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

Supreme Court Overturns Several High Court Decisions Quashing Reassessment Notices

In a recent decision of Union of India vs. Ashish Agarwal[1], the Supreme Court (“SC”) effectively overturned several High Court decisions which had quashed reassessment notices issued under Section 148 (as it existed prior to the amendments introduced through the Finance Act, 2021). The decision has a significant impact for pending reassessments, notices for which have been issued after April 1, 2021. This blog shall briefly explain the background to the appeal as well as the decision of the SC, and analyse the reasoning and impact of the decision.

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IT Act

Background

The Income Tax Act, 1961 (“IT Act”) confers various powers on the Income Tax Department (“ITD”) to curb the menace of laundering of unaccounted money. One such power-bestowing provision is Section 68 of the IT Act, which is often resorted to by the ITD when large amounts of unaccounted funds are invested in companies at a significant premium. This provision puts the onus on the taxpayer, i.e., the investee company, to satisfactorily explain the source of those funds and produce details to evidence the identity, genuineness and creditworthiness of the shareholders as well as the source of the shareholders’ fund.

Continue Reading Is regulatory compliance sufficient to discharge onus u/s 68 of the IT Act?

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

Gift of ‘Brand’ to family trust not taxable

Family trusts have become a widely popular tool for not only succession and estate planning, but also for managing assets and investments. If deployed wisely, these trusts can prove to be an effective and tax efficient structuring instrument. However, despite the advantages offered by these family trusts, contributing or settling existing assets into such trusts may pose some challenges, especially on account of certain tax provisions. One such challenge is posed by the provisions of Section 56(2)(x) of the Indian Income-tax Act, 1961 (“IT Act”), which seeks to tax a notional income, where certain assets (such as land, securities, work of art, etc.) are transferred or settled/ contributed into a trust for no consideration or for a consideration less than the fair market value of such assets. (exempts transfer or contribution to a trust settled by an individual for the sole benefit of his/ her relatives). Recently, a similar issue came before the Mumbai ITAT, in the case of Balaji Trust[1], where the tax authorities sought to tax the gift of ‘Essar’ brand to a family trust.

Continue Reading Gift of ‘Brand’ to family trust not taxable

In its recent ruling[1], the Income Tax Appellate Tribunal Bench at Delhi (ITAT) has reiterated the well-established principles, including (i) validity of Trusts; (iii) use of Trusts to hold treasury shares[2]; and (iii) the taxation of its income as a representative of the beneficiary/beneficiaries under the provisions of sections 160-166 of the Income-Tax Act, 1961 (IT Act). The ITAT further upheld the principle that trustees are to be assessed as ‘representative assessee’ in the same and like manner as beneficiaries and therefore, creation of a Trust is not a tax evasion device as the Trust will have the same tax liability and exemptions accruing to the beneficiary.

Continue Reading Trust is Trustworthy, not a Device to Evade Tax: ITAT Delhi

 

ITAT on the Taxability of Transfer of Know-how Under Development

Research and development (R&D) in all fields is a costly affair, but more so in bio-technology, where molecules are first evolved, developed and then subjected to arduous and expensive clinical trials. Till such time that the molecule reaches the final stage, it is simply work-in-progress (WIP), even though the idea and formulation are valuable.

Further development of the WIP is even more expensive and needs an even larger source of funding. To brave cash crunches and the inherent risk of uncertainty in R&D, a common and relevant modus operandi for many WIP technologies is to transfer such WIP into another group company or a joint venture company. Such transfer is intended to facilitate further fine-tuning of the WIP until eligible for commercial exploitation, through licensing, manufacturing, production or processing.
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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

Taxpayer’s Choice for Valuation of Shares at Premium Upheld

The Income Tax Appellate Tribunal (ITAT) in the case of M/s. Rameshwaram Strong Glass (P) Ltd. v The Income Tax Officer[1] has upheld the right of the company issuing shares to choose the valuation methodology under the provisions of the Income Tax Act, 1961 (IT Act) read with the rules framed thereunder (Tax Law) for the purposes of determining the ‘fair market value’ (FMV) of such shares at premium.
Continue Reading Taxpayer’s Choice for Valuation of Shares at Premium Upheld

The Telangana and Andhra Pradesh High Court (High Court) in the case of Leo Edibles and Fats Limited v. TRO, Writ Petition No 8560 of 2018, has allowed the liquidation of assets of a company under the Insolvency and Bankruptcy Code, 2016 (IBC), despite the claim of the tax authorities that they have a charge over it, by virtue of having initiated attachment proceedings under the Income Tax Act, 1961 (IT Act). The High Court, while dealing with the interplay between the IT Act and the IBC, held that the income tax authorities are not at par with ‘secured creditors’ under the IBC.

The petitioner in the instant case had purchased certain property of a company undergoing liquidation under the IBC in an e-auction. The registrar refused to register the transfer in favour of the petitioner due to the attachment notice issued by the tax authorities. Accordingly, the petitioner filed a writ petition challenging the refusal of the registrar to register the sale deed – and sought issuance of direction to the income tax department to withdraw the said attachment.

Continue Reading Decoded: The Interplay Between Tax Law and the Insolvency and Bankruptcy Code