Important issues/ provisions in Proposed New Direct Tax Law

(Audit of Income beyond a specified Threshold)

(Reward the Deductor instead of punishing for services to the State)

Further, on account of small defaults, thousands of deductors are facing long drawn out litigation / disputes with the income-tax department. This results in substantial wastage of time and efforts on the part of the deductors as well as the income-tax department.

a) A threshold limit may be drawn up and only if a default exceeds that threshold should the deductor be pursued as per existing law. All petty defaults may be overlooked as the cost of administering the law in such cases would surely be higher than the benefit to the Revenue.

b) Passbook scheme should be introduced where an assessee can deposit an amount every year at any point of time and that balance should be used for any payments / appropriations against his TDS liability.

a) To provide a monetary
compensation by way of credit against a tax liability if the application / appeal is not disposed of within the given time frame and;

b) If the application / appeal is not disposed of beyond a particular time limit, it should be treated as having been allowed.

While this will undoubtedly cost the exchequer, it will also create significant accountability.

Ideally a tax payer should be rewarded or helped by reimbursement of medical expenses or pension out of the taxes paid by him during his active life. With the help of technology now it is feasible to record the amount of taxes paid by an individual. It will help as an incentive for the tax payer to contribute positively for the nation building during his active service life.

Unfortunately, at present, there are various complicated and ambiguous provisions in the Act as well as in the FAQs issued by the CBDT which have resulted in substantial MAT liability on account of some of the Ind AS related changes in the financial accounts of companies.

In case deductor has not reported PAN of deductee u / s 206AA(1) or 206AA(6) i.e. non furnishing of PAN or invalid PAN furnished by deductee In case deductor has wrongly furnished TDS credit in name of deductee instead of such other person despite reporting of such information to deductor as per declaration. Deductee shall report such information in prescribed form to concerned authority before due date of filing ROI u / s 139(1) to claim TDS credit accordingly.

Accordingly we suggest that re- opening or revision of completed
assessments should not take place as a tool to rectify internal audit objections as such instances only create uncertainty for taxpayer and increase disputes and litigation.

Any addition or disallowance made without any evidence or in a routine manner or on estimate basis and in cases where Assessing Officer takes a view which is different from bonafide view adopted by assessee on any issue involving interpretation of any provision of IT Act or any other law in force and which is supported by any judicial ruling.

Further, there is frequent litigation in respect of transactions of Income arising to the Foreign Company, and adjustments proposed / made by TPOs, when payment is accepted at Arm’s Length in hands of Payer Indian Co.

ii) Therefore, while dealing with TP provisions, base erosion principle should be kept in mind and if this test is not satisfied then notional adjustment under TP should not be made. Areas where there is widespread litigation are in respect of payment of Royalty / FTS and interest transactions.

Lot of litigation is happening under TP for the intra group services / cost share agreements on account of insistence by TPOs to establish with more than reasonable documentation for establishing benefit test as well as provision of services. Even though, it may not be possible to suggest any standard rules and regulations for maintaining  documentation, amendment could be made in TP provisions for recommending maintenance of documentation including certification of cost base and allocation basis as certified by Independent Accountant / Auditor of Parent Company. Insistence of documents for benefit analysis or for provision of services with such rules will help to reduce the litigation at various levels including Tribunal.

Safe Harbor Rules have provided certain documentation for low value services, cost base and allocation basis. These could be enlarged to cover intra group services and cost charges.

The concept of secondary adjustment in Section 92CE was introduced w.e.f. AY 2018-19. This provision results into a violation of FEMA as it entails treating the transfer pricing adjustment amount as a loan to Associated Enterprises.

In practice, at times it is quite difficult for the Associated Enterprise to repatriate the excess money from the foreign company keeping in view the foreign exchange laws, accounting principles and corporate laws etc. prevailing in other country.

The threshold limit of Rs. One Crore is quite low as most of the time the TP adjustments made are above this figure.

Under Rule 10CA, the TPO can insist on substituting the figures of current year in case the same were not available at time of preparing study report. This instills a lot of uncertainty.

a) the definition should be the same as provided by OECD and UN; and

b) the prescribed rate should apply irrespective whether Indian party is receiving or rendering the services and not only where Indian party is receiving such services.

a.

i. Employees deputed abroad by Indian Companies

Controversy arises on several occasions particularly in respect of taxability of employees of Indian MNCs deputed for rendering services outside India, either on short term or long term basis. Many times, major part of the salary is paid / deposited by the Indian company / employer into the Indian bank account of the employee (mainly to discharge their obligations towards EMI, family expenses, PF, insurance, schooling expenses etc). Part of the salary and allowances are paid to such expats in the country where they are rendering services.

The tax department takes a view that since he is an employee of an Indian company, and he is receiving part of the salary in India, the salary will be taxable in India as per Section 5 and / or under Section 9(1)(ii) of the IT Act. Even though some of the treaties do clarify that if the employee is working for more than 180 days in other country he will be chargeable to tax only in that country.

Suggestion for amendment:

Suitable amendment have to be made in Section 5, Section 9 (1)(ii), 9 (1)(iii) and Section 192 etc. to clarify that in respect of employees of Indian companies, if they are working in a foreign country for more than 180 days in a financial year, salary will be deemed to accrue or arise in the country, wherever services are rendered, irrespective of where the salary is received. This is based on source principle and based on the principle that income accrues to the employee wherever the services are rendered.

This would considerably reduce the litigation in respect of taxation of in bound and outbound expats.

Presently, Section 9(1)(iii) in respect of Government employees, provides that salary of Government employees, taxable only in India, irrespective of wherever services are rendered.

It is a common practice for MNCs operating in India to depute their senior executives to ensure smooth functioning of their Indian subsidiaries or joint ventures in India. The expats are deputed and become employees of Indian subsidiaries or joint venture companies. Their salaries are partly paid in India and partly paid by their overseas parent company in the bank accounts of expats, (mainly for expats to discharge their obligations like EMI, social security, insurance, schooling expenses etc.). Tax is however paid by the expats in India on the entire salary irrespective of where salary is received. The Indian subsidiary reimburses the parent company towards part of the salary paid / deposited for expats.

Controversy has arisen in respect of taxability of reimbursements / payments made by Indian subsidiary to parent company towards amount paid / deposited by them for expats. In many cases, view is taken by the Tax Department that, such reimbursement is chargeable to tax in India as FTS on the ground that the parent company is rendering services to Indian subsidiary / JV. In many cases Tax Department has taken a view that service PE gets created, on account of deputation of employees to India. There are judgements by AAR, HC and TAT on various issues resulting in multiple taxation of the same income as salary in the hands of the employee and FTS / Business Income in the hands of the Foreign principal.

Suggestion :

With a view to reduce litigation and achieve certainty, suitable amendments need to be made in Section 9(1)(vii) and Section 195, that once the expats / employees of the foreign company are deputed / seconded to Indian subsidiary, and if they are working as an employee of Indian company and salary earned by them is taxed in India, based on services are rendered in India, the foreign company should not be taxed on the amount of reimbursements given by Indian subsidiary (towards part of the salary paid to the employees on behalf of Indian subsidiary) as FTS on the ground that services are rendered by expats for and behalf of foreign company.

Many times even the Treaties do not envisage such situation and do not provide a solution to reduce the litigation. Therefore, if the amendment is made in the Act, it will avoid lot of litigation.

In view of the far reaching importance, PE should be clearly defined in the Act.

Consequent to the decision of Ishikawajima 288 ITR 408, it was felt that law is now well settled, and offshore supply of goods or rendering of services outside India (i.e. offshore services) by the foreign company to Indian companies, will not be chargeable to tax in India, unless the foreign company has a PE in India. Subsequently, amendments were made in Section 9(1)(vii) that the services rendered by foreign company to Indian companies, irrespective of the place of rendering service, whether in India or outside India, will be chargeable to tax in India, irrespective of the fact whether foreign company has PE in India or not.

Many treaties have a provision that in respect of offshore supply of goods, where the title of goods and delivery is given outside of India, no income should be deemed to accrue or arise to foreign company in India, merely because payment is done by Indian company from India. As regards, rendering of offshores services, most of the treaties, provide that unless the foreign company has PE in India, payment for offshore services shall not be taxable in India.

Controversy:

Tax Department has started taking a view that after supply of goods and services from outside India, foreign company has also rendered onshore services, then it would be deemed to be installation PE / fixed place PE and profit arising from the entire supply and services i.e. offshore and onshore, will be deemed to accrue to the PE in India. This view has been adopted more regularly after the decision of Madras High Court, in the case of Ansaldo, 310 ITR 237 without realizing that it was peculiar to the facts of that case only.

Even in respect of offshore services rendered by foreign companies (which does not have PE in India) to the Indian companies, are held to be chargeable to tax in India, based on the explanation to Section 9(1) inserted by Finance Act 2010 with retrospective effect (Explanation is made applicable to 9(1)(v), 9(1)(vi) and 9(1)(vii))

Suggestions:

Based on the principle of sourced based taxation, amendment should be made in Section 9(1) read with Section 195 to clarify that offshores supply and services, should not be taxed in India unless the foreign company has PE in India and said income is attributable to that PE. In case after completion of offshore supply and services, onshore services have been rendered by such foreign company, income that is attributable to the activities carried out by the PE should only be liable to tax. This will help to bring the provisions in the Act in line with the Treaty provisions.

Even though many Courts (L.G. Cables 237 CTR 438 Delhi(HC), Hyosung Corporation 314 ITR 343(AAR)), Tribunals have taken a view on those lines, still the Tax Department in many of the contracts of offshore and onshore supply create these controversies. Hence, clarity and certainty in the statute itself will avoid unwanted litigation.

Exceptions:

However, exceptions could be provided in respect of certain type of income which is deemed to accrue or arise in India on presumptive basis like in case of Royalties, profits arising to Shipping, Airline, certain type of projects in India etc.

ii. Attribution of Profits:

Foreign companies operating in India, expect certainty about the rate of tax and the income being attributed to the PE in India. Higher attribution of profit to PE or any litigation, ultimately increases cost of the projects and cost to be borne by the Indian entity availing those services. Therefore, for improving the investment climate and ease of doing business in India, it is important to bring about certainty and clarity in determination of PE and attribution of income to such PE.

As per the provision of Section 9(1)(i), all income accruing or arising through or from business connection in India, or through or from any property in India or from any asset or source of Income in India, or through the transfer of a capital asset situated in India is taxable in India. It is also clarified in the Explanation that in case of a business, where all operations are not carried out in India, income of the business shall be deemed to accrue or arise in India, only to the extent as is reasonably attributable to operations carried out in India.

Most of the treaties also contain similar provisions for deeming the income that could accrue or arise in India.

Controversy:

Lot of litigation arises on account of attribution of profit / Income to the PE of a foreign company or on account of business connection in India.

Suggestions:

Appropriate amendment in Section 9(1)(i) read with Section 195 and some clarity need to be brought in for determining or attributing profits to a PE in India or on account of business connection.

Amendment could be considered on the basis of existing provisions contained in Section 44DA (special provisions for computing income by way of royalty etc. in case of Non-resident having PE in India) or 44BBB (special provisions for competing profits and gains of foreign company engaged in business of civil construction in Turnkey power projects).

It is true that there cannot be universal rate applied to all assessees for determining pro fit attributed to a PE of a foreign company. However, it should be industry, sector or activity wise. These rates may be prescribed in Rules, based on mandate given by the Act, (as determined by the committee consisting of industry representatives, IRS and professionals), and may be reviewed periodically.

The taxation principles should be on the basis of source, either on gross basis or on the basis that profit is worked out similar that to of Indian company.

iii. EPC Projects:

In case of EPC projects executed by PE, actual profitability from the project shall be considered on the basis of overall profitability earned by the foreign company and by attributing proportionately to Indian PE. In these cases also, presumptive basis of taxation could be recommended unless proved by PE to be lower than that with documentary evidence.

ii. The levy is applicable to payments made by a person resident in India, irrespective of whether the payments are made for carrying business / profession in India or outside India. The applicability of levy could be viewed as “extra-territorial”and could lead to protracted litigation.

iii. The levy should not be made applicable to payments in respect of services utilized for carrying on the business or profession outside India (Similar to Section 9(1)(vii))

i. In the current Indian tax regime, losses of a business carried on by subsidiaries / group entities are not allowed to be offset against the profits of business carried on by the holding entity or by other subsidiaries / joint venture entities in the group. This leads to inefficiency and immobility in the conduct of business operations, resulting in complex business structures. In several situations (e.g. infrastructure sector or financial services sector), commercial imperatives (e.g. requirement of a separate Special Purpose Vehicle for bidding for infrastructure projects) or regulatory requirements (e.g. Securities and Exchange Board of India regulations requiring a separate entity for an Asset Management Company), necessitate set up of separate companies; however, it is more rational to look at this as an integrated operation, which is the underlying rationale for the suggested Group Taxation regime.

ii. Based on the Group Taxation regimes prevailing in various countries the following concepts are suggested to be introduced in Indian tax legislation:

Concept –Group Taxation Relief Mechanism:

Allow transfer of losses incurred by eligible entities under the group to the profit making entities within the group for set-off against such profits

Entities to be considered for group taxation (Eligible entities under the (Group) :

All domestic wholly owned subsidiaries may be covered

Anti-abuse provisions

Restriction on divestment of entities aggregated under group taxation for certain period of time say 3 years post set-off of losses / income

MAT provisions

Non-applicability of MAT to profit making entities aggregated under group taxation

It suggested to bring about clarity on taxability of capital gains on transfer of Rupee Denominated Bonds through Stock Exchanges outside India since its situs is in India.

i) Sale of shrink wrapped software;

ii) Payment for standard facility with no human intervention

iii) Treaty benefit to airlines on code sharing basis.

It is suggested that the requirement of SBI TT buying rates be substituted with the RBI exchange rate which is freely available on RBI website.

i) The composition of AAR needs to be changed as under:

Chairman –Retired / Sitting Supreme Court / High Court Judge;

Vice Chairman –Retired President of ITAT or retired Vice President of ITAT or retired members of ITAT as recommended by President;

Members –CCIT having experience of at least 2 years in International Tax or Senior Officer of legal department having 2 years’ experience in direct tax including International tax.

Members should have a tenure of minimum 3 years. Also there should not be any time gap between date of retirement and new appointments of members and chairman.

ii) The transaction limits (of minimum Rs.100 Crores) and fees for approaching AAR (ie. Rs. 2 lakh –10 lakh) by resident tax payer should be revisited as they are quite high –reduction will help to broad base AAR, which can significantly help to mitigate litigation (availability of Advance ruling before transaction is entered into) which will help in enhancing the Ease of Doing Business.

iii) Admission process can be dispensed with and cases should be heard as in ITAT to expedite disposals –only technical conditions can be verified based on which application to be admitted or rejected. Other objections of Revenue can be heard at the time of final hearing. This will speed up the process and time limit of 6 months for pronouncing ruling can be adhered to.

iv) It is suggested that the rulings of the AAR be made appealable directly to the Supreme Court.

v) The recommendatory time limit of 6 months should be made mandatory so that the real purpose of providing certainty to taxpayers is achieved.