India Oct8 2012no4

OCTOBER 2012

India Tax Konnect

Editorial

The month of September has witnessed a number of key decisions taken by the Government of India (GOI). The government has launched a series of policy reforms to revive confidence in the Indian economy. The reforms include the opening up of the multi-brand retail, broadcast and aviation sectors to foreign investment. Besides, other measures such as the diesel price increase, disinvestment in four public sector undertakings and a cap on subsidies on Liquid Petroleum Gas (LPG) to curb the fiscal deficit have been announced.

The Central Board of Direct Taxes (CBDT) has issued a notification with effect from 1 April 2013 which prescribes that certain details should be included in the Tax Residency Certificate (TRC) to be obtained by non-residents to claim tax treaty benefit. Further, the CBDT also notifies the Form 10FA and Form 10FB for resident of India to obtain TRC from the Assessing Officer (AO).

The CBDT vide Notification No.36 of 2012, dated 30 August 2012, notifies the Advance Pricing Agreement (APA) program which is certainly seen as one of the more positive amendments introduced by the Finance Act 2012, which should assist taxpayers to obtain certainty on their crucial Transfer Pricing (TP) matters, if they so desire. Internationally, as is widely known, the APA program is considered to be an excellent controversy management tool and many of the countries which have specific TP regulations, such as the USA, UK, Japan, Australia etc, also provide an APA option.

On the controversial issue of the availability of depreciation on goodwill, the Supreme Court of India, in the case of Smifs Securities Ltd. held that goodwill in the form of difference between the amount paid and the cost of the net asset acquired from the amalgamating company is an asset and therefore eligible for depreciation under the Income-tax Act, 1961 (the Act).

On the international tax front, the Authority for Advance Rulings (AAR) in the case of Schellenberg Wittmer held that the legal fees received by the Swiss partnership firm in connection with the adjudication of a dispute arising in relation to a project in India between two Indian parties are taxable under the Act. Since the firm is not liable to tax in Switzerland, it is not eligible to claim the benefits of the India-Switzerland tax treaty. Further, the partners do not receive the legal fees from an Indian entity hence they cannot claim the tax treaty benefits.

On the indirect tax front, the Central Board of Excise and Customs (CBEC) has made e-payment of duty mandatory for importers paying customs duty of one lakh rupees or more per Bill of Entry and for importers registered under the Accredited Clients Programme, with effect from 17 September 2012.

We at KPMG would like to keep you informed of the developments on the tax and regulatory front and its implications on the way you do business in India. We would be delighted to receive your suggestions on ways to make this Konnect more relevant.

Tax & Regulatory

Contents

International tax 2

Corporate Tax 4

Mergers and acquisitions 6

Transfer pricing 7

Regulatory development 8

Indirect tax 10

Personal taxation 15

not carry out its activities in any other country. The Applicant was appointed by an Indian company for representation in an adjudication proceeding in Switzerland.

The question posed for consideration before the AAR was whether the firm could be treated as a resident of Switzerland under the India-Switzerland tax treaty and whether the legal fee received by the partnership firm from the Indian company would be taxable in India.

The AAR, based on the facts and arguments of the case, observed and held as follows:

• The definition of the term ‘person’ provided in the tax treaty includes, inter alia, a company, body of persons, or any other entity ‘which is taxable under the laws in force in either contracting state’. The firm is not a ‘person’ under the tax treaty for the following reasons:

- There is no definition of the term ‘person’ in Swiss Law corresponding to section 2(31) of the Act which confers the status of a ‘person’ on a partnership firm;

- The partnership firm is not a taxable entity in Switzerland.

• Although the partners of the firm are residents of Switzerland, they cannot invoke the tax treaty to determine the taxability of the legal fees received by the firm since they have not received the legal fees from the Indian company;

• The source of income for rendering professional services to the Indian company is in India. The fact that the major part of the services are rendered outside India in respect of a dispute arising in India cannot alter the source of income;

• Accordingly, the firm will not be treated as a resident under the tax treaty and will not be entitled to treaty benefits. Therefore, the legal fees received by the firm will be taxable in India.

Schellenberg Wittmer along with its partners (AAR No. 1029 of 2010 dated 27 August 2012)

International tax

DecisionsPayments made towards acquisition of cable capacity taxable as ‘royalty’

The Applicant is an Indian company engaged in the business of providing telecommunication services in India. The Applicant entered into an agreement with a Saudi Arabian Company (STC) for transfer, to the Applicant, the right to use the capacity in the EIG cable system (Europe India Gateway submarine cable linking Indian subcontinent and the United Kingdom) for a consideration of USD 20 million.

The applicant contended, inter-alia, that, as the amounts payable to STC represented payment made for acquiring a ‘capital asset’ which was entirely situated outside India, such payment could not be taxed in India both under the Act and under the India-Saudi Arabia tax treaty.

The issue for consideration before the AAR was whether the payment made by the Applicant to STC for acquisition of the cable capacity would be chargeable to tax in India.

In connection with the above, based on the facts and arguments of the case, the AAR observed and held as follows:

• No right of ownership, property in or title to the capacity, facilities or network infrastructure, equipment or software was conveyed to or vested in the Applicant;

• The transfer of capacity by STC to the Applicant amounted to ‘making available’ the right to use the capacity in the EIG cable system;

• In view of the clarificatory amendment in Section 9(1)(vi) of the Act, the payments made by the Applicant to STC for the acquisition of cable capacity were for a right to use a process and a right to use commercial or scientific equipment and would therefore be taxable in India as ‘royalty’.

Dishnet Wireless Limited [AAR No. 863 of 2010]

Legal fee received by Swiss law firm for adjudication proceedings outside India is taxable in India

The Applicant was a Switzerland based partnership firm (the firm) and its partners are tax residents of Switzerland. The firm is engaged in the practice of law in Switzerland and it does

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No capital gains on transfer of Indian shares if foreign companies are merged without consideration

The Applicant, a company incorporated in Switzerland, was a wholly owned subsidiary of another company incorporated in Switzerland (Company C). Pursuant to the proposed merger of the Applicant with Company C, all the assets and liabilities of the Applicant would be assumed by Company C, including its holding in a subsidiary in India (Indian company). On merger, no consideration would pass to the Applicant.

The question for consideration before the AAR, inter alia, was whether on merger, any capital gains under Section 45 of the Act would arise to the Applicant and whether such capital gains would be exempt under Section 47(via) of the Act.

In connection with the above, based on the facts and arguments of the case, the AAR, inter alia, observed and held as follows:

• The change of ownership of the shares of the Indian company from the Applicant to Company C would involve the transfer of shares and be within the inclusive definition of ‘transfer’ given under Section 2(47) of the Act;

• The transaction does not fulfill the condition specified under section 47(via) of the Act i.e. at least 25 percent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company. This is because the shareholders of the Applicant merging with Company C will not or cannot become shareholders of Company C, as Company C is the only shareholder of the Applicant;

• As the gain, if any, in the instant case is not determinable within the scope of Section 45 and Section 48 of the Act, no capital gains arises to the applicant as a result of the merger.

Credit Suisse (International) Holding AG (AAR No.956 of 2010)

Taxability of supply of equipment comprising hardware and software

The taxpayer, a tax resident of Finland, supplied GSM equipment comprising both hardware and software to Indian telecom operators under independent buyer-seller agreements. The installation activities were undertaken by the wholly owned subsidiary of the taxpayer, Nokia India Private Limited (NIPL) under independent contracts with the Indian telecom operators.

The issue for consideration before the Delhi High Court was whether the consideration received by the taxpayer for the supply of hardware and software would be chargeable to tax in India under the Act and the India-Finland tax treaty.

Based on the facts of the case, the Delhi High Court, inter alia, observed and held as follows:

Whether payments for supply of equipment are taxable

• In a transaction relating to the sale of goods, the relevant factor would be as to where the property in the goods passes.

• Even in the case of one composite contract, offshore supply is to be segregated from installation.

• Relying on the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd v. DIT [2007] 288 ITR 408 (SC), the High Court concluded that where the property in goods passed to the buyer outside India (i.e. on the high seas), the equipment was manufactured outside India, and the sale had taken place outside India, the income from the supply of equipment would not be taxable in the hands of the taxpayer in India.

Whether payments for software constitute royalty

• The language of the tax treaty differs from the language in the amended section 9(1)(vi) of the Act.

• The Bombay High Court in the case of CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Bom) has held that the amendments in the Act cannot be read into the treaty.

• In its earlier decision in the case of DIT v. Ericsson A.B. [2012] 343 ITR 370 (Delhi), which had a similar fact pattern as that of the taxpayer, it was held that a copyrighted article does not fall within the purview of ‘royalty’.

• Accordingly, the payment for software was held to be not taxable as ‘royalty’ in India.

DIT v. Nokia Networks OY (ITA 512 of 2007, ITA 1137 of 2006, ITA 1138 of 2006, ITA 503 of 2007, ITA 505 of 2007, ITA 506 of 2007, ITA 359 OF 2005, ITA 1324 of 2007 ITA 30 of 2008)

Payments made for installation services that are inextricably linked to sale of product not taxable

The taxpayer was an Indian company engaged in the business of engineering and general contracting. It entered into two separate contracts with a non-resident for the purchase, installation and commissioning of the SCADA system and application computer programs. The consideration for the installation was paid by the taxpayer to the non-resident without deducting taxes at source on the premise that such payments were excluded from the definition of ‘Fees for Technical Services’ (FTS) in Explanation 2 to Section 9(1)(vii) of the Act.

The AO disallowed the installation charges in the hands of the taxpayer on failure to deduct tax at source.

Corporate tax

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DecisionsGoodwill in the form of difference between the amount paid and the cost of the net asset acquired from the amalgamating company is an asset eligible for depreciation under the Act

Pursuant to a Scheme of Amalgamation of an Amalgamating Company with the taxpayer, duly sanctioned by the High Court, the assets and liabilities of the Amalgamating Company were transferred to and vested in the taxpayer. The excess consideration paid by the taxpayer over the value of the net assets acquired from the Amalgamating Company was considered as goodwill arising on amalgamation on account of the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. The taxpayer claimed depreciation on goodwill under Section 32 of the Act, treating it as an intangible asset. The AO disallowing the claim for depreciation contended that as no amount was actually paid on account of goodwill it is not an asset falling under Explanation 3(b) to Section 32(1) of the Act.

The Supreme Court did not dispute the factual finding of the Tribunal and the Commissioner of Income-tax (Appeals) [CIT(A)] that, as a part of the Scheme, assets and liabilities of the Transferor were transferred for a consideration and the difference between the cost of the net assets and the amount paid constituted goodwill. Explanation 3(b) to Section 32(1) of the Act states that the expression ‘asset’ shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of a similar nature. The Supreme Court held that the principle of ejusdem generis would strictly apply to the words ‘any other business or commercial rights of a similar nature’ of Explanation 3(b) to Section 32(1) of the Act. Accordingly, ‘goodwill’ would be an asset under Explanation 3(b) to Section 32(1) of the Act and depreciation on ‘goodwill’ would be allowable under Section 32 of the Act.

CIT v. Smifs Securities Ltd. [2012] 24 taxmann.com 222 [SC]

The Mumbai Tribunal, based on the facts of the case, observed and held as follows:

• The installation charges paid to the non-resident cannot be regarded as ‘consideration for any construction, assembly, mining or like project undertaken by the non-resident’ to fall within the exception to the definition of FTS as provided under Explanation 2 to section 9(1)(vii) of the Act;

• From the terms and conditions of the agreement between the taxpayer and the non-resident, it was evident that the installation and commissioning services were ancillary and subsidiary, as well as inextricably and essentially linked, to the supply/sale of the SCADA system. Accordingly, these services would not qualify as FTS by virtue of the exception provided in Article 12(5)(a) of the India-Canada tax treaty.

• Hence, the payment made to the non-resident was not taxable in India and could not be disallowed for non-deduction of tax at source.

DCIT v. Dodsal Pvt. Ltd. (ITA No.2624/Mum/2006)

Reimbursement of salary of seconded employees to foreign company is income in the hands of the foreign company

The AAR has held that the salary reimbursed by the applicant to the foreign parent company under the secondment agreement is income in the hands of the foreign parent company, in view of the fact that:

• The applicant does not become the employer of the seconded employee;

• What is paid by the applicant to the foreign parent company could not be construed as reimbursement of salary.

The AAR relied on its earlier ruling in the case of Centrica India Offshore Private Ltd [AAR No. 856 of 2010] in reaching this conclusion.

Target Corporation India Pvt. Ltd. [AAR No. 851 of 2009]

Notifications/Circulars/Press releasesIndia and Liberia sign an agreement for exchange of information with respect to taxes

India and Liberia signed an agreement for the exchange of information with respect to taxes on 3 October 2011. The Agreement will be effective in India from 30 March 2012. The Agreement, inter alia, provides for exchange of information relevant to the determination, assessment and collection of taxes covered, recovery and enforcement of tax claims, and investigation or prosecution of tax matters. The Agreement also provides that the competent authorities of both the States shall lend assistance to each other in the collection of tax claims.

Notification No.32/2012-FT&TR-II [F.No.503/02/2010-FT & TR-II]/SO 1877(E), dated 17 August 2012

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Supreme Court held that tax should not be withheld on the vendor’s discount since it is not commission or brokerage

The taxpayer, an association of stamp vendors, bought stamps from the State Government at prescribed discounts ranging from 0.5 percent to 4 percent. The tax department claimed that the stamp vendors were ‘agents’ of the State Government and that the discount was ‘commission or brokerage’, liable for tax deduction at source under Section 194H of the Act. The taxpayer urged that the transaction was for sale of stamps in bulk quantity and the discount was nothing but cash discount given to purchasing members.

The Supreme Court ruled in favour of the taxpayer by holding that the discounts in the range of 0.5 percent to 4 percent given to the stamp vendors were for purchasing the stamps in bulk quantity and the discount was in the nature of a cash discount. Accordingly, the transaction was regarded a sale. Consequently, Section 194H of the Act has no application to the transaction and tax is not liable to be deducted from the discount.

CIT v. Ahmedabad Stamp Vendors Association [2012] 25 taxmann.com 201 [SC]

Sale of pledged shares at loss to a group company which set-off capital gain arising from the transfer of other shares is not a ‘colourable transaction’

The taxpayer in Assessment Year (AY) 1993-94 sold certain shares of Rustom Spinners Ltd and derived long-term and short-term capital gain. The taxpayer had also sold certain equity shares of Rustom Mills and Industries Ltd and claimed long-term capital loss. The AO was of the view that the transfer of shares would be complete only when the share certificates along with duly executed transfer forms are delivered to the purchaser. However, in the present case, there was no valid transfer since the share certificates were in the possession of IDBI bank who had lien over such shares. Further, the AO noted that the purchaser company and the taxpayer were part of the same group of companies. Consequently, the full transaction was intended to create loss to the taxpayer so that its capital gains resulting from the sale of shares of Rustom Spinners Ltd could be set-off.

The Gujarat High Court observed that since the taxpayer had entered into the agreement, given Power of Attorney and received the full sale consideration from the purchaser company, the transfer of shares was complete by virtue of Section 2(47) of the Act. There is no provision in the Act which would prevent the taxpayer from selling loss making shares. Further, there is no restriction that such a sale cannot be effected with a group company. Simply because such shares were sold during the previous year when the taxpayer had also sold some shares at profit by itself would not mean that this is a case of ‘colourable device’ or that there is a case of tax avoidance. In the present case, the shares were pledged to IDBI Bank and therefore, it would not be possible for the taxpayer to deliver the original share certificates to its purchaser along with the on the legal relation between the taxpayer and IDBI and the purchaser’s right to have shares transferred in its name. However, this would not establish

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that the sale of shares was only a paper transaction and a device contrived by the taxpayer. Accordingly the High Court held that the transaction could not be treated as a duly signed transfer forms. This may have repercussions ‘colourable device’ created for tax avoidance.

CIT v. Biraj Investment Pvt. Ltd. [2012] 24 taxmann.com 273 [Guj]

Section 234D applies even to refunds granted prior to 1 June 2003

The taxpayer filed its return of income for AY 2002-03. Refund was granted to the taxpayer on 25 March 2003 after processing the return under Section 143(1) of the Act. After completion of a regular assessment under Section 143(3) of the Act on 10 March 2005, a demand for interest under Section 234D of the Act was made.

The Bombay High Court, ruling in favour of the Revenue, rejected the reliance placed by the taxpayer on the decision of of CIT v. Bajaj Hindustan Limited (IT Appeal No. 198 of 2009) and the Delhi High Court ruling in Jacabs Civil Incorporated [TS-111-HC-2010(DEL)]. The High Court observed that in those cases, the coordinate benches had no occasion to interpret Explanation 2 to Section 234D inserted by the Finance Act, 2012 and its impact on refunds granted prior to June 2003. The High Court held that Explanation 2 to Section 234D of the Act was a clarificatory statement which declared the law on a particular issue so as to overcome doubts, merely clarifying what the law always was, and hence Section 234D applies even to refunds granted prior to 1 June 2003.

CIT v. Indian Oil Corporation Ltd. [ITA No. 2012 of 2011/Bom HC/dated 12 September 2012]

Notifications/Circulars/Press releasesCBDT sets up committee to form Departmental View on Contentious Legal Issues

On observing that over the years due to lack of desired clarity on a contentious legal issue, amongst the officers of the department, inconsistent approach on the same issue was being taken giving rise to litigation. In an attempt to provide clarity, promote a consistent approach, and thereby reduce litigation, the CBDT has decided to set up an institutional mechanism to form a ‘Departmental View’ on contentious legal issues.

This mechanism shall consist of a ‘Central Technical Committee (CTC) on Departmental View’ in the CBDT and ‘Regional Technical Committee (RTC)’ under each Chief Commissioner of Income-tax. The CTC shall form the departmental view on the issues referred to it by the RTC and after approval by the CBDT, the ‘Departmental View’ will be issued as a circular under Section 119 of the Act.

Office memorandum dated 28 August 2012 bearing F. No. 279/M-6112012-ITJ

SEBI Takeover Regulation

Arch Pharmalabs Ltd (Arch) holds 63.6 percent shares in Avon Organics Ltd a listed company (Avon).

The promoter group holds 34.27 percent in the total share capital of Arch and are also in control of Arch and thus in a position to influence any decision with respect to voting rights of Arch in Avon. Arch proposed to issue Fully Convertible Debentures, and, on conversion thereof, the promoter shareholding in Arch would raise from 34.27 percent to 41.49 percent; however, there would be no change with regard to the voting rights that can be exercised in Avon.

The issue raised is whether the proposed transaction would trigger open offer requirements under Regulation 3(1) and regulation 5(1) (dealing with indirect acquisition) of the Takeover Regulation.

The Securities Exchange Board of India (SEBI) held that the increase in the promoters shareholding in Arch would not result in a change of control in Arch, and therefore would not trigger open offer under Regulations 3(1) and 5(1) of the Takeover Regulation.

SEBI order informal guidance note in the case of Arch Pharmalabs Ltd. dated August 28, 2012

Mergers and acquisitions

DecisionsScheme of Arrangement

The Company Judge of the Gujarat High Court rejected the Scheme of Arrangement (Scheme) on the ground that the sole object of the Scheme was to avoid tax.

On an appeal, the division bench of the Gujarat High Court, while approving the Scheme, held that:

• The Scheme is supported by adequate commercial rationale including recommendations of the working group on the telecom sector.

• Transfer of an undertaking by way of gift for commercial reasons is tantamount to reconstruction of business and, hence, is an ‘arrangement’ covered under Section 391 of the Companies Act.

• A scheme which is supported by adequate commercial rationale may result in the benefit of saving income tax or other taxes, which itself cannot be a ground for coming to the conclusion that the sole object of framing the Scheme is to defraud the tax authorities.

• While examining the Scheme each and every objection of a third party cannot be considered by carrying out microscopic examination.

• The Court accepted the locus of the tax department to raise objections to the Scheme in its capacity as a creditor of the Company.

Vodafone Essar Gujarat Limited v. Dept. IT. (O.J.APPEAL/81/2010)

Buy-back of shares

The AAR held that the proposed buy-back of shares by an Indian company from its shareholder, a Mauritian company, is not a tax avoidance scheme and it is not liable to capital gains tax in India under the India-Mauritius tax treaty in view of Article 13(4) of the tax treaty. Furthermore, the AAR held that the capital gain transaction is not exempt under Section 47(iv) of the Act since the entire share capital is not held by the applicant or its nominees. The proposed buy-back is an international transaction between related parties and income arises out of it, therefore the TP provisions under Sections 92 to 92F of the Act are attracted to the present case.

Armstrong World Industries Mauritius Multiconsult Limited (A.A.R. No. 1044 of 2011)

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Transfer pricing

DecisionsRule 10 of the Income-tax Rules, 1962 providing for the global formulary apportionment approach can be applied only where income accruing or arising to any non-resident from any business connection cannot be definitely ascertained

The taxpayer, a company incorporated in South Korea established a Project Office (PO)/Permanent Establishment (PE) in India for providing liaisoning, co-ordination and administrative support services to its Head Office. In the Financial Years (FYs) 2001-02, 2002-03 and 2003-04, the taxpayer showed the income of the PE at cost plus 9 percent and prepared and submitted TP documentation. For FY 2001-02 and FY 2002-03 the AO determined the income of the taxpayer by applying Rule 10 of the Rules and adopted a global formulary apportionment approach in order to determine such income attributable to the PE. In FY 2003-04 a reference was made to the Transfer Pricing Officer (TPO) who accepted the international transactions of the taxpayer to be at arm’s length based on the TP documentation furnished by the taxpayer.

The Tribunal ruled that the income of the taxpayer had to be determined either on the basis of a tax treaty or on the basis of the Income Tax Act, 1961, whichever is more favourable to the taxpayer. Relying on the Supreme Court ruling in the case of CIT v. Hyundai Heavy Industries [2007] 291 ITR 482 (SC), the Tribunal observed that the only way to ascertain the profit arising in India is by treating the Indian PE as a separate profit centre in relation to the foreign enterprises. The AO applied Rule 10 of the Rules without providing any cogent reasons for rejecting the TP documentation prepared by the taxpayer. Rule 10 of the Rules can be applied in cases where income accruing or arising to any non-resident from any business connection cannot be definitely ascertained. The AO has nowhere pointed out that income cannot be definitely ascertained on the basis of the material placed on record by the taxpayer. The tax treaty provides that profits attributable to PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. Tribunal accepted the income computed at cost plus 9 percent as declared by the taxpayer.

Hyundai Rotem Company [ITA Nos. 3300 to 3302/Del/2009]

Transfer of shares in Indian company by a Mauritius holding company to a Singapore company as a part of internal re-structuring is not liable to capital gains tax under the India-Mauritius tax treaty. Further, TP provisions are applicable to the facts of the present case even though share transfers are not taxable under the tax treaty

The Applicant, a company based in Mauritius, had invested in the equity share capital of GlaxoSmithKline Pharmaceuticals Limited (GSKPL). GSKPL is a company incorporated and registered in India and is a part of the international GlaxoSmithKline Group (GSK), which is headquartered in the UK. The Applicant sought to transfer the equity shares of GSKPL held by it to another GSK group company in Singapore as a part of internal re-structuring. The transfer of shares was proposed off the market, and not through a recognised stock exchange, without attracting securities transaction tax. Accordingly, the Applicant had sought a ruling from the AAR on whether the transfer of such shares was taxable in India as capital gains, and also sought clarity on the applicability of the TP provisions to the transfer of shares.

The AAR held that the transfer of shares would not be taxable in India in view of Article 13(4) of the India- Mauritius tax treaty. Section 92 of the Act is a machinery provision and does not indicate that the expression ‘income’ has to be given a restricted meaning. The AAR held that as per Section 92, TP provisions are applicable to ‘any income arising from an international transaction” and that the word “income” has wide connotations. The definition under the Act does not restrict its meaning. The tax treaty also does not define the expression ‘income’. The Applicability of Section 92 of the Act does not depend on the chargeability under the Act. The AAR held that in the present case, the capital gains are taxable under the Act. However, in view of the benefit of Article 13(4) of the tax treaty and the decision in Azadi Bachao Andolan [2003] 263 ITR 706 (SC), it was not taxable even if there was no double taxation. Therefore, the provisions of Section 92 to 92F of the Act are applicable.

Castleton Investment Limited (AAR No. 999 of 2010, dated 14 August 2012)

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Notifications/Circulars/Press releasesAPA Rules notified in India

The Finance Act 2012 introduced the APA Program to be effective from 1 July 2012. The APA provisions contained in the Act authorised the CBDT to prescribe a scheme specifying the manner, form, procedure and any other general matters in respect to APA. The detailed rules have now been introduced vide Notification No. 36 of 2012 dated 30 August 2012. Some of the salient features of the APA Rules are:

• Any person who has undertaken or is contemplating to undertake an international transaction shall be eligible to enter into an APA.

• Unilateral, bilateral and multilateral APAs may be entered into. For Unilateral APAs, applications to be filed with the Director General of Income Tax (International Tax) (DGIT), and for bilateral and multilateral APAs, applications to be filed before the Competent Authority.

• The most appropriate method would be any of the six methods provided in the Act.

• APA team to include experts in economics, statistics, law or any other field.

• APA shall not be binding on the Board or the taxpayer if there is a change in any of the critical assumptions - “Critical assumptions” means the factors and assumptions that are so critical and significant that neither party entering into an agreement will continue to be bound by the agreement, if any of the factors or assumptions is changed.

• Pre-filing Consultation (also anonymous) is available.

• Application for an APA shall be made in Form No. 3CED to the DGIT (or the Competent Authority in the case of bilateral or multilateral APAs), along with the requisite fees. The applicants need to furnish exhaustive and detailed information. The fees payable at the time of making the application is as under:

- Transaction value not exceeding INR 1000 million – Fee amount is INR 1 million

- Transaction value not exceeding INR 2000 million – Fee amount is INR 1.5 million

- Transaction value exceeding INR 2000 million – Fee amount is INR 2 million

• Taxpayer, who has entered into an APA would be required to file an annual compliance report to the DGIT for each year covered in the APA. The TPO shall carry out a compliance audit for each year covered in the agreement.

• Provisions have also been introduced for revision, cancellation and renewal.

Source: www.pib.nic.in

Regulatory developments

Foreign Direct Investment in Retail, Broadcasting and Civil Aviation

GOI launched a package of landmark reforms on 14 September 2012 allowing Foreign Direct Investment (FDI) in Multi-Brand Retail (MBT), aviation, power exchange, and broadcasting sectors.

Following the pronouncement of these much awaited big-ticket reforms, the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce has issued a series of separate Press Notes dated September 20, 2012 formally notifying these proposals. The liberalisations according to the various Press Notes are summarised below:

A. Multi-Brand Retail Trading

In November, 2011 the GoI approved decision of permitting upto 51 percent FDI in MBT; however this decision was rolled-back for evolving a broader consensus on the issue. After consulting various stakeholders, the GOI in its reviewed policy [Press Note No. 5 (2012 series)] has excluded retail trading from the list of prohibited sectors and decided to permit FDI in MBT, subject to the following conditions:

• FDI up to 51 percent is permitted under the Government approval route

• Minimum investment of USD 100 million to be infused by the foreign investor

• At least 50 percent of the foreign investment (FI) to be invested in back-end infrastructure within three years of induction of FDI

• Minimum sourcing of 30 percent of manufactured /processed products from Small scale industries

• GoI to have first right of procurement of agricultural products

• Self-certification by the Company on compliance with the above conditions, which may be verified by the GOI

• The decision to permit setting-up of retail outlets has been left to the State Governments. DIPP has stated that this is an enabling policy only and the autonomy for the implementation of the policy rests with the respective States and Union Territories.

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D. Civil Aviation

Keeping in mind the capital needs of private airlines in the Country, presently ailing under mounting operational losses, DIPP, in Press Note No. 6 (2012 series), has permitted foreign airlines to acquire up to 49 percent under the approval route in Scheduled and Non-scheduled air transport services subject to the following conditions:

• Compliance with relevant regulations of the SEBI, as well as other applicable rules and regulations.

• The 49 per cent limit will subsume FDI and Foreign Institutional Investors (FIIs) investment.

Activity Existing FI Cap Revised FI Cap

Teleports (setting up up-linking HUBs); Direct to Home; Cable Network (Multi-System-Operators operating at National or State or District level and undertaking upgradation of networks towards digitalisation and addressability)

49 percent under approval route

• Upto 49 percent under automatic route;

• Beyond 49 percent and up to 74 percent under Government approval route

Mobile TV No specific policy

• A Scheduled Operator’s Permit can only be granted to a Company:

- that is registered and maintains its principal place of business in India,

- the Chairman and at least two-thirds of the Directors are Indian citizens,

- the substantial ownership and effective control is vested in Indian nationals.

• All foreign nationals associated with Indian Scheduled and Non-Scheduled Air transport services should be cleared from a security view point before deployment.

• All imported technical equipment requires clearance from the relevant authority in the Ministry of Civil Aviation.

These relaxations in the extant FDI policy are not applicable to Air India.

E. Power Trading Exchanges

Press Note No. 8 (2012 Series) issued by DIPP also permits FDI up to 49 percent (FDI limit of 26 percent & FII limit of 23 percent) in Power Trading Exchanges (PTE), subject to certain conditions.

Source: www.pib.nic.in

Additional reporting requirements for Liaison Offices (LO)/Brach Offices (BO)/POs

• The Reserve Bank of India (RBI), vide Circular No. 35 dated September 25, 2012, prescribed the additional reporting requirements for Liaison Offices (LO)/Brach Offices (BO)/POs operating in India. The key inclusions are as follows:

- List of personnel employed, including foreigners in India office;

- List of foreigners other than employees who visited India offices in connection with the activities of the Company;

- Whether all foreign nationals employed at the LO/BO/PO are on E Visas. If not, indicate details of such foreign nationals.

- Whether the foreign nationals on E visas have reported to the mandatory authorities i.e. Police Station etc. If not, the name of such nationals / nationality, along with the relevant details and reasons for not complying with the requirement

- Projects/Contracts/Collaborations worked upon or initiated during the year.

- List of equipment imported for business activities in India.

• Time lines

- On setting up a LO/BO/PO – To be submitted within five working days of LO/BO/PO becoming functional to the DGP of the state concerned in which LO/BO/PO is established;

- Existing LO/BO/PO – on annual basis along with a copy of Annual Activity Certificate/ Annual Report to the DGP of state and with AD bank.

Source: www.rbi.org.in

B. Single Brand Retail Trading

The GoI had earlier permitted up to 100 percent FDI in Single Brand Retail Trading (SBT) under the Government approval route, subject to satisfaction of prescribed conditions. In recent Press Note No. 4 (2012 Series), DIPP has eased out the two restrictive conditions of ownership of brand and 30 percent mandatory local sourcing which had been a cause of concern to foreign investors. The amended policy notified by the DIPP is as follows:Products to be sold should be of a ‘Single Brand’ only;

• Products should be sold under the same brand internationally;

• SBT would only cover products which are branded during manufacturing;

• Only one non-resident entity, whether the owner of the brand or otherwise, shall be permitted to undertake SBT in India;

• For proposals involving FDI beyond 51 percent, the sourcing of 30 percent of the value of the goods purchased will be done from India, preferably from Micro, Small and Medium enterprises, Indian villages, cottage industries, artisans and craftsmen.

The above Press Notes further clarify that retail trading, in any form, by means of e-commerce, would not be permissible for companies with FDI engaged in the activity of MBT or SBT.

C. Broadcasting Sector

The GoI has raised the existing FI limits for various key activities in this sector and also rationalised the methodologies for FI. Key changes announced in Press Note No. 7 (2012 Series) are tabulated below:

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Indirect tax

Central Excise - DecisionGoods sold consistently at a price below the cost of production cannot be accepted as assessable value

The taxpayer, a manufacturer of motor cars, sold cars consistently at a price lower than its cost of manufacture to penetrate the market. The central excise authorities rejected the said valuation and insisted the taxpayer to compute the assessable value by including the cost of production, selling expenses and the profit margin, on the ground that the cars were not ‘ordinarily sold’ in the course of wholesale trade as the cost of production was much more than their wholesale price.

The taxpayer contended that, since no additional consideration is received over and above the assessable value declared and the dealings with their buyers were at arm’s length, the price declared should be accepted as the assessable value. The Apex Court held that, as per Section 4, ‘normal price’ is the price at which the goods are ‘ordinarily sold’. Admittedly taxpayer had been selling cars at a loss continuously for five years, and therefore, the transactions of the taxpayer could not fit into description of the expression ‘ordinarily sold’. The main reason for the taxpayer to sell their cars at a lower price than the manufacturing cost and profit was to penetrate the market and this will constitute extra commercial consideration and not the sole consideration. Hence, the price charged cannot be considered as the ‘normal price’ under Section 4, and accordingly one has to resort to the valuation rules for the purpose of determining the assessable value. The Valuation Rules need not be applied sequentially, as there is no provision in the said Rules to that extent. Therefore in the facts and circumstances of the present case, assessing authorities may determine the value according to their best judgment and the value determined by the authorities on the basis of ‘cost of manufacture’ is reasonable.

CCE v. Fiat India Private Limited & Others [2012-TIOL-58-SC-CX]

Each and every kind of packing/ labeling may not amount to ‘manufacture’ as defined under Section 2(f) of the Central Excise Act, 1944

The taxpayer provides an online platform to facilitate the sale of goods by various merchants. The merchants will list and market their products on the website of the taxpayer. The taxpayer would also provide logistical services (storage, packing and shipping) in relation to the goods sold by the merchants. All the activities undertaken by the taxpayer are intended to protect the merchant’s goods, facilitate inventory management and the logistics of storage, retrieval, shipment and transportation of goods. The transaction of sale and purchase is only between the merchant and their customers and the taxpayer only provides the website and logistics services. None of the activities performed by the taxpayer alter the primary packing or the original labeling affixed by the merchant under applicable regulations and also no change is made in the MRP/RSP. In the above factual background, the taxpayer had sought an Advance Ruling as to whether the proposed activities would constitute “manufacture” under Central Excise Act 1944 (Central Excise Act).

The AAR has held that, each and every case of fixing a label or a sticker cannot come within the purview definition of ‘manufacture’ under Section 2 (f) of Central Excise Act. Value addition is a relevant consideration. The operations of the applicant may introduce greater efficiencies by improved logistics thereby reducing costs and permitting more competitive pricing. There is no value addition happening in the present case, where admittedly the position is that the original labels including the declaration of MRP/RSP is not being altered by the taxpayer. The term “label” within the meaning of these provisions has to be one that conveys information relating to the product and its producer or supplier to the consumer. Stickers that are affixed to goods for the purposes of inventory management, and which convey no information about the product to the consumer cannot come within its scope.

Amazon Seller Services Private Limited [2012-TIOL-04-ARA-CX] [AAR]

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Expenses incurred by dealers would not form part of the assessable value of goods

The taxpayer, a manufacturer of cars, was paying excise duty on the price charged to the dealers. As per the dealership agreement, dealers could not sell the car for an amount more than the one which is specified by the taxpayer. As per the said agreement, the dealer is required to carry out pre-delivery inspection and provider free after sales services and the expenses to render the said services are to be incurred by the dealer without reference to the taxpayer.

The central excise authorities have contended that, the cost of pre-delivery inspection and after sales services provided by the dealers is required to be included in the assessable value of the cars, on the ground that, the expression “transaction value” does not merely include the amount paid to the taxpayer but also includes any amount that a buyer is liable to pay on behalf of the taxpayer to the dealer. It was further alleged that, the warranty is given by the taxpayer to the ultimate customer and if these services are not carried out, the warranty cannot be availed of by the customer; and also dealers provide these services on behalf of the taxpayer and accordingly the cost incurred towards the said services is required to be included in the assessable value.

The High Court has held that, if a dealer incurs expenses towards the pre-delivery inspection and free after sales services without reference to the manufacturer, then, the said expenses incurred by the dealer cannot form a part and parcel of the assessable value of cars.

Tata Motors Limited v. UOI & Others [2012-TIOL-721-HC-MUM-CX]

Credit cannot be denied if goods are received into an unregistered factory before transferring it to the registered factory, as it is just a procedural lapse

The taxpayer engaged in the manufacture of plywood and imported the raw materials namely, logs and timbers and stored the same at their log-yard, located about 12 Kms away from the factory. At this log-yard, the imported wooden logs and timbers were immersed in water and thereafter cut into the required sizes so as to make it suitable for further processing in the factory premises. However, the Cenvat Credit is availed before the said raw materials were transferred to the factory.

The central excise authorities demanded the reversal of Credit availed on the logs and timbers on the ground that the credit had been availed before receipt of the said inputs in the factory. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that, as part of the processing is done at the log yard itself, even the log yard is required to be considered as ‘factory’ as defined under Section 2 (e) of the Central Excise Act, 1944 and accordingly the credit cannot be denied just for the reason of non-registration of log yard. Accordingly the CESTAT remanded the matter back to the Adjudicating Authorities for considering the same afresh in view of the definition of ‘factory’ as aforesaid.

Greenply Industries Limited & Others v. CCE [2012-TIOL-1082-CESTAT-KOL]

When goods are exempted absolutely, the taxpayer has no option to pay duty by availing the CENVAT Credit benefit

As per Notification No. 6/2006-CE dated 01 March 2006, parts of tractors are fully exempted from payment of excise duty when they are captively used in the factory of production for the manufacture of tractors. However, the taxpayer had been paying duty on the parts even though they were captively consumed by claiming the benefit of CENVAT Credit on the inputs used for the production of such parts. In this regard, the central excise authorities have demanded the reversal of the credit availed, on the ground that, parts of tractors are unconditionally exempted under Notification No. 6/2006-C.E and as per Section 5A (1A) of the Central Excise Act, in case the goods are absolutely exempted, the taxpayer has no option to pay duty on such goods. In this regard, the taxpayer has contended that, parts are not absolutely exempted, since the exemption is subject to the condition that parts shall be captively consumed within the factory premises.

The CESTAT held that, the parts of tractors are absolutely exempted from the payment of duty of excise and therefore, the taxpayer is not entitled to pay any duty on such parts. The contention of the taxpayer that exemption granted to parts of tractors is subject to the condition that the same are captively consumed in the manufacture of tractors is misconceived and the same is to be rejected.

Mahindra & Mahindra Limited v. CCE [2012-TIOL-1188-CESTAT-MUM]

Credit cannot be claimed in the case the supplier has not paid duties to the Government

The taxpayer availed CENVAT Credit on goods purchased from a registered vendor. The subsequent investigations carried out by the central excise authorities revealed that the said vendor had not paid any duties to the Government and accordingly the central excise authorities demanded the taxpayer to reverse the credit availed. The taxpayer contended that, they had taken the precaution to verify that the supplier is registered under central excise provisions and accordingly credit availed cannot be denied at their end.

The CESTAT has held that, the CENVAT Credit scheme cannot allow credit out of public revenue, when the input duty has not been paid initially into the public revenue. Accordingly, the taxpayer cannot be given duty credit if the supplier from whom they have purchased the goods has not paid the duty to the Central Excise Department in the first place, as there are other legal recourses available to the taxpayer to obtain compensation from the supplier.

Ellen Industries v. CCE [2012-TIOL-1115-CESTAT-MAD]

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the goods, then consequently SAD is also not required to be paid and as a result the SAD paid is required to be refunded.

Comm. of Customs v. Katyal Metal Agencies [2012-TIOL-1053-CESTAT-KOL]

Notifications/Circulars/Press releasesE-payment of customs duties made mandatory

The CBEC has made the e-payment of duty mandatory for importers paying customs duty of Rupees one lakh or more per Bill of Entry and for importers registered under the Accredited Clients Programme, with effect from 17 September 2012.

Circular No. 24/2012-Cus dated 05 September 2012

Service tax - DecisionsCredit eligibility of input service used for setting up a new unit of the Company

In the instant case, the issue was whether a manufacturing unit (‘Unit I’) could claim Cenvat credit of Service tax paid on input services used for setting up of another unit (‘Unit II’) of the Company, both having separate Service tax registrations. The department challenged the eligibility of credit on the ground that in absence of the respondent being registered as an Input Service Distributor (ISD), the credit should have been taken by Unit II only and not by Unit I.

The Tribunal, in this regard, held that while Unit II (being an independent registered manufacturer) can claim the credit, Unit I cannot claim credit (pertaining to expenses incurred in relation to setting-up Unit II), otherwise than on the strength of an invoice issued as a registered ISD by the Company.

CCE v. Nelcast Ltd [2012-TIOL-1054-CESTAT-BANG]

Inclusion of cost of material supplied for the purposes of levy of Service tax

The revenue contested the valuation method adopted by the appellant of paying Service tax only on the labour charges recovered for retreading of tyres on a job work basis (under the service category of ‘Management, Maintenance or Repair Service’) and not on the cost of material supplied (on which VAT was paid treating the same as a ‘works contract’).

The Chennai Tribunal denied the benefit of deduction of cost of materials consumed observing the following:

• Material claimed to have been sold (such as tread rubber, patches, bonding, gum etc.) was in fact consumed in the rendering of tyre retreading services

Customs - DecisionsFor claiming the benefit under Project Imports, the entire consignment is required to be imported under Project Imports

The substantial goods required for the setting up of the Mega Power Project were imported by the taxpayer on payment of duty, by classifying the same under their respective tariff headings. However, only with respect to the import of few remaining consignments, the taxpayer has claimed the benefit of Notification No. 21/2002-Cus read with Project Import Regulations, 1986, by classifying the same under Chapter 9801, as Project Imports.

The Customs Authorities rejected the registration sought by the taxpayer under CTH sub-heading 9801 and Project Import Regulations, 1986, on the ground that, considerable items/ goods required for the said project had already been imported and cleared on payment of duty on merits without registering under Project Import Regulations, 1986.

The CESTAT held that it is imperative that, for classification under Heading 9801, as Project Imports, the bundle of items/ goods must be complete so as to be considered to be “required for the setting up of a power plant or for the substantial expansion of an existing power plant”. In the present case, substantial part of the material requirements for the Power Project imported are cleared on payment of duty at merit rates. The benefit of Project Imports is claimed only with respect to some items of machinery and these items alone cannot, by any stretch of imagination, constitute the whole bundle of goods/items of “required for the setting up of a power plant or the substantial expansion of an existing power plant”.

Samalkot Power Limited & Others v. Comm. of Customs [2012-TIOL-1059-CESTAT-BANG]

If VAT is exempted on the sale of goods, SAD refund claim cannot be rejected

The taxpayer imported the goods on payment of Special Additional Duty of Customs (SAD) and subsequently claimed the same as refund under Notification No. 102/2007-Cus dated 14 September 2007. The said Notification grants refund of SCD, in case at the time of sale of such goods, the importer pays the appropriate sales tax or value added tax (VAT). The customs authorities denied the refund on the ground that the goods are exempt from the payment of sales tax/ VAT and accordingly no sales tax/ VAT is paid at the time of sale of such goods.

The CESTAT has held that, what is abated cannot be taken away indirectly. The SAD is levied to counter-balance the effect of sales tax/ VAT and if sales tax/ VAT itself is not payable on

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• Deduction of material cost from the value of services (i.e. the benefit of Notification No. 12/2003-ST, dated 10 June 2003) would not be available since, the invoices raised did not substantiate the amount attributable to the value of goods supplied

• Since the understanding with the customers was not to supply both material and services, the contract cannot be treated as a ‘works contract’ and hence the contract value would not be apportioned towards material supplied

Safety Retreading Company (P) Ltd v. CCE [2012-26-STR 225-Tri.-Chennai]

Service tax liability on installation charges included under consolidated sales consideration

In this case, the appellant manufactured solar water heater system (which was not liable to Excise duty) and installed the same at the customer’s site. The appellant alleged that since they have charged a consolidated sale consideration from the customers (without bifurcating charges towards the activity of installation), Service tax should not be levied.

The Mumbai Tribunal held that although the installation charges are not recovered separately, the activity of installation of solar system falls under the service category of ‘Erection, Installation and Commissioning Services’ on which Service tax should be payable.

Suryatech Solar Systems v. CST [2012 -27-STR-279-Tri.-Mumbai]

Notifications/Circulars/Press ReleasesApplicability of Service tax on vocational education/ training courses

The Tax Research Unit (TRU), vide this Circular, has clarified that Service tax would not be applicable on vocational education/ training/ skill development courses (VEC) offered by the Government (Central or State) or any local authority.

Further, the Circular clarified that the applicability of Service tax on VEC offered by an institution, other than of Government or local authority, would need to be determined as per the relevant provisions of the Service tax law.

Circular No. 164/15/2012-ST, dated 28 August 2012

VAT - Notifications/Circulars/Press ReleasesAndhra Pradesh

Circular has been issued whereby Form C can be issued and used by the dealer only when goods are purchased for specific purpose indicated in Section 8(3) Act read with

Section 8(1) of Central Sales Tax Act, 1956. Mere entry of goods in the Registration Certificate will not entitle the dealer to get ‘Form C’ benefit. It also states misuse of Form C will lead to penal action.

Circular No. CC No. 24 CCT’s Ref. No.A II(2)/292/2012, dated 6 September 2012

Himachal Pradesh

With effect from 6 September 2012, a notification is issued prescribing a new Form ‘ND’ for claiming exemption on interstate sales made to Defence forces/Central Government/Central Public Undertakings. Such Form would be valid subject to being signed by authorised officer / authority.

Notification no. 7/2012 dated 6 September 2012

Punjab

A new rule is inserted whereby every taxable person shall be required to pay annual processing fee of Rs. 800 in October every year and proof of payment shall be attached along with the quarterly return.

Notification No. GS.R.45/P.A.8/2005/S.70/Amd.(44)/2012 dated 5 September 2012

Goods sold to Canteen Stores Department, subject to furnishing of a certificate signed and stamped by officer authorized to make purchase certifying that the goods purchased are meant for sale to serving military personal and ex-serviceman directly or through unit run Canteens, will be exempt from tax. Earlier such sale was taxable at 5 percent.

Notification No. S.O.71/P.A.8/2005/S.8/ 2012 Dated 5th September, 2012 and Notification No. S.O.73 /P.A.8/ 2005/S.8/ 2012 dated 5 September 2012

Sikkim

The due date for filing VAT & CST return for the first quarter of FY 2012-13 has been further extended till October 31, 2012 for allowing dealers in adopting the on-line system of tax administration.

Corrigendum Ref No. GOS/CTD/2005-06/12-A1(14)111 dated 11 September 2012

Rajasthan

A notification has been issued whereby the transfer of right to use goods for display of advertisement is exempted with effect from 1 April 2006.

Notification F.12 (48) FD/ Tax/ 2012 -54 dated 21 August 2012

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Tamil Nadu

New Section 63-A is inserted which provides that every registered dealer whose total turnover including zero-rate sale and sale in the course of inter-State trade or commerce in a year, exceeds 1 crore rupees other than specified exceptions are required to get their accounts audited by Chartered accountant or Cost Accountant and submit the report in prescribed form.

Further as per new rule 16-A, wherein Audit report is to be furnished in Form-WW within 7 months from the end of the year.

Notification No. G.O, Ms, No, 118/119, dated 30 August 2012

Uttar Pradesh

With effect from 8 September 2012 the additional tax on tyres and tubes excluding specified exceptions has been increased to 3 percent and in the case of Goods described in Schedule-V from 1 percent to 1.5 percent.

Notification No. KA. NI.-2-898/XI-9(1)/08-U.P. Act.-5-2008-Order-(82)-2012, dated 7 September 2012

Orissa

With effect from 1 October 2012 the way bills (Form VAT-402) will be issued only electronically through department’s website. Waybills received at check points at Railway / Air Station / any other place may be closed in the system by the receiving officer in the local circle.

Notification No.V-27/2010-15246/CT., dated 6 September 2012

Delhi

With effect from 27 August 2012, the Declaration Forms or Certificate ‘C, ‘F’ and ‘H’, for the year 2012-13 and onwards, shall be obtained electronically through the website of the department.

Notification No. F.7 (466)/Policy/VAT/ 2012/532-542, dated 27 August 2012

Circular is issued stating that the information relating to stock held as on 31 March 2012, is required to be submitted online up to 31st day of October, 2012 on website of department. The information filed by the dealers in form Stock-1 will be used in scrutinizing the information given by the dealer in DVAT / CST returns and Annexure 2A and 2B.

Circular No. 14 of 2012-13 F.7/ 433/Policy-II/VAT/2012/ 495-503 dated 22 August 2012

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Personal taxation

Decisions/Notifications/Circulars/Press Releases/PublicationsClaim for exemption of capital gains by investing in specific bonds not barred by simultaneous claim for exemption by investment in a residential house, and more than one residential unit built as a composite residential house can be treated as one property

Recently, the Mumbai Tribunal has upheld the simultaneous claim by the taxpayer for exemption of capital gains in respect of investment of the net sale consideration / capital gains both in the acquisition of a house, as well as specified bonds. The tax laws permit an exemption in respect of the investment of the net sale consideration arising from the transfer of a long-term capital asset, in the acquisition of a residence, within the time stipulated. An exemption is also prescribed in the case of investment of the gain from such a transfer in the purchase of specified bonds.

ACIT v. Shri Deepak S Bheda (ITAT No.5011/Mum 2010)(Mum)

Liberal interpretation of mandatory requirement to withhold taxes in absence of Permanent Account Number for persons whose income is below taxable limit

The Karnataka High Court has held that the provisions that stipulated the mandatory withholding of taxes in the absence of the deductee’s Permanent Account Number (PAN) (Registration number issued by the Indian Revenue Authorities) cause undue hardship to small investors who are otherwise not required to obtain a PAN.

An individual is not required to apply for a PAN where his income does not exceed the taxable threshold. The High Court held that if such individuals are forced to obtain a PAN to avoid mandatory withholding of tax at source, such withholding provisions are discriminatory in nature. The mandatory withholding provision in absence of a PAN would therefore need to be made inapplicable when applied to persons whose income is less than the taxable limit.

Smt. A. Khowsalya Bai & Ors v. UOI [2012] TS-416-HC-2010 (Kar HC)

Reimbursement of employee related costs to overseas companies is not liable to tax withholding if no element of income is embedded in the payment

The Bangalore Tribunal has held that the reimbursement of expenditure in relation to employee relocation, employee awards, etc. incurred on behalf of the taxpayer by overseas companies does not contain any ‘income’ element. Accordingly the taxpayer was not required to withhold tax while making such payments.

Global E-Business Operations Pvt Ltd vs. DCIT [ITA No 643 & 957 (B)/2010]

EPFO issues circular on readjustment of excess payment in Pension Fund for Indian outbound employees

In October 2008, GOI made fundamental changes in the Employees’ Provident Funds Scheme, 1952 and Employees’ Pension Scheme, 1995 by bringing International Workers (IWs) under the purview of the Indian social security regime. Indian outbound employees posted to countries with which India has signed a Social Security Agreement (SSA) were also treated as IWs with effect from the date of commencement of the Certificate of Coverage (COC). Therefore, every Indian employee who obtained a COC was treated as an IW and the contribution in respect of such IWs became payable on full salary.

Recently, the Employees’ Provident Fund Organisation (EPFO) has issued a circular to its officers regarding pension fund contribution made in the past for Indian outbound employees.

EPFO has reiterated the clarification issued on 25 May 2012 that persons going on postings with a COC are not to be treated as IWs. Therefore, the pension contribution for such IWs should be limited to the wage ceiling of INR 6500.

Consequently, the excess contribution mistakenly made to the pension fund in the past will be readjusted by the local Regional Provident Fund Commissioner by diverting it to a provident fund account if a request is made by the company in this regard.

Source: www.epfindia.com

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Contact us

Dinesh KanabarDeputy CEO & Chairman Tax T: + 91 (22) 3090 1661 E: [email protected]

Uday VedHead of Tax T: + 91 (22) 3090 2130 E: [email protected]

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