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Supreme Court lays to rest the Most Favoured Nation Controversy

The Most Favored Nation Clause

A Double Taxation Avoidance Agreement (“DTAA”) with one country might have a different treatment for the same income as compared to DTAA with another country. To ensure that such differential treatment is avoided, and similar benefits are available across different DTAAs, DTAAs may include the Most Favored Nation (“MFN”) clause. The MFN clause is not a part of the Organization for Economic Co-operation and Development’s (“OECD”) or the United Nation’s model tax conventions and is also not a standard clause of all DTAAs. Such a clause can be negotiated and included at the discretion of the contracting states for certain income (typically investment income).Continue Reading Supreme Court lays to rest the Most Favoured Nation Controversy

Background

The Income-tax Act, 1961 (“IT Act”) contains various machinery provisions which enable tax authorities to recover tax dues from taxpayers. When payments are made to non-residents that are chargeable to tax under the IT Act, payers (both resident and non-resident) are obligated to withhold tax at applicable rates prior to remittance of funds. Typically, no such obligation arises if the payments are not subject to tax in India. Thus, there are times when taxpayers don’t withhold tax on payments, believing they should not be subject to tax under the IT Act. However, if the Indian tax authorities take a different view, they may initiate proceedings under section 201 of the IT Act against such taxpayers, i.e., the person responsible for withholding taxes.Continue Reading Orders for default in withholding tax on payments made to non-residents must be passed in a reasonable time

Cognizant’s High Court approved scheme of arrangement was held to be a colorable device by Chennai ITAT

The ITAT recently dismissed an appeal and slammed Cognizant India Private Limited (“Cognizant India”) for what it perceived as  using a colorable device to evade taxes during its INR 190 billion share buyback exercise.Continue Reading Cognizant’s High Court approved scheme of arrangement was held to be a colorable device by Chennai ITAT

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

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

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

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

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

Supreme Court holds that filing of declaration under Section 10B is mandatory

The Hon’ble Supreme Court (“SC”) recently in the case of Principal Commissioner of Income Tax-III, Bangalore and another Vs. M/s Wipro Limited[1] refused to allow the assessee i.e. Wipro Limited (“Assessee”), a 100% export oriented unit, to carry forward its losses under Section 72 of Income Tax Act, 1961 (“IT Act”) due to its failure to withdraw deduction  (which was regarded as exemption) under Section 10B of IT Act within the prescribed timeline.Continue Reading Supreme Court holds that filing of declaration under Section 10B is mandatory