Transcript Discussion on Budget Updates – Direct Taxes

Discussion on Budget Updates – Direct Taxes
by
CA Ramprasad
[email protected]
CA Mallikarjuna Rao
[email protected]
Date: 18th March 2015
CA Mithilesh
[email protected]
Personal & Corporate Tax Proposal
► Rates
of Tax
► Domestic
taxation – AP and Telangana
► Domestic
taxation – deductions
► Domestic
taxation – others
► International
taxation – clarification on indirect transfers
► International
taxation – others
► Measures
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against Black Money
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Changes in Surcharge
 No change in tax rates and the income slabs
 Surcharge rate has been increased from 10% to 12% for individual taxpayers
having income exceeding INR 10 Mn
 Tax payable to increase due to the increase in surcharge – maximum marginal
tax rate 34.608%
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Personal Tax - Rates
PERSON
SURCHARGE
TOTAL INCOME (Rs)
RATE
Individual/AOP/BOI/HUF/AJP/
NR( Individual)
Up to Rs. 2.5 lakh
2,50,001- 5 lakh
5,00,001- 10 lakh
Above 10 lakh
NIL
10%
20%
30%
@12% if Total Income
exceed
`1 crore
Senior Citizen ( 60 yrs above less than 80 years)
Up to Rs. 3.00 lakh
3,00,001- 5 lakh
5,00,001- 10 lakh
Above 10 lakh
NIL
10%
20%
30%
@12% if Total Income
exceed
`1 crore
Up to Rs. 5 lakh
5,00,001- 10 lakhs
Above 10 lakh
NIL
20%
30%
@12% if Total Income
exceed
`1 crore
Very Senior Citizen ( 80 years or above)
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SLAB RATES
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Allowances and Deductions
 Deduction for medical treatment (u/s 80DD, 80DDB and 80U)
 Increase in limit for medical treatment with respect to certain diseases to INR 80,000
in the case of very senior Citizens (80 years or more).
 Tax payer is also required to obtain a prescription from a specialist doctor in order to
claim this deduction instead of a certificate from doctor of a Government hospital
 Increase in limit for medical treatment for a person with disability to INR 75,000 and
INR 125,000 for severe disability
 Infrastructure bonds
 Proposal to re-introduce tax free infrastructure bonds
 New Pension Scheme
 Overall cap limit for employee contribution is 10% of Salary or GTI
 Additional deduction of INR 50,000 ( not included in limit of Rs. 1,50,000 U/S 80CCE.
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Allowances and Deductions
 Deduction for medical treatment (u/s 80DD, 80DDB and 80U)
 Increase in limit for medical treatment with respect to certain diseases to INR 80,000
in the case of very senior Citizens (80 years or more).
 Tax payer is also required to obtain a prescription from a specialist doctor in order to
claim this deduction instead of a certificate from doctor of a Government hospital
 Increase in limit for medical treatment for a person with disability to INR 75,000 and
INR 125,000 for severe disability
 Infrastructure bonds
 Proposal to re-introduce tax free infrastructure bonds
 New Pension Scheme
 Overall cap limit for employee contribution is 10% of Salary or GTI
 Additional deduction of INR 50,000 ( not included in limit of Rs. 1,50,000 U/S 80CCE.
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Other Changes
 Wealth tax abolished!
 Assets reported under wealth tax return will now be required to be reported in
income tax return – return forms to be notified
 Income tax return filing obligation even if no taxable income
 Forms for investment/exemption/deduction declaration by employees
 Section 192 amended to enable CBDT to prescribe form and manner in which
employer need to obtain evidential proof for any claim by employee
 Detailed rules awaited – likely more diligence expected from employers!
 Withholding on PF withdrawal
 PF withdrawals which are taxable will be subject to TDS @ 10% if amount exceeds
INR 30,000. If PAN not furnished, maximum rate to be applied
 Possibility of submitting Form 15G/H to avoid TDS if total income is below the basic
exemption threshold limits
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Corporate Tax Rates – Rates of Tax
► No change in corporate tax rates proposed for Financial Year (‘FY’) 2015-16.
► Proposal to levy additional surcharge of 2% on corporates having taxable
income of over INR 1 crore. Accordingly, applicable surcharge for corporates
having taxable income over INR 1 crore but less than INR 10 crores is 7%, and
applicable surcharge for corporates having income over INR 10 crores is 12%.
► Effective tax rate for Companies for FY 2015-16 will be 34.608%.
► Surcharge on DDT and Buyback tax also increased to 12%.
Wealth Tax
 Proposal to abolish wealth tax (in lieu of which, an additional surcharge of 2%
on taxpayers having taxable income of over INR 1 Crore is proposed to be
levied).
 Information relating to assets currently forming part of wealth tax return shall
now be captured by way of modification in the income tax return.
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Rates of Tax (wef. AY 2016-17)
Particulars
Proposed effective rate1
Domestic company
►
Income > 1crore, but <10 crore
► Income > 10 crore
32.45%
33.99%
33.06%2
34.61%3
Company other than domestic
Company
►
Income > 1crore , but <10 crore
► Income > 1 crore
42.02%
43.26%
42.02%
43.26%
Non-corporate assessees
►
33.99%
34.61%3
MAT rate for domestic companies
►
20.01%
20.96%
20.39%2
21.34%3
AMT rate for non-corporates
►
20.96%
21.34%3
TDS on royalty & FTS payment
to NR
►
26.27%
27.04%
10.51%4
10.82%4
Income > 1 crore
Income > 1crore , but <10 crore
► Income > 10 crore
Income > 1 crore
Income > 1crore , but <10 crore
► Income > 1 crore
1. With applicable surcharge and 3% Education Cess
2. Due to increase in surcharge from 5 to 7%
3. Due to increase in surcharge from 10 to 12%
4. Due to decrease in basic rate from 25% to 10%
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Current effective rate1
(Upto A.Y. 2015-16)
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Tax on Distribution of Income (W.e.f A.Y. 2016-17)
Current effective rate1
(Upto A.Y. 2015-16)
Proposed effective1 rate
DDT rate u/s. 115 –O
19.99%
20.36%2
Buyback tax rate u/s. 115-QA
22.66%
23.07%2
Individual or Hindu Undivided Family
28.33%
28.84%2
Any other person
33.99%
34.61%2
Distribution by Infrastructure Debt
Fund (IDF) u/s 115-R
Non-residents
5.67%
5.77%2
Distribution by securitization trust
u/s 115-TA
Individual or Hindu Undivided Family
28.33%
28.84%2
Any other person
33.99%
34.61%2
Nil
Nil
Particulars
Distribution by mutual fund u/s
115-R
Recipient
Tax exempt entities (Mutual funds)
1. With applicable surcharge and 3% Education Cess
2. Due to increase in surcharge from 10 to 12%
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Domestic Taxation – AP & Telangana
 Additional investment allowance of 15% proposed on new plant and machinery
(new section 32AD)
 Undertaking is engaged in the manufacture of article or thing on or after 1 April 2015
in notified backward area of AP and Telangana
 Investment is made during the period 1 April 2015 to 31 March 2020 (eligible period)
 New assets are acquired and installed during the said period
 The said deduction shall be in addition to
 Normal depreciation
 Existing investment based allowance as per section 32AC
 New assets acquired cannot be transferred within a period of 5 years from date of
installation except in certain circumstances
 Further, in respect of such notified areas, the additional depreciation of eligible
plant and machinery shall be at the rate of 35% instead of the current rate of 20%
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Domestic Taxation – AP & Telangana - Illustration
Particulars
Formula
Amount (INR)
A
100
- Investment allowance u/s 32AC (15%)*
B = A*15%
15
- Investment allowance u/s 32AD (15%)
C = A*15%
15
- Depreciation u/s 32 (15%)
D = A*15%
15
- Additional Depreciation u/s 32 (35%)
E = A*35%
35
F=B+C+D+E
80
G = A - (D + E)
50
Cost of asset
Deductions
Total Deduction available for the year
Written Down value of the asset
* Subject to satisfaction of investment threshold limits
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Domestic Taxation – Deductions
 Mandate introduced to fulfil the conditions with regard to maintenance of audit
and accounts along with furnishing of prescribed reports to DSIR for the
purpose of claiming weighted deduction u/s 35(2AB)
 The DSIR shall now be required to send the report to Principal Chief Commissioner
or Chief Commissioner having jurisdiction over the Company in addition to DGIT
(Exemptions)
 Deduction u/s 80JJAA in respect of additional wages paid to new workmen is
extended to all type taxpayers (including LLP, Partnership Firm, Individuals,
etc.) engaged in manufacturing of goods in factory
 Further, the minimum number of workers employed is reduced from the existing 100
to 50 for claiming the deduction
 100% deduction u/s 80G for Swachh Bharat Kosh, Clean Ganga Fund.
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Domestic Taxation – Others
 Threshold limit for applicability of transfer pricing rules to specified
domestic transactions increased to INR 20 crores from erstwhile INR 5
crores
 Provisions of 40A(2) and others still applicable on transactions below
threshold limit
 Corporate laws may still require compliance
 Share of a member in AOP on which income tax is not payable shall be
excluded for MAT purpose
 Accordingly, corresponding expenditure, if any, shall be added back in
computing the book profit as per MAT
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Changes in TDS
 Section 194DA of the Act provides for deduction of tax at source @2% from payments under life
insurance policy, which are chargeable to tax.
 The benefit of non-deduction of tax from any sum paid to transport contractor referred to in
U/S 194C(6) is restricted to only to those owning ten or less goods carriage at any time of
previous year and declaration to this effect is furnished. (WEF 01/06/2015).
 Tax has to be deducted at source on payment of interest on time deposits to members by co-
operative banks U/S 194A. Time deposits include “Recurring Deposits”….
 Interest referred to in Section 194A shall be made with reference to income credited of paid by
banking company or co-operative bank or public company adopting core banking solutions.
 Deduction of tax at source U/S 194A from payment of interest on the compensation amount
awarded by the Motor Accident Claim Tribunal if such payment or aggregate of payments
during the financial year exceeds Rs. 50,000/-
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Changes in TDS
 Sec 200A provides for computation of fee payable U/S 234E at the time of
processing of TDS/TCS statement.
 Sec 206CB provides for processing of TCS statement including correction
statement.
 No interest will be charged U/S 220 if the interest for delay in collection of
tax at source is levied U/S 206C(7) in the intimation issued U/S 206CB.
 Tax deduction or collection made by the government deductor without
production of challan, the person responsible for crediting the sum to
the credit of the Central Government shall furnish a statement within the
prescribed time and format. Failure to do so attract a penalty of Rs. 100/U/S 272A till default continues
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Domestic Taxation - Others
 The formulae for computation of tax sought to be evaded has been amended to also
provide for the levy of penalty in situations where, income has been assessed as per
MAT, but additions are made to income under regular provisions as well.
 Either by way of same addition or separate addition
 Orders are now proposed to be deemed ‘erroneous in so far as prejudicial to the
interests of the revenue’ if, in the opinion of the Principal Officer or Commissioner:
 The order is passed without making any inquires or verification;
 The order is passed allowing any relief without inquiring into the claim
 The order has not been made in accordance with any order, direction or instruction by the
Board
 The order has not been passed in accordance with any decision, prejudicial to the assessee,
rendered by the Jurisdictional HC or the SC
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International Tax
► Indirect
Transfer
► Place of Effective Management (POEM)
► GAAR deferral
► Reduced tax rate on royalty / FTS
► Foreign Tax Credit
► Residential status of Indian citizen as crew member on ‘foreign’ ship
► Reporting requirements u/s 195(6)
► Taxability of offshore funds managed by fund managers in India
► Interest Source Rule
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Reporting Requirements u/s 195(6) (wef. 1st June 2015
Present law
• Any payment* made to a NR which is chargeable under the ITA, will attract withholding under
S.195(1)
• By the FA 2008, a new sub-section (6) was inserted in S. 195, providing that the person referred in
S.195(1) is required to electronically furnish the information relating to such payments in form and
manner as may be prescribed.
• As per the present position, the reporting requirement under S. 195(6) applies only in cases where
remittance made to NR is chargeable to tax under the ITA.
• For the purpose, Rule 37BB was introduced in the Income-tax rules, 1962(IT Rules) prescribing Form
15CA /CB for furnishing the information electronically.
• Rule 37BB and related forms were amended in September 2013 which increased the scope of
reporting to cover various other payments made to NRs subject to withholding under other sections
of the ITA*.
• Presently, no specific penalty for default of non reporting u/s. 195(6)
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Reporting Requirements u/s 195(6) (wef. 1st June 2015
• Proposals in the FB 2015
Amendment to S.195(6)
• To amend S. 195(6) to provide that person responsible for paying any sum whether
chargeable to tax or not, to a NR is required to furnish the information in such form and
manner as may be prescribed.
• Memorandum explains that mechanism of 195(6) reporting is to attain twin objectives • Ensuring deduction of tax at appropriate rate from taxable remittance
• Identifying remittances on which tax was deductible but the payer has failed to deduct
• Present provisions of 195(6) which cover only taxable payments which defeat object of
identifying TDS defaults
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Reporting Requirements u/s 195(6) (wef. 1st June 2015
New Penalty provision introduced
• Penalty under new S. 271I of INR 1 Lakh for non-submission or inaccrurate submission of
information under 195(6)
• Will penalty apply for each default?
• No penalty imposable if it is proved that there was ‘reasonable cause’ for the default (S.
273B)
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Place of Effective Management (POEM) [ S.6(3)] [w.e.f 1.04.16]
• S. 6(3) of ITL: A Company is ‘resident in India’ in a previous year if:
• it is an Indian company or
• During that year, the control and management of its affairs is situated wholly in India
• Apprehension: Very high threshold of residency leads to creation of overseas shell companies controlled in India but hold one board meeting outside
India
• In order to align the ‘residency’ concept with International standards (Article 4(3) of OECD MC and India’s DTAA’s with other countries) the concept
of Place of Effective Management (POEM) is now sought to be introduced by FB2015
FB 2015 seeks to provide that a company shall be a resident in India if:
 it is an Indian company; or
 its place of effective management, at any time in that year, is in India
Meaning of POEM
 A place where key management and commercial decisions are made
 Place where decisions are, in substance
 Decisions are necessary for the conduct of the business of an entity as a whole
 Decisions may be made at any time in the relevant year
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S. 115A – Reduced tax rate on royalty / FTS
(w.e.f.1 April 2016 i.e. Tax Year 2015-2016 and AY 2016-2017)
• S. 115A provides for a tax rate, inter alia,
• In respect of income by way of royalty and fees for technical services (FTS), which is not effectively
connected to a PE of a non-resident taxpayer (NR) in India and
• Received by an NR from Government or an Indian concern1 after 31 March 1976
• S. 115A currently provides for a tax rate of 25% on gross amount of royalty/FTS
• The tax rate of 25%* was introduced by Finance Act 2013, considering that majority of tax treaties
allowed India to levy tax on gross amount of royalty at rates ranging from 10% to 25%, whereas the
tax rate as per section1 115A then was 10%*
• The FB 2015 now proposes to amend the section to revert back to the tax rate to 10%*
• Reduced rate applies also to past continuing transactions
• Objective of amendment: to reduce hardship faced by small entities due to high rate of tax of 25%
and to facilitate technology inflow to small businesses at low costs
• Treaties providing for a tax rate of 10% will still be relevant since, it is inclusive of surcharge and education
cess, and is thus, the final tax rate
• If an NR taxpayer is eligible for treaty rate of 10% (which is inclusive of SC and Cess), higher withholding
rate of 20% may be applicable under S. 206AA (if NR recipient does not possess/ furnish a valid PAN)
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Indirect transfer [S.9(1)(i)] [w.e.f. A.Y. 2016-17]
• Indirect transfer provisions will apply only if, as on “specified date”, the following conditions are satisfied
cumulatively • Value of assets located in India > INR 10 Cr and
• Value of assets located in India is at least 50% of the value of all assets owned by the company which
is subject of transfer
• Gross value of all assets (tangible or intangible) to be considered
• No reduction for liabilities, if any, in respect of the assets (Refer further slides on impact of liabilities)
• Valuation of assets based on FMV of assets • But, method for determining FMV (e.g. DCF, NAV) to be prescribed in the rules
• Taxation in proportion to the value of Indian assets
• Method for determination of proportionality proposed to be prescribed in the rules
• Amendment has no impact on relief by virtue of treaty provisions
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Specified Date
• Specified date for FMV valuation is generally - the end of the “accounting period” of FCo preceding the
date of transfer.
• But it is date of transfer if the book value of assets of F Co / FE as on date of transfer exceeds the
book value at preceding year end by 15%
• Specified date relevant for determining FMV proportion of Indian assets
• Specified date not for relevant for determining ‘small’ shareholder exemption
• “Specified date” values are based on book value
• Will Book value exclude revaluation? Arguably, book value is net of amortization and depreciation
• Determination of whether >15% value threshold is breached will necessarily require preparation of
balance sheet of F Co as of the date of transfer
• Profits / losses during intervening period will impact calculation
• Indirect transfer trigger arises if FMV of Indian assets as of the “specified date” is ≥50% of the total FMV
of assets of F Co
• Not clear if ‘book value’ of assets needs to be reckoned with or without value of liabilities
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International Taxation – Clarification on Indirect transfers
•
•
•
•
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Exemption available in certain cases for:
•
Small shareholders (not having management or control and holding less than 5% of voting power/ share capital)
•
Foreign amalgamations and demergers, subject to certain conditions
Reporting obligations exist on Indian concerns through or in which Indian assets are held by foreign company/entity
(S.285A)
•
Detailed reporting requirements proposed to be prescribed in the rules
•
Reporting is for the purpose of determination of any income accruing or arising in India
•
Apparently, the information is to be furnished after the transaction is completed and tax trigger is attracted
Failure to report attracts penalty (S.271GA)
•
2% of the transaction value, if such transaction had the effect of directly or indirectly transferring the right of
management or control in relation to the Indian concern
•
INR 5,00,000, in any other case
Considering the levy of 2% penalty, S. 285A may impliedly cover such transactions which result in direct or indirect
transfer of management or control right of an Indian concern
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GAAR Deferral (Chapter X-A and Sec 144BA)
• GAAR deferred by two years i.e. applicable to income earned from 1 April 2017
• The deferment is stated to be in the wake of OECD BEPS project and India’s active
participant in the project
• GAAR provisions are implemented as part of a comprehensive regime to deal with BEPS and
aggressive tax avoidance
• No other changes have been announced
• Grandfathering benefits extended to investments made till 31 March 2017
• Rules will need to be amended to reflect grandfathering
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Taxability of offshore funds managed by fund managers in India- S.9A
• Where a business connection or PE is constituted in India, income attributable to operations/ PE in India
becomes taxable in India
• Income earned offshore may also be attributed to such operation/PE in India and hence may be
taxed in India!
• Fund managers are hence hesitant of locating in India
• In the budget speech relating to Finance (No.2) Bill, 2014, finance minister highlighted the need to
encourage fund managers to shift to India
• FB 2015 has now proposed a specific regime based on international best practices to encourage fund
managers to locate in India
• As per the specific regime provided under newly inserted S.9A
• Eligible investment fund carrying on fund management activity through an eligible fund
manager will not constitute business connection in India
• Such a fund shall not be treated as a resident of India, merely because fund management
activities are undertaken by an eligible fund manager on its behalf in India
• Specific regime, is applicable only in case of eligible investment fund managed through an eligible
fund manager.
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Source rule for taxation of interest paid by banks to HO’s [w.e.f . 1 April 2016]
• Under the ITL, S. 9(1)(v) provides the source rule for taxation of interest paid to a NR.
• Introduced as a part of Rationalization measure
• New Explanation to be inserted in sub clause (c) to section 9(1)(v),
(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of
banking, any interest payable by the permanent establishment in India of such non-resident to the head
office or any permanent establishment or any other part of such non-resident outside India shall be
deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable
to the permanent establishment in India and the permanent establishment in India shall be deemed to be
a person separate and independent of the non-resident person of which it is a permanent establishment
and the provisions of the Act relating to computation of total income, determination of tax and
collection and recovery shall apply accordingly;
(b) “permanent establishment” shall have the meaning assigned to it in clause (iiia) of section 92F.’.
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Interest paid by bank PE to HO [w.e.f . 1 April 2016]
• In the case of a taxpayer in banking business, interest paid by Indian PE to its HO outside India or any
other PE / Branch outside India to be deemed to accrue or arise in India and accordingly taxable in India
• This is over and above the income otherwise attributable to PE under Article 7 of the applicable tax treaty
• Creation of a deeming fiction between HO and PE being separate entities for the purpose of (a)
computation of income; (b) determination of tax, (c) collection and recovery of tax
• Memorandum to FB 2015 explains,
• Based on judicial rulings, PE were claiming deduction of interest paid under the computation
mechanism under tax treaty, but the income was not taxable in the hands of NR Bank being payment
to self. This leads to base erosion in India contrary to legislative intent.
• Certain DTAAs (India- Us) recognize that interest paid by PE to HO is payment sourced in India and
hence, should be taxable in India.
• Mumbai SB in the case of Sumitomo noted that in absence of specific provision in the ITA, such
interest was not taxable.
• The proposed amendment is to bring in clarity and certainty on the issue.
• PE obligated to deduct tax and failure leads to disallowance, interest and penal consequences
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International Taxation – Other Important Issues
• Capital gains earned by FII on sale of Indian securities shall be excluded in computing the book profit as
per MAT
• CBDT to make rules to provide the manner of granting tax credit on income tax paid in the foreign
countries
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Measures against Black Money
Curbing Black Money
• Bill to be introduced to enact a comprehensive new law on black money to specifically deal with such
money stashed overseas
• Concealment of income and assets and evasion of tax in relation to foreign assets will be
prosecutable with punishment of rigorous imprisonment up to 10 years
• The offence shall be non compoundable, not permitted before Settlement Commission and
subjected to penalty of 300% of the tax amount
• Non/ In -accurate filing of particulars in return of income shall be liable to rigorous imprisonment up
to 7 years
• Beneficial owner of foreign assets to mandatorily file return of income irrespective of taxable income
• Date of opening of foreign account to be furnished in return of income
• Amendments to be made in Prevention of Money Laundering Act and FEMA for actions to be taken
• New Benami Transactions Prohibition Act proposed to be introduced
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Transfer pricing
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Concept of Transfer Pricing
Associated
enterprise
Independent
entity
International transactions
- goods
- services
- intangibles
- loans
Resident
Transfer price
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Resident
Arm’s length
price
Increasing Transfer Pricing Disputes
Financial
Year
Number of TP Audits
Completed
Number of
Adjustment
Cases
% of Adjustment
cases
Amount of
Adjustment (in Rs
crore)
2004-05
1,061
239
23
1,220
2005-06
1,501
337
22
2,287
2006-07
1,768
471
27
3,432
2007-08
219
84
39
1,614
2008-09
1,726
670
39
6,140
2009-10
1,830
813
44
10,908
2010-11
2,301
1,138
49
23,237
2011-12
2,638
1,343
52
44,531
Source : White Paper on Black Money, Ministry of Finance, GOI May 2012
Adjustment during FY 2012-13 estimated to cross INR 64,000 crores based
on draft orders*
* as per article published in Taxsutra
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Applicability
► The provisions of Section 92 to 92F of the Act are applicable only if:

There are two or more enterprises (defined in Sec 92F)

The enterprises are Associated enterprises (defined in Sec 92A)

The enterprises enter into a transaction (defined in Sec 92F)

The transaction is an International transaction (defined in Sec 92B)
► Provisions do not apply in certain cases (Section 92(3))
► Further w.e.f. 1 April 2012, TP provisions shall also apply to specified domestic transactions (SDT) (defined
in Sec 92BA)
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Applicability & Consequences of these provisions
 Computation of income/ expenses having regard to the Arm’s length price (Section 92(1))
 Maintenance of prescribed Documentation (Section 92D read with Rule 10D)
 Obtaining of Accountant’s report (under Form 3CEB) (Section 92E)
 To ensure compliance with the arm’s length principle, stringent Penalties have been
prescribed
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Applicability
 Section 92(1) –
Any income (or expense or interest) arising from an international
transaction shall be computed having regard to the arm’s length price
 Section 92(3) –
The provisions are not intended to be applied in case determination of
arm’s length price reduces the income chargeable to tax or increases the
loss as the case may be
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Meaning of Associated Enterprises (Section 92A)

A
Both A and B are
associated enterprises
of C
B
C
A
B
C
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D
E
D and E are also
associated enterprises of C
since they have a common
ultimate parent (A)
Direct or indirect participation (through one or
more intermediaries) in management, control or
capital
Deemed Associated Enterprises (Section 92A(2))
Equity Holding
Management
Activities
Control
1. >= 26% direct / indirect
holding by enterprise
. Appointment > 50% of
Directors / one or more
Executive Director by an
enterprise
8. 100% dependence on use of
intangibles for manufacture /
processing / business
11. One enterprise controlled by
an individual and the other by
himself or his relative or jointly
9. Direct / indirect supply of > =
90%
Raw Materials
under influenced prices and
conditions
12. One enterprise controlled by
HUF and the other by
- a member of HUF
- his relative or
- Jointly by member and
relative
OR
2. By same person in each
enterprise
3. Loan >= 51% of Total Assets
4. Guarantees > = 10% of debt
5. > 10% interest in Firm / AOP /
BOI
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OR
7. Appointment by same person
in each enterprise
10. Sale under influenced prices
and conditions
International Taxation (Section 92B)
 Transactions between two or more associated enterprises
 Either or both of whom are non-residents
 Transaction relates to:
 purchase, sale or lease of tangible or intangible property; or
 provision of services; or
 lending or borrowing money; or
 any other transaction having a bearing on the profits, income, losses or assets of the enterprises; or
 mutual agreements or arrangements for allocation or apportionment of, or any contribution to, any
cost or expense incurred
 Scope expanded in Finance Act, 2012 to include - intangibles like marketing intangibles, human capital,
Business restructuring, inter-company guarantees, capital funding, etc.
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Deemed International Transaction (Sec 92B(2))
Transactions with non-group companies deemed to be international transactions subject to
transfer pricing regulations
Prior agreement
A’s Parent
3rd party
A

Transaction between A and 3rd party also subject
to transfer pricing norms, if:
− a prior agreement exists between A’s parent
and 3rd party (both non-residents) in relation
to services rendered by A to the 3rd party; or
−
Determination of terms
A’s Parent
3rd party
A
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terms of transaction are determined in
substance by A’s parent and 3rd party
Specified Domestic Transactions (SDT)
Scope of transfer pricing provisions expanded
 Applicable to specified domestic transactions if aggregate value of such transactions exceeds INR 20
crores
 Transactions that could be impacted include
 Transfer of goods/services between related domestic companies wherein either of them is
eligible for tax holiday benefit
 Transfer of goods / services between tax holiday eligible business / units and other
businesses / units of the taxpayer in India
 Payments made to persons specified u/s 40A(2)(b) [definition amended]
 All provisions applicable for determination of ALP for international transactions would apply in case of SDT
also. Also penal provisions applicable to international transactions would apply to SDT
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Arm’s Length Price
Price applied or proposed to be applied in a transaction between persons other than associated enterprises, in
uncontrolled conditions
Determination of arm’s length prices using one of the Prescribed methods
Yes
No
Whether you arrive
at a single price ?
The price thus determined is the
arm’s length price
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The arithmetic mean of such prices which
varies from transfer price (not exceeding 3%
(upper ceiling)
is the arm’s length price (92C(2))
The Arm’s Length Range – How it works??
47

In most cases, it is not possible to identify a single price that can be
considered to be an uncontrolled price.

It may be that a number of different comparables are equally
comparable. Several comparable transactions can therefore define an
arm’s length range of possible transfer prices

Overall range may contain extremes. Indian legislation recognizes only
arithmetic mean (with a +/-3% variation) though statistically and
internationally an inter-quartile range may be more appropriate.

If transfer price falls within a +/- 3% range, pricing should be defendable
as arm’s length from tax authority audit perspective
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Comparables
► All methods require comparables
► Transfer price is set/ defended using data from comparable
companies
► Comparable company should be independent and similar to
an associated enterprise.
► Following factors are generally used in judging comparability
(Rule 10C(2)):
• nature of transactions undertaken (i.e. type of good,
service etc.)
• company functions
• risks assumed
• contractual terms (i.e. similar credit terms)
• economic and market conditions
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Documentation – Rule 10D
Entity related
Price related
Transaction related
 Profile of industry
 Transaction terms
 Agreements
 Profile of group
 Functional analysis (functions, assets
and risks)
 Invoices
 Profile of Indian entity
 Profile of associated enterprises
 Economic analysis (method selection,
comparable benchmarking)
 Pricing related
correspondence (letters,
emails etc)
 Forecasts, budgets, estimates
Contemporaneous documentation requirement – to be maintained by November 30 of relevant Assessment Year
Documentation to be retained for 9 years from financial year
Comprehensive Documentation is not required to be maintained if the aggregate value of all international transactions does not exceed one crore rupees
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Accountant’s Report – Rule 10E
► Obtained by every tax payer filing a return in India and having international transaction
► To be filed by due date for filing return of income (30 November)
► Essentially comments on the following:
•
whether the tax payer has maintained the transfer pricing documentation as required by the
legislation,
•
whether as per the transfer pricing documentation the prices of international transactions are at
arm’s length, and
•
certifies the value of the international transactions as per the books of account and as per the
transfer pricing documentation are “true and correct”
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Revised Form 3CEB – CA Certificate as per Sec 92E
Revised Form 3CEB has been bifurcated into following 3 parts:

Part A: Details of taxpayer
Part B: Details of International Transactions

Part C: Details of Specified Domestic Transactions

Part A – Details of taxpayer
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►
Taxpayer is required to mention its nature of business in point No. 4 of Part A of Form 3CEB. Codes for nature of business to be filled
in as per instruction for filing Form ITR 6.
►
This code may be considered by the tax office while allowing range benefit (i.e. for wholesale traders range of 1 percent is
applicable)
►
Aggregate value of international transactions and SDT as per book of account to be specified in clause 8 and 9 of Part A respectively
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Revised Form 3CEB
Part B: Details of International Transactions
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►
Clause 15 of the new Form requires disclosure regarding transactions in the nature of
guarantee. Details like name of AE, nature of guarantee agreement, currency and
compensation/fee charges are to be disclosed in addition to method used for determining ALP
►
Clause 16 deals with international transaction of purchase and sale of marketable securities,
issue and buyback of equity shares, optionally convertible/ partially convertible/ compulsorily
convertible debentures/ preference shares
►
Clause 18 deals with international transactions relating to business restructuring and
reorganization
►
Clause 19 deals with any other transaction including a transaction which has a bearing on
profits, income, losses or assets of the assessee
►
Clause 20 requires disclosure about deemed international transactions
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Revised Form 3CEB
Part B: Details of International Transactions
53
►
Clause 15 of the new Form requires disclosure regarding transactions in the nature of
guarantee. Details like name of AE, nature of guarantee agreement, currency and
compensation/fee charges are to be disclosed in addition to method used for determining ALP
►
Clause 16 deals with international transaction of purchase and sale of marketable securities,
issue and buyback of equity shares, optionally convertible/ partially convertible/ compulsorily
convertible debentures/ preference shares
►
Clause 18 deals with international transactions relating to business restructuring and
reorganization
►
Clause 19 deals with any other transaction including a transaction which has a bearing on
profits, income, losses or assets of the assessee
►
Clause 20 requires disclosure about deemed international transactions
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Revised Form 3CEB
Part C: Details of Specified Domestic Transactions
54
►
Clause 22 deals with expenditures for which payment made to persons specified u/s 40A(2)(b)
►
Clause 23 deals with inter-unit transfer of goods and services u/s 80A(6), 80IA(8) or 10AA.
Sub-clause A deals with transfer by eligible unit/business undertaking to other units while subclause B deals with acquisition of goods/ services by such eligible unit/business undertaking
from other businesses carried on by the assessee
►
Clause 24 deals with business transacted as specified u/s 80-IA(10) and Sec. 10AA.
►
Clause 25 deals with any residual SDT
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TP – Penal Provisions
Section
Trigger
Quantum of penalty
271(1)(c)
In case of an adjustment post assessment, if regarded as concealment of
income
100-300% of the tax leviable on the amount
of adjustments
271AA
Failure to maintain TP documentation, failure to report the transaction,
maintenance or furnishing of incorrect information/document
2% of the value of the transactions
271BA
Failure to furnish Form 3CEB
INR 100,000
271G
Failure to furnish TP documentation with the tax officer
2% of the value of the transactions
 Adjustment related penalty not leviable where taxpayer has acted in ‘good faith’ and exercised ‘due
diligence’
 TP documentation serves as a good basis to demonstrate good faith and due diligence
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Approach to Transfer Pricing
Our proposed approach for transfer pricing review will be based on the following phases of work as described in detail
below:
4
Documentation/ Accountants report
Report writing/
Accountants report
Economic analysis
3
Functional analysis
2
Calculation of arms length result
Selection of Best
Method
Selection of
Comparables
Analysis of Functions, Risks, and Intangibles
1
Fact gathering
Mapping of international transaction
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Industry Analysis
Steps in a Transfer Pricing study
2
Investigation & data collection
1
• Questionnaire
• Interview
3
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Others
• Assist in implementation
• Litigation support
Documentation
• Industry overview
• Functional analysis
• Economic analysis
Assessment Procedure
1
4
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U/s 92CA the AO may refer determination
of ALP to the TPO, with prior approval of
Commissioner
AO would proceed to
compute income of the
taxpayer in conformity with
ALP determined by the TPO
and pass a draft order
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3
2
TPO would then notify the
taxpayer to produce evidence
supporting transfer price as
arm’s length
TPO would determine ALP by passing an
order based on information gathered from
the assessee/ other sources and intimate
the AO & taxpayer
Dispute Resolution Panel
 The AO to provide “draft” order to
assessee, in case any adjustment is
proposed.
TPO’s order
Show cause
notice
 The assessee has to file the objections
within 30 days of receipt of the draft order;
 Directions of the DRP to be issued within 9
months of the end of month draft order
forwarded to Assessee;
 The directions issued by the DRP Panel are
appealable in the ITAT by the Assessee.
 The department can appeal against the
DRP directions for objections filed after 1
July 2012.
AO’s draft order
Within 30 days of
receipt of draft order
No response
File Objections with DRP
AO’s order
Within 9 Months from
end of the month in
which draft order was
forwarded to
Assessee
CIT(A)
DRP Order
AO Order
ITAT
Appeal
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APA Overview
•
Any “person” who has undertaken or who is contemplating to undertake an international transaction can apply for an
APA
•
Pre-filing consultation mandatory to determine scope of APA, identify issues, determine suitability and discuss broad
terms of the APA
•
Anonymous filing permitted but it shall not bind the applicant or the CBDT to enter into an agreement
•
Application can be made after pre-filing consultation and can be for unilateral, bilateral or multilateral APAs.
Withdrawal and amendment to application permitted
•
Fees varies in accordance with value of international transaction
Value of international transaction in respect of which APA is
proposed
Less than INR 1 billion
INR 1-2 billion
More than INR 2 billion
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Filing fees (INR Million)
1
1.5
2
APA Overview Process
Pre-filing
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APA request
►
Unilateral vs bilateral
►
Industry overview
►
Pre-filing meeting (anonymous?)
►
Supply chain overview
►
Pricing study and strategy
►
FAR analysis
►
Proposed economic analysis
►
Proposed term
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Evaluation and
negotiation –
Agreement
►
►
►
Field work (functional interviews,
review financial statements)
Execution and
monitoring
►
Annual report, record-keeping
►
Audit
►
Revocation, cancellation or
revision
►
Renewal
Government-to-government process
Position papers – face to face
meetings
►
Critical assumptions
►
Drafting and concluding APAs
APA – Pros and Cons
Pros
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Cons
–
Proactively avoids TP controversy - Provides certainty
and enhances predictability
–
Strain on resources for taxpayers personnel and
expenses
–
Discussion at the “right level”
–
–
Solution to complex/ difficult TP issues
Fairly detailed forms/ information request during
pre-filing and application stage - normally not a
practice in an audit
–
Eliminates/reduces risk of economic double taxation
–
Can reduce compliance cost
–
Concerns around domestic tax law process
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SBS And Company LLP
Chartered Accountants
6-3-900/6-9, Flat No. 103 & 104, Veeru Castle
Durga Nagar Colony,
Panjagutta, Hyderabad - 500 082
Telangana, India.
Our Presence in
Telangana: Hyderabad (HO)
Andhra Pradesh: Nellore, Kurnool, TADA (Near Sri
City), Vizag
Thanks for your patient hearing!!!
CA Ram Prasad
CA Mallikarjun Rao
CA Mithilesh
+91-40-40183366 / +91-40-64584494 / +91-9246883366
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