Article analyses Budget Proposals by the Finance Act (No. 2), 2019 – Relevant for International Tax, Transfer Pricing & Non-Resident which includes Amendment of section 9 – Gift made to person outside India (non-resident), Amendment of section 9A – Providing relaxation in condition for offshore funds, Amendment of section 10 – Exemption of interest income of a non-resident arising from borrowings by way of issue of Rupee Denominated Bonds referred to under section 194LC,Amendment of section 40 & 201 – Relaxing the provisions in case of payments to Non-Resident, Amendment of section 92CD – clarifying the restrictions in the powers of AO in respect of assessment / reassessment of modified returns filed in pursuance to give effect the APA, Amendment of section 92CE – Clarification with regard to provisions of secondary adjustment and giving an option to assessee to make one-time payment, Amendment of section 92D – Rationalisations of provisions relating to maintenance, keeping and furnishing of information and documents by certain persons,  Amendment of section 195 & 197 – Online filing of application seeking determination of tax to be deducted at source on payment to non-residents, Amendment of section 286 – Online filing of application seeking determination of tax to be deducted at source on payment to non-residents and Other Amendments proposed by the Bill relevant for Non-Residents

Abbreviation

1. Amendment of section 9 – Gift made to person outside India (non-resident)

Background: Under the existing provisions of the Act, for example, a gift of money or property is taxed in the hands of donee (i.e. recipient of Gift), except for certain exemptions provided in clause (x) of sub-section (2) of section 56. Section 2(24) provide the definition of term “Income”, which inter-alia provide the term “Income” includes any sum of money or value of property referred to in clause (x) of sub-section (2) of section 56.

As per provisions of the section 5(2) of the Act, the non–residents are taxable in India in respect of income that;

  • accrues or arises in India or
  • is received in India or
  • is deemed to accrue or arise in India or
  • is deemed to be received in India

Which “income deemed to accrue or arise in India” is codified in section 9 of the Act. This section, creates deeming fiction with respect to incomes, such as income from – business connection, salaries, royalty, fees for technical services, interest etc. However, this section does not contain the specific reference w.r.t. income mentioned in section 2(24)(xviia).

The Government observed that the gifts are made by persons being residents in India to persons outside India and are claimed to be non-taxable in India in view absence of reference w.r.t. income mentioned in section 2(24)(xviia) in the section 9.

The scope Section 56(2)(x) is very wide, which provides, “incomes, shall be chargeable to income-tax under the head “Income from other sources“, namely :— (x) where any person receives, in any previous year, from any person or persons on…”. Accordingly, a phrase “any person receives, in any previous year, from any person” is sufficiently equipped and wide enough to cover the gift received by the Non-Resident from the resident or from the Non-Resident to the resident (subject to limitation and exemption provided in that section). Further, the definition of “Income” also contain a reference to section 56(2)(x).

However, section 5 (charging section) which inter-alia provide that the non–residents are taxable in India in respect of income that is deemed to accrue or arise in India and which “income deemed to accrue or arise in India” is mentioned in section 9 of the Act. Therefore, even though, the scope of section 56(2)(x) is wide and also the definition of term contain the specific inclusion of reference to section 56(2)(x), nonspecific provision in deeming provision of “income deemed to accrue or arise in India” w.r.t. income of nature as mentioned in 56(2)(x) may lead to income does not accrue or arise in India.

Proposed Amendment: The Bill has proposed following amendment;

Amendment in Section Provision Analysis and applicability
Insertion of new clause in section 9(1) 9 The following incomes shall be deemed to accrue or arise in India: –

….

“(viii) income of the nature referred to in sub-clause (xviia) of clause (24) of section 2, arising from any sum of money paid, or any property situate in India transferred, on or after the 5th day of July, 2019 by a person resident in India to a person outside India.”.

Accordingly, the nature of income, for example gift, by the resident person to non-resident will be taxable in India (subject to exemptions as provided in 56(2)(x)) and therefore, the non-resident has required to pay the tax on such income by filing the return of income in India

This amendment applies immediately with effect from 5th July, 2019. Therefore, the income of the nature referred to in sub-clause (xviia) of clause (24) of section 2, arising from any sum of money paid, or any property situate in India transferred, on or after the 5th day of July, 2019 by a person resident in India to a person outside India, shall be taxable in India.

Other Points: As per provisions of section 90(2), the assessee is eligible to apply the provisions of the Act or DTAA, to the extent they are more beneficial to that assessee (subject to GAAR). Accordingly, the assessee can still take the shelter of the DTAA and may claim the exemption of such kind of income in India (which are depends upon the provisions of the DTAA with particular country).

The MTC of UN & OECD, contain the article 21 – Other Income. Paragraph 1 contain general provision, which provide exclusive right to tax such income to the resident state and paragraph 2 contain exception to paragraph 1. Therefore, the assessee may still claim the benefit of the DTAA regardless of the amendment in section 9[1].

In case if the Non-Resident is Relative, who is recipient of gift, then he may opt the exemption u/s 56(2)(x).

Obligation on part of Resident Payer: Accordingly, as per proposed law, while providing the gift to Non-Resident, the resident payer is required to deduct tax at source (if applicable) u/s 195 of the Act, and to comply with the rule 37BB[2] of the IT Rules.

If the gift is not taxable in view of exemption provided in section 56(2)(x) then the assessee have not required to furnish such information in Form of 15CA/15CB[3].

2. Amendment of section 9A – Providing relaxation in condition for offshore funds

Background: The new regime was introduced through the Finance Act, 2015 by insertion of new section 9A in the Act which provides that in the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in India. Further, an eligible investment fund shall not be said to be resident in India merely because the eligible fund manager undertaking fund management activities on its behalf is located in India. This specific exception from the general rules for determination of business connection and ‘resident status’ of off-shore funds and fund management activity undertaken on its behalf, is subject to the conditions stated in that section.

The benefit under section 9A is available subject to the conditions provided in sub-sections (3), (4) and (5) of the said section. Which inter-alia includes conditions that

  • The monthly average of the corpus of the fund shall not be less than one hundred crore rupees. it is provided that if the fund has been established or incorporated in the previous year, the corpus of fund shall not be less than one hundred crore rupees at the end of such previous year
  • The remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken by him on its behalf is not less than the arm’s length price of the said activity”

Practical Issues: Representations were made to liberalise these conditions, as suppose, if the fund is setup just few days before the end of previous year, then it would become difficult or almost become impossible to meet this condition, consequently, bonafide funds which incorporated / established just few days / months before the end previous year will not be able to take the benefit of this regime. With respect to second condition, i.e. Arm’s Length remuneration to Fund Manager, which may subject to under scrutiny and redetermination of ALP. The Government consider the representation and liberalise these conditions.

Proposed Amendment: the proposed amendments are mentioned as follows;

Amendment in Section Provision Applicable from
Substitution of phrase in – first proviso to section 9A(3)(j) & 9A(3)(m) (3) The eligible investment fund referred to in sub-section (1), means a fund established or incorporated or registered outside India, which collects funds from its members for investing it for their benefit and fulfils the following conditions, namely:—

(j) the monthly average of the corpus of the fund shall not be less than one hundred crore rupees:

Provided that if the fund has been established or incorporated in the previous year, the corpus of fund shall not be less than one hundred crore rupees at the end of such previous year [at the end of a period of six months from the last day of the month of its establishment or incorporation, or at the end of such previous year, whichever is later]:

[Provided further that nothing contained in this clause shall apply to a fund which has been wound up in the previous year;]

(m) the remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken by him on its behalf is not less than the arm’s length price of the said activity [the amount calculated in such manner as may be prescribed]:

1st April, 2020

Comparative analysis and impact of amendment:

Condition Existing Provision Proposed Provision Impact
With respect to corpus of the funds which established/ incorporated during the PY corpus of fund shall not be less than Rs. 100 crore at the end of such previous year corpus of fund shall not be less than Rs. 100 crore

at the end of a period of six months from the last day of the month of its est./inc., or

at the end of such previous year, whichever is later

Accordingly, the Fund will get minimum period of six months from the date of its establishment or incorporation for arranging the corpus of Rs. 100 crores
Remuneration to Fund Manager not less than the arm’s length price not less than the amount calculated in such manner as may be prescribed The remuneration to fund manager will be computed on the basis of prescribed formulae, which will lead to less litigation and more certainty

Applicability of this amendment: The bill does not contain the date of applicability of above amendments, however, memorandum explaining the Finance Bill provides that these amendments applies retrospectively w.e.f. 1st April, 2019 and shall apply to the assessment year 2019-20 and subsequent assessment years.

3. Amendment of section 10 – Exemption of interest income of a non-resident arising from borrowings by way of issue of Rupee Denominated Bonds referred to under section 194LC

Background: With view to seeks the improve capital inflow, help the rupee strengthen against the US dollar and to helps the borrower avoid currency risks which are borne by the investor, the CBDT on 17th September 2018, through press release[4], announced that the rupee denominated bond issued outside India during the period from September 17, 2018 to March 31, 2019 shall be exempt from tax. Consequently, no tax was required to be deducted on the payment of interest in respect of the said bond u/s 194LC.

The CBDT further announced that the legislative changes will be proposed in due course.

Section 194LC was amended by the Finance Act, 2017 retrospectively w.e.f 1st April 2016. As per section 194LC of the Act, the interest payable by an Indian company or a business trust to a non-resident, including a foreign company, in respect of rupee denominated bond issued outside India before the 1st of July, 2020 is liable for concessional rate of tax of Five Percent (5%).

Proposed Amendment: Through the Bill, it is proposed to incorporate the said announcement in the Act and accordingly subsection 4C inserted in the section 10 which provides that, “any income by way of interest payable to a non-resident, not being a company, or to a foreign company, by any Indian company or business trust in respect of monies borrowed from a source outside India by way of issue of rupee denominated bond, as referred to in clause (ia) of sub-section (2) of section 194LC, during the period beginning from the 17th day of September, 2018 and ending on the 31st day of March, 2019 shall not be included in the total income of a previous year of any person”

In view of above, the comparative analysis before and post amendment is analysed as follows;

Rupee denominated bond Issued between Rate Applicable
01/04/2016 to 16/09/2018 5% as per section 194LC
17/09/2018 to 31/03/2019 Nil, as per section 10(4C)
01/04/2019 to 30/06/2020 5% as per section 194LC
01/07/2020 or thereafter Taxed as per normal provisions or rate as per relevant DTAAs

Obligation on part of Payer: Although, the payer is not required to deduct TDS u/s 195 of the Act on interest paid upon the rupee denominated bond issued outside India during the period from September 17, 2018 to March 31, 2019, but they shall require to comply with provisions of the rule 37BB as the sub rule 3 does not contain any exclusion.

Applicability of this amendment: This amendment will apply to rupee denominated bond issued outside India during the period from September 17, 2018 to March 31, 2019 and accordingly will take effect from 1st April, 2019 and apply in relation to the assessment year 2019-20 and subsequent assessment years.

4. Amendment of section 40 & 201 – Relaxing the provisions in case of payments to Non-Resident

Background: Section 201 of the Act provides that where any deductor, who is required to deduct tax at source on any sum in accordance with the provisions of the Act, does not deduct or does not pay such tax or fails to pay such tax after making the deduction, then such person shall be deemed to be an assessee in default. The first proviso to section 201(1) specifies that the deductor shall not be deemed to be an assessee in default if he fails to deduct tax on a payment made to a resident,

  • if such resident has furnished his return of income under section 139
  • disclosed such payment for computing his income in his return of income,
  • paid the tax due on the income declared by him in his return of income and
  • furnished an accountant’s certificate to this effect (Form 26A)

This relief in section 201 is available to the deductor, only in respect of payments made to a resident. In case of similar failure on payments made to a non-resident, such relief is not available to the deductor.

Besides, section 40(a) provide that where an assessee fails to deduct tax in accordance with the provisions of Chapter XVII-B on any sum paid to a resident, but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of the return of income by the payee referred to in that proviso. Thus, there will be no disallowance under section 40 in respect of such payments. However, second proviso to section 40(a)(ia) provide relaxation w.r.t. only the resident payee and not contain the reference to Non-Resident.

Therefore, currently if the deductor fails to deduct TDS or deposit TDS in respect of payments made to NR, the assessee shall be deemed to be an assessee in default and also provisions of section 40(a) will get attracted, even if the such non-resident payee;

  • has furnished his return of income under section 139
  • disclosed such payment for computing his income in his return of income,
  • paid the tax due on the income declared by him in his return of income and
  • furnished an accountant’s certificate to this effect (Form 26A)

Relevant Rulings:

Delhi HC[5] had held there was no Sec 40(a)(i) disallowance to assessee (an Indian company) for TDS default on payment to US company. HC had noted that there existed a differential treatment for expense deductibility with respect to payments made to resident taxpayers vis-a-vis payments made to nonresidents u/s 40(a)(i) which amounted to discrimination as envisaged under Article 26(3) of the DTAA.

Further, SC in the case of Hindustan Coca Cola Beverage (P.) Ltd.[6] had held that, No demand visualized under Section 201(1) of the Income-tax Act should be enforced after the tax deductor has satisfied the officer-incharge of TDS, that taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest under Section 201(1A) of the Act till the date of payment of taxes by the deductee-assessee or the liability for penalty under Section 271C of the Income-tax Act.

Proposed Amendment: The Bill has proposed four amendments, which are explained as under;

Amendment in Section Provision Applicable from
to insert proviso in the section 40(a)(i) Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso; 1st April, 2020
To omit word “Resident” in second proviso to section 40(a)(ia) Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso. 1st April, 2020
Substitution of word payee with in place of resident in proviso to section 201(1) wherever occurred Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident [payee] or on the sum credited to the account of a resident [payee] shall not be deemed to be an assessee in default in respect of such tax if such resident [payee]

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed:

1st September, 2019.
Substitution of word payee with in place of resident in proviso to section 201(1A) wherever occurred Provided that in case any person, including the principal officer of a company fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident [payee] or on the sum credited to the account of a resident [payee] but is not deemed to be an assessee in default under the first proviso to sub-section (1), the interest under clause (i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident [payee]. 1st September, 2019.

Impact and Applicability of Proposed amendments: By proposing above amendments, the Government have tried to remove anomaly, bring parity and worked in the spirit of removing Discrimination between Resident and Non-Resident as envisages in the various DTAAs. Further, the rulings of Delhi HC and Supreme Court seems to be confirmed and codified in the Act accordingly.

The applicability of these amendments are not retrospectively and therefore, applicable from the date as specified here in above. However, still the assessee could take shelter of above rulings in order defend the pending matters.

5. Amendment of section 92CD – clarifying the restrictions in the powers of AO in respect of assessment / reassessment of modified returns filed in pursuance to give effect the APA

Background: Section 92CC of the Act empowers the Central Board of Direct Taxes (CBDT) to enter into an APA, with the approval of the Central Government, with any person for determining the ALP or specifying the manner in which ALP is to be determined in relation to an international transaction which is to be entered into by that person. The APA is binding upon the assessee as well as upon the Revenue.

The APA is valid for a period, not exceeding five previous years, as may be specified therein.

This section also provides for rollback of the APA for four years (applicability of APA in case of completed assessments). Section 92CD provides for mechanism, including filing of modified return of income by the taxpayer and manner of completion of assessments by the Assessing Officer having regard to terms of the APA in case of rollback of the APA.

Section 92CD(3) deals with a situation where assessment or re-assessment has already been completed, before expiry of the time allowed for filing of modified return and provides that “the Assessing Officer shall, in a case where modified return is filed in accordance with the provisions of sub-section (1), proceed to assess or reassess or recompute the total income of the relevant assessment year having regard to and in accordance with the agreement.

The Government received representations, stating that due to the use of words “assess or reassess or recompute”, the Assessing Officer may start fresh assessment or reassessment in respect of completed assessments or reassessments of the assessees who have modified their returns of income in accordance with the APA entered into by them, while the intention of the legislature is for Assessing Officer to merely modify the total income consequent to modification of return of income in pursuance to APA.

Proposed Amendment: The Bill has proposed two amendments, which are explained as under;

Amendment in Section Provision Applicable from
Substitution of phrase in 92CD(3) (3) If the assessment or reassessment proceedings for an assessment year relevant to a previous year to which the agreement applies have been completed before the expiry of period allowed for furnishing of modified return under sub-section (1), the Assessing Officer shall, in a case where modified return is filed in accordance with the provisions of sub-section (1), proceed to assess or reassess or recompute the total income of the relevant assessment year [pass an order modifying the total income of the relevant assessment year determined in such assessment or reassessment, as the case may be] having regard to and in accordance with the agreement. 1st September, 2019
Ommission of phrase in clause (a) of section 92CD(5) (5) Notwithstanding anything contained in section 153 or section 153B or section 144C,—

(a) the order of assessment, reassessment or recomputation of total income under sub-section (3) shall be passed within a period of one year from the end of the financial year in which the modified return under sub-section (1) is furnished;

(b) the period of limitation as provided in section 153 or section 153B or section 144C for completion of pending assessment or reassessment proceedings referred to in sub-section (4) shall be extended by a period of twelve months.

1st September, 2019

Impact of Amendments: By proposing above amendments, the Government have put the restrictions upon the powers of AO with respect to assess or reassess or recompute the total income of the assessee in case of modified return of income, and accordingly the AO can only pass an order modifying the total income of the relevant assessment year determined in such assessment or reassessment, as the case may be having regard to and in accordance with the agreement.

6. Amendment of section 92CE – Clarification with regard to provisions of secondary adjustment and giving an option to assessee to make one-time payment

Background: Section 92CE introduced by the Finance Act, 2017 which provides Secondary adjustments in certain cases. Secondary adjustment” means an adjustment in the books of accounts of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.

“primary adjustment” to a transfer price, means the determination of transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee.

Section 92CE(2) provides that;

  • Where, as a result of primary adjustment to the transfer price,
  • there is an increase in the total income or reduction in the loss, as the case may be, of the assessee,
  • the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed[7], shall be deemed to be an advance made by the assessee to such associated enterprise and
  • the interest on such advance, shall be computed in such manner as may be prescribed7.

Therefore, the intent of the legislature is not only to collect the tax on the primary adjustments made but also to bring such excess money, available with AE, in India in order to preserve foreign currency reserves of the India and forbid the practice of indirect advance.

The provisions of the secondary adjustment are subject to exemption in cases where the amount of primary adjustment made in any previous year does not exceed one crore rupees; and the primary adjustment is made in respect of an assessment year commencing on or before 1st April, 2016.

However, there are several obstacles and practical issues are involved in implementing these provisions, such as;

  • even minor primary adjustment will require the compliance of secondary adjustment (as the relaxation provision adjoin the threshold of Rs. 1 crore and applicable date with “and”)
  • how to counter situation in case if the assessee is not able to bring such excess money – any other alternative not available
  • whether assessee can receive such excess money from other AE or any other person
  • what if the assessee received the excess money in part?
  • In case of rollback APA, the provisions of secondary adjustments become applicable on prior concluded agreements

Proposed Amendment: In order to remove above obstacles and for smooth implementation of the provisions of secondary adjustments, the Bill has proposed various amendments, which discussed as follows;

Proposed Amendment Provision after amendment Analysis and applicability
Substitution of phrase in section 92CE(1)(iii) 92CE. (1) Where a primary adjustment to transfer price,—

…..

(iii) is determined by an advance pricing agreement entered into by the assessee under section 92CC [section 92CC, on or after the 1st day of April, 2017]

Accordingly, APA entered into after 01/04/2017 are covered under the provisions of the secondary adjustment

Applicable Retrospectively w.e.f. 1st April, 2018

Substitution of phrase in proviso to section 92CE(1) Provided that nothing contained in this section shall apply, if,—

(i) the amount of primary adjustment made in any previous year does not exceed one crore rupees; and [one crore rupees; or]

(ii) the primary adjustment is made in respect of an assessment year commencing on or before the 1st day of April, 2016.

Accordingly, the provisions of the secondary apply only if the primary adjustment is more than Rs. 1 crore

Applicable Retrospectively w.e.f. 1st April, 2018

Insertion of new proviso Provided further that no refund of taxes paid, if any, by virtue of provisions of this sub-section as they stood immediately before their amendment by the Finance (No.2) Act, 2019 shall be claimed and allowed Amendment in section 92CE(1) and first proviso to section 92CE(1) are made retrospectively, however, if the assessee has already made secondary adjustment and paid taxed thereon, then by virtue of this proviso, the assessee not is eligible to claim refund of such taxes paid.

Applicable Retrospectively w.e.f. 1st April, 2018

Substitution of phrase in proviso to section 92CE(2) 92CE(2) – Where, as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money which [the excess money or part thereof, as the case may be, which] is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed in such manner as may be prescribed. By proposing this amendment, the Government has made attempt to clarify that the interest on excess money to be calculated on balance amount, in case if excess money is received in part.

Applicable Retrospectively w.e.f. 1st April, 2018

Insertion of explanation in Section 92CE(2) Explanation. –– For the removal of doubts, it is hereby clarified that the excess money or part thereof may be repatriated from any of the associated enterprises of the assessee which is not a resident in India By inserting this explanation, it has been clarified that the assessee can receive excess money from any associate, which is not resident in India.

Applicable Retrospectively w.e.f. 1st April, 2018

Insertation of New Subsections in the section 92CE (2A) Without prejudice to the provisions of sub-section (2), where the excess money or part thereof has not been repatriated within the prescribed time, the assessee may, at his option, pay additional income-tax at the rate of eighteen per cent. on such excess money or part thereof, as the case may be. Through this proposed amendment, the Government has proposed to provide an option to the assessee to either bring the excess money in India or pay additional Income tax @ 18% (plus surcharge) on such excess money or part thereof.
(2B) The tax on the excess money or part thereof so paid by the assessee under sub-section (2A) shall be treated as the final payment of tax in respect of the excess money or part thereof not repatriated and no further credit therefor shall be claimed by the assessee or by any other person in respect of the amount of tax so paid. No credit of such additional tax paid u/s 92CE(2A) shall be allowed either to assessee or any other person
(2C) No deduction under any other provision of this Act shall be allowed to the assessee in respect of the amount on which tax has been paid in accordance with the provisions of sub-section (2A). No deduction, for example u/s 37 shall be allowed to the assessee of such additional tax paid u/s 92CE(2A)
(2D) Where the additional income-tax referred to in sub-section (2A) is paid by the assessee, he shall not be required to make secondary adjustment under sub-section (1) and compute interest under sub-section (2) from the date of payment of such tax If assessee pay additional tax u/s 92CE(2A), then he has not required to comply with the provisions of section 92CE(2) i.e. to make secondary adjustment and compute interest under rule 10CB

All above proposed amendments (from section 92CE(2A) to 92CE(2D)) are Applicable w.e.f 1st September 2019

Other Issues: Through the above proposed amendments, it is apparent that the Government have made attempt to bring clarification and for smooth implementation of provisions of secondary adjustment.

However, there are still certain question which required clarification, such as –

  • Time limit for payment of additional tax as proposed through section 92CE(2A)?
  • Whether Balance payoff / set off is sufficient compliance for Section 92CE(2)?
  • In case of rollback APAs, whether provisions of secondary adjustments are still applicable for the prior assessment years i.e. for the AY 2017-18 and before?
  • To make suitable amendments in rule 10CB in order to bring parity with proposed amendments as the rules are contain the reference of “excess money”
  • To clarify that whether the interest on excess money or part thereof is to be calculated for each day, month or part of month?
  • MAT impact on receipt of such excess money from AE and also MAT impact on recognising interest income?

7. Amendment of section 92D – Rationalisations of provisions relating to maintenance, keeping and furnishing of information and documents by certain persons

Background: Section 92D of the Act inter alia, provides for maintenance and keeping of information and document by persons entering into an international transaction or specified domestic transaction in the prescribed manner.

In view of BEPS Action plan 13 – “Guidance on Transfer Pricing Documentation and Country-by-Country Reporting”, the proviso to said section inserted through the Finance Act, 2016 provides that the person, being a constituent entity of an international group, shall also keep and maintain such information and document in respect of an international group as may be prescribed. Accordingly, Rule 10DA, prescribed for this purpose, provides the requisite information to be furnished in prescribed form, subject to the thresholds of the consolidated group revenue and the international transaction.

The wording of section 92D(3), give the raise to interpretation that the information and document to be kept and maintained by a constituent entity of an international group only if they entered into an international transaction or specified domestic transaction.

Proposed amendment: The proposed amendments are mentioned as follows;

Substitution of entire section 92D 92D. (1) Every person,––

(i) who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof as may be prescribed;

(ii) being a constituent entity of an international group, shall keep and maintain such information and document in respect of an international group as may be prescribed.

Explanation.––For the purposes of this clause,––

(A) “constituent entity” shall have the meaning assigned to it in clause (d) of sub-section (9) of section 286;

(B) “international group” shall have the meaning assigned to it in clause (g) of sub-section (9) of section 286.

(2) Without prejudice to the provisions contained in sub-section (1), the Board may prescribe the period for which the information and document shall be kept and maintained under the said sub-section.

(3) The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person referred to in clause (i) of sub-section (1) to furnish any information or document referred therein, within a period of thirty days from the date of receipt of a notice issued in this regard:

Provided that the Assessing Officer or the Commissioner (Appeals) may, on an application made by such person, extend the period of thirty days by a further period not exceeding thirty days.

(4) The person referred to in clause (ii) of sub-section (1) shall furnish the information and document referred therein to the authority prescribed under sub-section (1) of section 286, in such manner, on or before such date, as may be prescribed.’.

Analysis There is no major changes proposed in the wording compared to existing provisions of section 92D and proposed provisions of section 92D, except as follows;

Existing provision of section 92D(3) with proposed amendment in said section:

“The Assessing Officer or the Commissioner (Appeals) may, in the course of any proceeding under this Act, require any person who has entered into an [international transaction or specified domestic transaction] [in the course of any proceeding under this Act, require any person referred to in clause (i) of sub-section (1)] to furnish any information or document in respect thereof as may be prescribed under subsection (1), [referred therein] within a period of thirty days from the date of receipt of a notice issued in this regard:

By removing the reference to phrase “require any person who has entered into an international transaction or specified domestic transaction” the Government have clarified that the information and document to be kept and maintained by a constituent entity of an international group, and filing of required form, shall be applicable even when there is no international transaction undertaken by such constituent entity.

Other Issues: With substitution of above provisions, the Government has made attempt to clarify that the information and document to be kept and maintained by a constituent entity of an international group, and filing of required form, shall be applicable even when there is no international transaction undertaken by such constituent entity.

However, it is noteworthy to mention here that the Government has not given the power to The Assessing Officer or the Commissioner (Appeals) to call information w.r.t. constituent entity of an international group i.e. proposed subsection 3 of section 92D contain reference only to 92D(1)(i) and not contain the reference to 92D(1)(ii). However, subsection 4 to section 92D contain a reference of 92D(1)(ii).

Accordingly, it can be interpreted that the assessee cannot rectify the mistakes in respect of Master File and Local File during the course of assessment proceedings or appeal proceedings, by filing manual submission as the both authorities have no power to call such information. Therefore, the only resort to rectify such mistakes is to rectify the same through prescribed electronic mode.

Accordingly, this will enable the Government to share data with other countries in updated manner. Further, applicable penalty provisions u/s 271AA can be effectively implemented by doing so.

8. Amendment of section 195 & 197 – Online filing of application seeking determination of tax to be deducted at source on payment to non-residents

Background: Under the existing provisions of the section 195, if a person who is responsible for paying any sum to a non-resident which is chargeable to tax under the Act (other than salary) considers that the whole of such sum would not be income chargeable in the case of the recipient, he can make an application to the Assessing Officer to determine the appropriate proportion of such sum chargeable. This provision is used by a person making payment to a non-resident to obtain certificate/order from the Assessing Officer for lower or nil withholding-tax. However, the process is currently manual.

Currently, there is no any procedure specified, no Form of application specified. Consequently, application u/s 195(2) are made plain paper application.

Proposed Amendment: The proposed amendments are mentioned as follows;

Proposed Amendment Provision after amendment Analysis and applicability
Substitution of phrase in sub section 2 and 7 of section 195 (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order [in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed] the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

(7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order [in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed], the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable.

Accordingly, the manner, Form of application and basis of determination of reduced rate of tax u/s 195(2) shall be prescribed by the Government.

Applicable w.e.f. 1st November, 2019

Other Points: This is step towards improving effectiveness of tax administration, bringing transparency and make administration more accountable.

9. Amendment of section 286 – Online filing of application seeking determination of tax to be deducted at source on payment to non-residents

Background: The OECD report on Action 13 of BEPS Action plan provides for revised standards for transfer pricing documentation and a template for country-by-country reporting of income, earnings, taxes paid and certain measure of economic activity. India has been one of the active members of BEPS initiative and part of international consensus.

The report mentioned that taken together, specified three documents viz; country-by-country report, master file and local file will require taxpayers to articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess transfer pricing risks. It will facilitate tax administrations to make determinations about where their resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries.

Subsection 1 to section 286 provides that Every constituent entity resident in India, shall, if it is constituent of an international group, the parent entity of which is not resident in India, notify the prescribed income-tax authority.

Further, subsection 2 to section 286 provides that Every parent entity or the alternate reporting entity, resident in India, shall, for every reporting accounting year, in respect of the international group of which it is a constituent, furnish a report, to the prescribed authority within a period of twelve months from the end of the said reporting accounting year in the prescribed form and manner.

Also, subsection 9 to section 286 define accounting year and provide that “accounting year” means,—

  • a previous year, in a case where the parent entity or alternate reporting entity is resident in India; or
  • an annual accounting period, with respect to which the parent entity of the international group prepares its financial statements under any law for the time being in force or the applicable accounting standards of the country or territory of which such entity is resident, in any other case;

Accordingly, an alternate reporting entity resident in India whose ultimate parent entity is not resident in India, the accounting year would always be the accounting year applicable in the country where such ultimate parent entity is resident and cannot be the previous year of the entity resident in India.

Proposed Amendment: The proposed amendment is as follows;

Proposed Amendment Provision after amendment Analysis and applicability
Omission of phrase in section 286(9)(a) “accounting year” means,—

(i) a previous year, in a case where the parent entity or alternate reporting entity is resident in India; or

(ii) an annual accounting period, with respect to which the parent entity of the international group prepares its financial statements under any law for the time being in force or the applicable accounting standards of the country or territory of which such entity is resident, in any other case;

Accordingly, accounting year in case of the alternate reporting entity of an international group, the parent entity of which is not resident in India, the reporting accounting year shall be the one applicable to such parent entity.

The unintended anomaly as regards the interpretation of accounting year in case of alternate reporting entity is removed.

Applicable Retrospectively w.e.f. 1st April, 2017

10.Other Amendments proposed by the Bill relevant for Non-Residents

The Bill has proposed other various amendments with a view to Incentives to International Financial Services Centre, which are relevant to Non-Residents are summarised as under;

  • tax-neutral transfer of certain securities by Category III Alternative Investment Fund (AIF) in IFSC (subject to certain specified conditions)
  • widen the types of securities listed in section 47(viiiab) by empowering the Central Government to notify other securities for the purposes of this clause.
  • Exemption (u/s 10) to income by way of interest payable to a non-resident by a unit located in IFSC in respect of monies borrowed by it on or after 1st day of September, 2019, to facilitate external borrowing by the units located in IFSC
  • any dividend paid out of accumulated income derived from operations in IFSC, after 1st April 2017 shall also not be liable for tax on distributed profits u/s 115-O
  • No DDT on any dividend paid out of accumulated income derived from operations in IFSC, after 1st April 2017 to incentivising relocation of Mutual Fund in IFSC
  • Enhanced the period of profit link deductions u/s 80LA from 5 AYs to 10 consecutive AYs out of fifteen years beginning with the year in which the necessary permission obtained.

conditions contained in sub-section section 115A(4), regarding prohibition any deduction under chapter VIA, shall not apply to a unit of an IFSC for under section 80LA is allowed.

——————

[1] However, such arrangement shall not amount to impermissible avoidance arrangement, within the meaning of Chapter X-A – GAAR.

[2] filing of Form 15CA and obtaining certificate from an Accountant in Form 15CB

[3] Sub rule 3 provides that “Notwithstanding anything contained in sub-rule (2), no information is required to be furnished for any sum which is not chargeable under the provisions of the Act, if,— the remittance is of the nature specified in column (3) of the specified list which inter alia includes the item 27 “Remittance towards personal gifts and donations” – However, this entry may be subject to modification by the Government in due course.

[4] https://taxguru.in/income-tax/exemption-interest-income-specified-off-shore-rupee-denominated-bonds.html

[5] Herbalife International India [TS-257-HC2016(DEL)]

[6] [TS-22-SC-2007]

[7] Rule 10CB(1) provided time limit for repatriation and 10CB(2) provides applicable interest rate in case it excess money not repatriate with prescribed time limit

Author Bio

Qualification: CA in Practice
Company: Harchandani & Associates (https://harchandani.in/)
Location: AHMEDABAD, Gujarat, IN
Member Since: 09 Jun 2017 | Total Posts: 12
Manish Harchandani (founder of Harchandani & Associates) is practicing Chartered Accountant and mainly practice in Direct Tax, International Taxation, Transfer Pricing & FEMA related advisory, litigation & compliance matters. View Full Profile

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