Income Tax Appellate Tribunal

Google Adwords program is not taxable as either “royalty” or “Fee for technical services” in India

The Income Tax Appellate Tribunal, Bangalore (“Tribunal”), recently in Google Ireland Ltd. v. DCIT[1] allowed an appeal by Google Ireland Ltd (“Google Ireland”) and held that the payments received from Google India Pvt Ltd (“Google India”) for granting marketing & distribution rights of Google AdWords program were not in the nature of “royalty” or fee for technical services (“FTS”) and consequently it could not be brought to tax in India.Continue Reading Google Adwords program is not taxable as either “royalty” or “Fee for technical services” in India

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

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

Determining Tax Implications on Hiring Foreign Employees from Related Foreign Entities

Multinational companies (“MNCs”), with a view to utilise available skill within the MNC group, often depute employees from a foreign entity to another entity of the same group. During the period of deputation, such employees often retain their employment with the original parent entity, typically to enjoy continued social security benefits. Employees under such arrangements (“Secondment Agreements”) are referred to as, inter alia, ‘seconded employees.’Continue Reading Your Employee or Mine? – Determining Tax Implications on Hiring Foreign Employees from Related Foreign Entities

Income Tax

The Indian Income Tax Department (“ITD”) has been closely scrutinising the internal business restructuring of companies to weed out any unwarranted tax incentives or benefits that may be claimed by the taxpayer. This has sometimes resulted in prolonged tax litigation, with no end in sight. The ongoing dispute between the ITD and Grasim Industries Limited (“GIL”)[1] is one such example.Continue Reading Could Demerger Consideration be Construed as Dividend Distribution – Our views on the IT Ruling on the Grasim matter

Faceless appeals, CBDT extends faceless assessments to the second level

Conception of new faceless regime

The government had introduced the faceless assessment regime from 2018, thereby eliminating the physical interface between the Assessing Officer (“AO”) and the assessee. Suitable amendments were made in the Income Tax Act, 1961 (“IT Act”), authorising the government to notify a suitable scheme for this purpose, which led to the setting up of a Centralised  Communication  Centre i.e. an internet-based, independent, centralised communication centre for issuance of e-notices to taxpayers, thus doing away with the need for the traditional face to face appearance by an assessee before the designated income tax authority. These preliminary steps finally culminated in the launch of the Faceless Assessment Scheme, 2019.Continue Reading Faceless appeals, CBDT extends faceless assessments to the second level

By Hook or By Crook - When IT dept. sought to tax rights issue as unexplained cash credit but Tribunal refused

Background

In general, tax can only be levied on an amount, which falls within the meaning of the term ‘income’ or ‘deemed income’. Capital receipts are not taxable except where they are characterised as ‘income’ through specific provisions in the Income-tax Act, 1961 (“IT Act”). Thus, amounts received by way of share capital, whether the amount representing face value or premium, being capital receipt are not characterised as ‘income’ of a company, and therefore not taxed. However, it has been seen that this exemption under the law can be misused. A time-tested strategy aimed at laundering an individual’s unaccounted funds involves incorporation of sham entities with huge capital at premium, which in turn invests these funds in the individual’s legitimate businesses by way of subscription to shares at a premium. Section 68 (‘Cash Credits’) of the IT Act attempts to deter such practices by bringing to tax any sum found credited in the books of an assessee if the assessee offers no or unsatisfactory explanations on the nature and source of the credit.
Continue Reading By Hook or By Crook: When IT dept. sought to tax rights issue as unexplained cash credit but Tribunal refused

“Heads I win, tails you lose” approach of tax authorities rejected by Kolkata ITAT bench

In its recent ruling[1], Kolkata bench of Income Tax Appellate Tribunal (“ITAT”) rejected the retrospective application of General Anti-Avoidance Rule (“GAAR”) on a scheme of amalgamation approved by the Punjab & Haryana High Court (“HC”) and Delhi HC.

Background

M/s. JCT Limited (“Assessee”) is a public limited company, engaged in the business of manufacturing, sale and export of textiles, nylon and different varieties of yarns. M/s Gupta and Syal Ltd. (“Subsidiary”) was a wholly-owned subsidiary of the Assessee. During Assessment Year (“AY”) 2011-12, the business of the Subsidiary was amalgamated with the Assessee by a scheme of amalgamation approved by the Punjab & Haryana HC as well as the Delhi HC. Prior to the amalgamation, the Subsidiary had no substantial business activity and the only income earned by the Subsidiary in that financial year was in the nature of rent and receipts from sale of a land. Upon amalgamation, the long-term capital gains (“LTCG”) from the sale of land of the Subsidiary were set off against the losses and unabsorbed depreciation of the Assessee for AY2011-12.
Continue Reading “Heads I win, tails you lose” approach of tax authorities rejected by Kolkata ITAT bench

Interest Paid on Convertible Debentures - Income Tax Law

The recent Income Tax Appellate Tribunal (ITAT) Order in CAE Flight Training (India) Pvt. Ltd. (TS-440-ITAT-2019 (Bang)) clarifies how Compulsorily Convertible Debentures (CCDs) are to be treated under Income Tax Laws.

Before delving into the Order and what the ITAT said in making it, it is important to understand the legal context in which this question arose in the first place. To do this, we first need to understand the nature of a CCD. A debenture is a debt-based security that may or may not be secured against the assets of the company. Although debentures are undisputedly debt instruments, CCDs are debentures that are mandatorily converted into equity according to pre-determined terms at a pre-defined time. In the pre-conversion stage, the CCD holder is considered as a debtor by the company and is required to be paid interest on its investment. Post-conversion, the debt becomes equity capital in the company, which results in such investor earning dividends from its holdings.
Continue Reading ITAT Puts On It’s Thin(king)-Cap – Treatment of Interest Paid on Compulsorily Convertible Debentures Under the Income Tax Laws

 

Insurance Compensation Outside India for Loss of Interest in Indian Subsidiary Not Taxable in India

In M/s Adidas India Marketing (P.) Ltd. v. Income Tax Officer,[1] the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that the insurance compensation received by the foreign parent due to loss of financial interest in its Indian subsidiary is not the subsidiary’s income as alleged by the tax officer and, therefore, is not taxable in India.

Facts

Adidas India Marketing (P.) Ltd. (Assessee) is an Indian company engaged in the business of sourcing, distributing and marketing products of the brand ‘Adidas’. Nearly all (98.99 %) of the Assessee’s equity is held by another Indian company, Adidas India Private Ltd. (Adidas India), which, in turn, is a subsidiary of a German company, Adidas AG, Germany (Adidas Germany).
Continue Reading Insurance Compensation Outside India for Loss of Interest in Indian Subsidiary Not Taxable in India, Holds Delhi ITAT