Direct Tax - Final CA R Giridharan FCA 1 Contents Tax Management .................................................................................................................................... 3 Objectives of Tax planning ....................................................................................................................... 4 Definition ........................................................................................................................................... 4 The incidence ...................................................................................................................................... 5 MINIMUM ALTERNATE TAX (MAT) ........................................................................................................... 6 Corporate Restructuring - Amalgamation, Mergers & Demergers, Conversion & Slumpsale ..................... 8 Areas of Tax planning under Financial Management and role of Tax Planner ......................................... 13 Concept of Dividends, Deemed dividends. ............................................................................................. 15 General Exclusion: Dividend doesn’t include – ................................................................................... 16 Bond-Washing transactions and provisions to prevent them ............................................................. 17 Tax treatment of expenditure on issue of bonus shares: .................................................................... 18 Setting up and commencement of business ........................................................................................... 19 Tax planning considerations while choosing and adopting a particular method of accounting............ 19 Tax planning with reference to form of business ................................................................................ 20 Company .......................................................................................................................................... 21 Tax planning with reference to nature of business ................................................................................. 22 Tax planning with reference to location of business............................................................................... 25 Non resident ......................................................................................................................................... 32 Business connection .......................................................................................................................... 32 levy of income tax on income pertaining to FIIs ................................................................................. 33 Section 160 ........................................................................................................................................ 35 Section 163: Agent of a non resident ................................................................................................. 35 Section 172: tax liability of shipping business ..................................................................................... 35 Transfer pricing ..................................................................................................................................... 36 Provisions relating to computation of income from international transactions – sec 92 ..................... 36 Section 92A associated enterprises and deemed associated enterprises. ........................................... 36 Deemed associated enterprises ..................................................................................................... 36
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Areas of Tax planning under Financial Management and role of Tax Planner ......................................... 13
Concept of Dividends, Deemed dividends. ............................................................................................. 15
General Exclusion: Dividend doesn’t include – ................................................................................... 16
Bond-Washing transactions and provisions to prevent them ............................................................. 17
Tax treatment of expenditure on issue of bonus shares: .................................................................... 18
Setting up and commencement of business ........................................................................................... 19
Tax planning considerations while choosing and adopting a particular method of accounting............ 19
Tax planning with reference to form of business ................................................................................ 20
Company .......................................................................................................................................... 21
Tax planning with reference to nature of business ................................................................................. 22
Tax planning with reference to location of business............................................................................... 25
Non resident ......................................................................................................................................... 32
Business connection .......................................................................................................................... 32
levy of income tax on income pertaining to FIIs ................................................................................. 33
Section 163: Agent of a non resident ................................................................................................. 35
Section 172: tax liability of shipping business ..................................................................................... 35
Transfer pricing ..................................................................................................................................... 36
Provisions relating to computation of income from international transactions – sec 92 ..................... 36
Section 92A associated enterprises and deemed associated enterprises. ........................................... 36
Condition : w.e.f 1-4-06, deduction u/s 80 I-A will be allowed only if the assessee furnishes the
return of income u/s 139 (a)
Period of deduction Ay’s :
For any 10 consecutive Ay’s out of 15 yrs beginning from the year in which the undertaking or the
enterprise –
Develops and begins to operate any infrastructure facility; or
Starts providing telecommunication services; or
Develops an industrial park; or
Generates power or commences transmission or distribution of power.
For operation and maintenance of the infrastructure facilities referred in Para 1(c) above subject to
fulfillment of conditions, the period of 15 years is substituted by 20 years.
Transfer of industrial park/ SEZ: the transferee undertaking is entitled for deduction u/s 80 IAB for
the remaining period in the 10 consecutive Ay’s.
Section 80 I-B
1) nature of undertakings - operation of ship, hotels, industrial research, production of mineral oil, developing and building housing projects, multiplex theatres, convention centres, oeprating and maintaining a hospital in rural area.
2) audit report - accts must be audited by CA and report should be given by all assessees to claim deduction u/s 80IB.
3)return of income - ROI should be submitted on or before due date of submission of return of income.
4)No splitting up - it should not be formed by splitting up, or reconstructing an existing business.
5) quantum of deduction - 25% to 100% of profits.
Section 80I-C deductions available to certain u/t s or enterprises in certain special category states.
The eligible businesses are a) in case of undertaking/ enterprise located in notified areas under
specified states: it has begun manufacture during specified period, or takes substantial expansion during that period.
b) In case of undertaking/ enterprise located in any area under specified states: it has begun manufacture during specified period, or takes substantial expansion (50% or more increase in book value of P&M) during that period. Specified period and deduction:
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Particulars of
deduction
Undertaking/ enterprise Located in States of --
Sikkim Himachal Pradesh,
Uttaranchal
North eastern
state
Specified period 23-12-02 to 31-3-07 (
finance act, 07)
From 7-1-03 to 31-3-2012 24-12-97 to
31-3-07
Deduction in
respect of profits
and gains of eligible
business
100% for 10 yrs
commencing with the
initial AY
100% for first 5 years starting
with initial AY and thereafter,
25% ( 30% in case of
company), for next 5 years.
100% for ten
years
commencing with
the initial AY.
Initial Ay: It means AY relevant to PY in which undertaking/enterprise begins to manufacture or
produce articles or things or commences operation or completes substantial expansion.
Section 80I-D: deduction in respect of P&G from business of hotels and convention centers in specified
areas: Eligible businesses are –
Business of hotel located in the specified area, if such hotel is constructed and starts functioning at any
time on or after 1-4-07 but on or before 31-3-10 ; or
Business of building, owning, and operating a convention centre located in the specified area, if such
centre is constructed and starts functioning at any time on or after 1-4-07 but on or before 31-3-10.
Specified area: it means national capital territory Delhi and the districts of Faridabad, guragon,
gautam, budh nagar and Ghaziabad.
Quantum and period of deduction: deduction = 100% of P&G derived from such business. Period of
deduction = 5 consecutive Ay’s beginning from the Ay in which hotel starts functioning.
section 80 IE :
spl provision in respect of certain undertakings in north eastern states:
1) nature of undertaking : the tax payer has begun to provide eligible services during 1-4-07 and 31-3-2017 in any of the NE states --
a) to manufacture and produce any eligible article or things
b) to undertake substantial expansion to manf. or product any eligible article or thing.
c) to carry on any eligible business.
2) Audit report - accts must be audited by CA.
3) Return of income - ROI should be submitted on or before due date of submission of ROI.
4) No splitting up : it should not be formed by splitting up, or reconstructing an existing business.
5) Quantum of deduction - 100% of profit and gains derived from such business for 10 consecutive Ay's commencing with the initial AY.
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Section 80 LA: deduction available for banks and financial institutions have an offshore banking unit:
Eligible assessee a) scheduled bank and having an offshore banking unit in a SEZ; or
b) Foreign bank and having an offshore banking unit in a SEZ; or
c) Unit of international financial services centre.
Conditions gross total income includes –
Income from the offshore banking unit in a SEZ;
Income from business referred in section 6(1) of banking regulation act, with an undertaking
Located in SEZ;
Which develops, develops and operates or operates and maintains a SEZ;
Income from any unit of the international financial services centre from its business for which it has
been approved for setting up in such a centre in a SEZ.
Amount of deduction
Period Quantum of deduction
For the first 5 AY’s relevant to the PY in which
permission under banking regulation act or SEBI
or under any other laws was obtained
100% of such income
Next 5 years 50% of such income
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Non resident
1) Non resident individual: An individual is regarded as non –resident if he is not resident in India
during that PY. An individual is regarded as resident in India if –
He is India for a period of 182 days*** or more during the PY; OR
He is in India for a period of 60 days or more during the PY and 365 days or more during the
4 years preceding the PY.
** Under the following circumstances, the period of 60 days are extended to 182 days –
a) An Indian citizen who leaves India during PY for the purpose of employment outside India.
b) An Indian citizen who leaves India during PY as a member of crew of an Indian ship.
c) An Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit
during the PY.
Note: A person is deemed to be of Indian origin, if he or either of his parents or any of his
grand parents was born in Undivided India.
2) Non resident HUF: If the control and management of the affairs of HUF is situated wholly
outside India, then HUF is said to be non resident in India.
3) Non resident company: According to section 6(3) an Indian company is always resident in India.
A foreign company will be non resident in India if the control and management of its affairs is
wholly or partly situated outside India.
4) Non resident firm/AOP/other persons: If the control and management of the affairs of Firm or
AOP or other person is situated wholly outside India then Firm or AOP or such other person is
said to be Non resident in India.
Tax incidence on Non –Resident: In case of non residents, only the income received or deemed
to be received in India or, income accrued or arisen or deemed to be have accrued or arisen in
India is taxable in their hands. All other incomes aren’t taxable.
Business connection
Business connection involves relation between a business carried on by a non – resident, which
yields profits and some activity in India, which contributes directly or indirectly to the earning of
those profits. It predicates an element of continuity between business of the non- resident and the
activity in India. It includes professional connection e.g. when foreign lawyer is called upon in India
to plead the case in Indian courts.
Definition Business activity carried through following agents of non resident is covered –
Concluding agent who concludes contracts on behalf of the non resident. However, agents who
only purchase goods/ merchandise for the non resident aren’t covered, or
Stocking agent who maintains stock of goods in India from which he regularly delivers goods on
behalf of the non resident.
Indenting agent who secures orders in India mainly/wholly for non resident or, that non –
resident and other non- residents who exercise control over one –another or are under
common control.
Exceptions:
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a) Business activity carried out through an agent having an independent status and acting in
ordinary course of business isn’t regarded as business connection. However, an agent
working mainly/ wholly for non resident or, that non resident and other non –residents who
exercise control over one another or are under common control is not regarded as having
an independent status.
b) In cases falling under the above three, only the income attributable to the operations
carried out in India shall be deemed to accrue or arise in India.
Income not to be treated as arising from or through business connection
A. In case all the operations of a business aren’t carried out in India, only the income
reasonably attributable to the operations carried out in India will be deemed to accrue
or arise in India.
B. In case of a non resident, income in respect of operations confined to purchase of goods
in India for the purpose of export shall not be deemed to accrue or arise in India.
C. In case of non resident, engaged in business of running a news agency/ publishing
newspapers, magazines, journals, income arising through and from activities confined
to collection of news and views in India for transmission out of India shall not be
deemed to accrue or arise in India.
D. In case of a non resident being –
a. An individual who isn’t a citizen of India ;
b. A firm not having a partner who is either a citizen of India or resident in India; and
c. A company not having any shareholder who is either citizen of India or resident in
India,
Income arising through or from operations confined to shooting of any
cinematograph film in India shall not be deemed to accrue or arise in India.
levy of income tax on income pertaining to FIIs
Sec Assessee Specified Income Tax
rate
Remarks , if any
115A Any non resident
Assessee
a) Interest from govt. or Indian
concern on debt given in foreign
currency **
20%
30%
20%
10%
->no deduction is
allowed in computing
such income under
any provision of Act.
-->such agreement
must be approved by
the central
Government or must
relate to a matter
covered by the
industrial policy of the
Govt. of India.
b) Royalty and fees for technical
services received under
agreement entered –
Between 1-4-1976 to 31-5-
1997
Between 1-6-1997 to 31-5-
2005
On or after 1-6-2005
115AB Overseas LTCG from transfer of units or UTI or a 10% Indexation benefit will
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CA R Giridharan FCA 34
financial
organization
(offshore fund)
mutual fund specified under section
10(23D), which were purchased in
foreign currency.
not be available in
computing LTCG.
115AC Any non resident
Assessee**
a)interest on notified foreign currency
bonds of Indian/ public sector company
b) LTCG from transfer of such bonds or
global depository receipts (GDRs)
10% No deduction in
computing such
income under any
provision and no
indexation benefit in
computing LTCG.
115
ACA
Resident
employee
LTCG from transfer of foreign currency
GDRs of an Indian company engaged in
specified knowledge based industry or
service, issued under employees stock
option scheme (ESOPs)
10% Assessee must be the
employee of such
Indian company.
No indexation benefit
in computation of
LTCG.
115AD Notified foreign
institutional
investor
Income in respect of securities other
than units referred to in section 115AB
20% No deduction
allowable in
computing such
income under any
provision of the act
and no indexation
benefit in computing
LTCG
Capital gains on transfer of the
securities—STCG under section 111A
Other STCG
LTCG
115BBA Non resident
sportsman being
foreign citizen**
Income from –
-participation in a game/sport in India ;
- advertisement ;
- Contribution of articles relating to any
game or sport in India in newspapers,
magazines or journals.
10% No deduction
allowable in
computing such
incomes under any
provision of act
Winnings from lottery,
crossword puzzles etc
are taxable under
section 115BB @ 30%
and therefore, they do
not fall under this
section.
Non resident
sports
association **
Any amount guaranteed to be paid or
payable to such association or
institution for any game/ sport played in
India
10%
Notes –
1) **in cases falling under sections 115A, 115Ac and 115BBA, the assessee needn’t file return of
income if his income consists of specified incomes only and tax on such incomes has been
deducted at source.
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2) Additional provisions of section 115A: section 115A applies only to such royalty and fees for
technical income from royalty/ fees for technical services, deduction under chapter VI-A shall be
available from income from royalty/ fees for technical services taxable under this section.
Section 160
Representative assessee of non resident includes his agent.
Section 163: Agent of a non resident
Agent in relation to a non resident includes following persons in India –
a) Person employed by or on behalf of the non resident.
b) Person who has any business connection with the non resident
c) Person from or through whom the non resident is in receipt of nay income, whether directly
or indirectly,
d) Trustee of the non resident
e) Any person who has acquired a capital asset in India by means of a transfer, whether such
person is a resident or non resident.
Section 172: tax liability of shipping business
Non resident carrying on shipping business presumptive income @ 7.5% of amount payable.
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Transfer pricing
Objective with the increase in participation of the multinational groups there has been
increase in the cross border transactions. The existence of different tax rates in different
countries offers a potential incentive to multinational enterprises to manipulate their
transfer prices to recognize lower profit in countries with higher taxes and vice versa.
In order to monitor transfer prices for goods, facilities and services, transfer pricing
regulations were introduces in the form of sections 92 and 92A to 92F.
The basic intention underlying the transfer pricing regulations is to prevent shifting out of
profits by manipulating prices charged or paid in international transactions, thereby eroding
the country’s tax base.
Provisions relating to computation of income from international transactions – sec 92
1) Income to be computed as per arms length price
2) Section not to apply when arms length prices decreases income or increases loss.
Section 92A associated enterprises and deemed associated enterprises.
Associated enterprise means an enterprise which participates, directly or indirectly, in management or
control or capital of other enterprise. Further, if one or more persons participate, directly or indirectly in
the management or control or capital of two enterprises those two enterprises are associated
enterprises.
Deemed associated enterprises: two enterprises are deemed to be associated enterprises. If, at any
time during the PY, -
a) One holds, directly or indirectly shares carrying 26% or more of voting power in other
enterprise.
b) Any person holds, directly or indirectly shares carrying 26% or more voting power in both of
them.
c) A loan advanced by one to the other constitutes 51% or more of BV of total assets of other.
d) One enterprise guarantees 10% or more of the total borrowings of the other enterprise.
e) One appoints more than half of board of directors or one or more executive directors of the
other.
f) Any person appoints more than half board of directors or one or more executive directors of
both.
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g) Manufacture/ processing of goods or business carried on by one is fully dependent on use of
know how, patents, copyright, etc. owned by the other, or in respect of which other has
exclusive rights.
h) 90% or more of RM required by one are supplied by the other or by persons specified by other,
and prices and other conditions relating to the supply are influenced by the other enterprise.
i) Goods manufactured/ processed by one are sold to the other enterprise or to persons specified
by other, and the prices and other conditions relating thereto are influenced by such other
enterprise.
j) Where one enterprise is controlled by an individual/HUF, the other enterprise is also controlled
by such individual/ HUF or his relatives or jointly by such individual/HUF and such relative.
k) One enterprise is a firm/AOP/BOI and other enterprise holds 10% or more interest in such
firm/AOP/BOI.
l) There exists between the two enterprises, any relationship of mutual interest, as may be
prescribed.
Section 92B international transaction
It means a transaction entered into between two or more associated enterprise (at least one is a
non resident) for purchase/sale/ lease of tangible/ intangible property or provision of services or
lending/ borrowing money or any other transaction (including sharing agreements for common
costs) having bearing on income and assets.
Deemed associated transaction: If an associated enterprise and a third person determine the
terms of a transaction between third person and another associated enterprise, such
transaction shall be regarded as having being entered into between two associated enterprise.
Section 92C methods under which arm’s length price is determined
1) Arms length price (ALP) means a price applicable in a uncontrolled transaction i.e. a
transaction between non associated enterprises, in uncontrolled conditions.
2) Methods for computation of arms length price: arms length price is determined by the most
appropriate of the following methods, selected as per the mode prescribed by the board –
a) Comparable uncontrolled price method
b) Resale price method
c) Cost plus method
d) Transaction net margin method
e) Profit split method
f) Other prescribed method.
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3) When more than one price determined : by the most appropriate method, the arms length
price shall be taken to be the lower of the following –
a) The arithmetical mean of such prices, or,
b) A price varying up to 5% of such arithmetical mean.
Double taxation avoidance agreement - DTAA
Double taxation means taxation of same income of a person in more than one country i.e. both under
Indian income tax act, 1961 and income tax law of other country.
DTAA are agreements entered into by the government of India with the government of other countries.
Effect of DTAA
a) If no liability is imposed under the Income tax Act on a particular income, then no liability will
arise on that income.
b) If the tax liability is imposed by the act on a particular and there’s a difference between the
provision of the act and the agreement then the provision or the conditions of agreement which
is more beneficial to the assessee can be enforced.
c) Any term used but not defined in the Act or in the DTAA shall, unless the context otherwise
requires, and isn’t inconsistent with the provisions of the Act or the agreement, have the same
meaning assigned to it in the notification issued by the central government in the official gazette
in this behalf.
Two methods of granting relief under DTAA [bilateral relief]
Exemption method
Tax credit method
Conditions for claiming relief:
1. The income should have been taxed in both the contracting countries.
2. Proof of income having suffered double taxation has to be provided.
3. If there is no tax treaty with the country levying double tax; then relief can be granted
unilaterally u/s 91.
DTAA- Sec 90A
Between two specified associations, adopted for levy of tax. - Section 90A
Meaning
Specified association: notified institutions, associations are bodies functioning under any law for the
time being in force either in India or the specified territory outside India.
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Specified territory: Any area outside India notified for the purposes of this section.
Adoption of agreement specified association in India may enter into an agreement with any specified
association in the specified territory outside India. Through notification in the official gazette, the central
Government may make such provisions necessary for adopting and implementing such agreement.
Purpose of adoption
a) Granting of relief in respect of –
Income which have suffered tax under both Indian tax laws and those of specified territory outside
India, or;
Income tax chargeable under this act and under the corresponding law in force in that specified
territory outside India to promote mutual economic relations, trade and investment, or
b) Avoidance of double taxation of income under Indian law and those governing the specified
territory; or
c) Exchange of information for the prevention of evasion or avoidance of income tax chargeable in
both in India and specified territory , or investigation of cases of such evasion or avoidance, or
d) Recovery of income –tax – tax under laws of both the countries/ territories.
Section 91 unilateral relief
Conditions
a) The assessee must have been resident in India in the relevant PY.
b) The income must have accrued or arisen outside India during that PY.
c) The assessee must have paid the tax either by deduction or otherwise in respect of such income as
per the law of the foreign country.
d) There should be no reciprocal agreement of relief or avoidance from double taxation with the country