the fact that this has been achieved at very low cost and consumers have also prospered from availing such services at one of the lowest charge-out rates.

The above was possible because Indian telecommunication players were able to come up with extremely innovative invoicing options and accordingly also adopted very different revenue recognition mechanisms. As most of the growth was seen in the pre-paid section, the revenue recognition methodology adopted by the industry was also subject to a vigorous amount of scrutiny by the tax authorities and there has been a significant amount of litigation on account of the same. The controversy primarily arose because the contracts entered into by the telecom companies with prepaid customers were large in numbers and got modified frequently.
Continue Reading Revenue Recognition Policy of Telecom Companies Attains Finality

Are the Assets or monies distributed to retiring partners taxable

Disputes involving whether capital gains taxes are leviable on sums/assets paid to retiring partners has been a subject matter of litigation for several decades now. In order to bring clarity, the legislature introduced a new provision (i.e. section 45(4)) into the Income tax Act, 1961 (IT Act), which provided that capital gains tax should be levied in the hands of the partnership firm at the time of distribution of assets. This seems, however, to have further complicated the situation.

Bangalore Income Tax Appellate Tribunal (ITAT) in the case of Savitri Kudur[1] and the Madras High Court (HC) in the case of National Company[2] have delivered noteworthy decisions recently. The Bangalore ITAT held that the cash consideration paid to the retiring partner on the basis of the amount lying in his/her capital account would not be subject to capital gains tax under the IT Act by relying on the decision of the Supreme Court (SC) in the case of Mohanbhai Pamabhai[3]. The Madras HC, on the other hand, held that even the allotment of immovable properties to the retiring partners would not be subject to capital gains tax by relying on the same SC decision in the case of the Mohanbhai Pamabhai (supra).
Continue Reading Never-Ending Saga: Are the Assets/Monies Distributed to Retiring Partners Taxable?

cbdt direct tax

In the Chamber of Tax consultants & ors v. CBDT and Union of India)[1], the Hon’ble Bombay High Court (HC) set aside a portion of the Central Board of Direct Taxes’ (CBDT) action plan that sought to incentivise commissioners of income tax (Appeals) (CIT(A)) whose orders have led to enhanced tax demand from the tax payers. The HC noted that the proviso to the section 119 of the Income tax Act, 1961 (IT Act) specifically prohibits it from issuing any such directions to make a specific assessment or dispose a case in a particular manner.

Facts

Sometime back, the CBDT issued a Central Action Plan for the financial year 2018-19 (CAP) inter alia for the purposes of setting out targets for tax collection, fixing timelines for disposal of cases by income tax authorities and for awarding certain reward points for such disposals. However, since the said CAP proposed to incentivise CIT(A)s who were passing orders favouring the Government, it raised a huge issue and there were widespread protests against such a move.
Continue Reading Bombay High Court Sets Aside CBDT’s Proposal to Reward CIT(A)s for Pro Revenue Orders

AT&T Communications Services (India) Pvt. Ltd. v. Deputy Commissioner of Income Tax

With increasing globalisation of the world economy, the continuous movement of people from one jurisdiction to another has become imminent. However, such decisions have also created a significant amount of uncertainty, not only because of the social impact of such movement, but also because it creates tax complexities.

In a recent case, the Income Tax Appellate Tribunal (ITAT) had the occasion to examine the tax implications of reimbursement of salaries and other expenses in the case of AT&T Communications Services (India) Pvt. Ltd. v. Deputy Commissioner of Income Tax[1]. The ITAT held that reimbursement made by AT&T Communication Services (India) Pvt. Ltd. (AT&T India) for salary and other costs to AT&T World Personnel Services Inc., USA (AWPS) for the seconded employees working in India did not constitute fees for technical services (FTS) or fees for included services (FIS) under section 9(1)(vii) of Income Tax Act, 1961 (IT Act) or Article 12 of India-US Double Tax Avoidance Agreement (DTAA). Hence, AT&T India was not required to withhold taxes under section 195 of the IT Act.
Continue Reading Control and Supervision is the Important Factor to Determine the Nature of Reimbursements in Secondment Agreements

Recently, the National Company Law Tribunal (NCLT) rejected Ajanta Pharma Limited’s (Ajanta Pharma) scheme of amalgamation and arrangement (Scheme) between the company and its shareholder Gabs Investments Private Limited (Gabs Investments) on the grounds of General Anti Avoidance Rules (GAAR).
Continue Reading NCLT Smell Tests GAAR! Rejects Ajanta Pharma’s Scheme of Merger on Grounds of Tax Avoidance

The Income Tax Act, 1961 (IT Act) contains several special beneficial provisions that allow for deductions in order to promote certain activities. One such provision is Section 10A of the IT Act, which seeks to promote and boost new business undertakings situated in free trade zones by providing suitable deductions. It provides for a 100 percent deduction of profits and gains derived by undertakings engaged in export of articles or computer software. The deduction is available for ten assessment years from the year in which the entity commences operations. These profits are to be determined based on the ratio of export turnover to the total turnover of the undertaking.

Over the years, there have been several disputes over the manner in which this ratio is to be determined. This is largely because while the term ‘export turnover’ has been defined under Section 10A of the IT Act, “total turnover” has not. In other words, there is no explicit provision that allows the taxpayer to exclude amounts from total turnover in case such amounts have already been excluded from export turnover.

In the recent case of CIT v HCL Technologies Limited[1], the Supreme Court of India dealt with this issue and provided much needed clarity on the subject.Continue Reading Expenses Excluded from Export Turnover, also to be Excluded from Total Turnover

Stock Appreciation Rights (SARs) are recognised globally as one of the most popular instruments of stock-based compensation. SARs are alternatives adopted for implementing equity-based compensation plans like an employee stock option or employee stock purchase. SARs can be structured as either ‘equity settled’ or ‘cash settled’. As a concept, SARs contemplate passing on of appreciation in the value of a certain number of equity shares to employees.

The Income Tax Act, 1961 (IT Act) did not have any specific provision to tax such income; specific provisions were introduced in 1999 to provide for taxation of benefits provided by an employer to its employees under share benefit rewards. From 1999 onwards, Section 17(2) of the IT Act specifies the payments that come within the ambit of ‘salary’ and ‘perquisites’, and covers benefits available to employees therefrom.

For the period prior to 1999, the issue of taxability of amounts received from various employee benefit programmes, including amounts received from the redemption of SARs, was always under dispute. The special bench of the Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Sumit Bhattacharya[1] held that the amount received on redemption of SARs should be taxable as salary because it was an employment related benefit, in the nature of deferred wages, bonuses or incentives received as a fruit of employment. However, the issue remained inconclusive and litigious. The Supreme Court (SC) appears to have settled this issue in the case of Bharat V. Patel[2], wherein it has been held that the amount received on account of SARs redemption prior to amendment to section 17(2) would not be taxed as salaries.Continue Reading SC Holds that Income from SARs is Taxed as Capital Gains Only

Taxation of international digital transactions has been a perplexing issue. As per the international tax rules, where an enterprise is a resident in one state with income originating in another state (source country), international tax rules provide that the source country will have the taxing rights over such income only if it is established that the enterprise has a permanent establishment (PE) in the source country. Thus, for the source country to be able to tax profits arising from the digital economy, some physical presence of the non-resident enterprise is required in the source state.

However, today a non-resident can carry out a large amount of internet transactions in the source state without having any significant physical presence there. A website can be launched from anywhere and made available to users anywhere in the world. There is no central point, or physical location, for such a transaction and thus, it may not fall within any country’s jurisdiction for taxation purposes.

This opens up two possibilities: double taxation or non-taxation. The concerned people could be even further creative, and actually set up an online business at a place where none of the founders / promoters are present, thereby making it even more difficult to tax them.Continue Reading Taxing the Digital Economy: The Rule of ‘Significant Economic Presence’