Tax Audit Report (Form 3CD) AY 2018-19 – Amendments and Detailed Analysis

In order to get various amendments made to Income-tax Act, 1961 and other laws (indirect taxes) within the format of tax audit report (TAR), the Central Board of Direct Taxes (CBDT) issued notification No. 33/2018  on 20 July 2018 amending the report format of tax audit. These amendments to TAR will come in force from 20 August 2018, which implies that the tax audits filed with the Income-tax on or after 20 August 2018 will have to be in the amended TAR. The point wise changes have been discussed in the ensuing paragraphs:

Tax Audit Report Form 3CD Amendments & Detailed Analysis

A. Serial no. 4 of Form 3CD – Registration details of indirect taxes

Details regarding the registration number of Goods & Service Tax (GST) has been added

B. Serial no. 19 and 24 of Form 3CD – Deduction for investment in new plant or machinery

Disclosure with regard to section 32AD has been added in these clauses to Form 3CD. This section allows deduction in respect of investment made in new plant or machinery in notified backward areas of Andhra Pradesh, Bihar, Telangana and West Bengal. This clause was inserted by the Finance Act, 2015 w.e.f 1-04-2016

C. Serial no. 26 – Section 43B Certain deductions on actual payment basis

Clause f of section 43B has been added for reporting under this clause which pertains to allowing of liability outstanding towards Indian Railways for use of their assets, on actual payment basis

D. Serial no 29A – New clause introduced for section 56(2)(ix) of the Act

This section was introduced in Finance Act 2014 primarily to tax the advance amounts initially received against the capital asset in the course of negotiation, and later forfeited and no transfer effected. Reporting under this section has been got under the TAR

E. Serial no. 29B – New clause introduced for section 56(2)(x) of the Act

This section of the Act widened the scope of taxability of any sum of money, immovable property or any other property received by one person from another person for no consideration or inadequate consideration. In case of applicability of this section certain details viz. nature of income and amount thereof needs to be given

F. Serial no. 30A – New clause introduced for section 92CE of the Act (‘Secondary adjustment’)

Section 92CE was introduced by the Finance Act, 2017 which brought in the concept of secondary adjustment in the Act. According to this section, where there has been any primary transfer pricing adjustments made in the case of an assessee, under various circumstances (viz. suo motu by the assessee, by the assessing officer, as per safe harbour rules, etc.), the assessee is required to make a secondary adjustment provided:

  • Such primary adjustment is more than 1 crore; and
  • The adjustment pertains to assessment year on or after 1 April 2016

This provision also provides that where such amount is not recovered, then such balance should be treated as an advance given to the AE and recovered along with interest. Details required to be reported under this clause are as follows:

  • Reference of relevant section
  • Amount of primary adjustment
  • Where repatriation is required to be made in India as per section 92CE and if the same is made within prescribed time
  • Computation of interest income on such excess money not repatriated to India

G. Serial no. 30B – New clause introduced for section 94B of the Act (‘Thin Capitalisation’)

Section 94B was introduced in Finance Act 2017 to limit the interest deduction in certain cases and to bring in the concept of ‘Thin Capitalisation’.

Thin Capitalisation’ is a situation where an entity is financed at a relatively high level of debt compared to equity. Some multinational companies engage in aggressive tax planning techniques such as placing higher levels of third party debt in high tax countries, using intragroup loans to generate interest deductions in excess of their actual third party interest expense, using third party or intragroup financing to fund the generation of tax exempt income.

In order to curb such structuring by the multinational group Companies having their presence through subsidiaries/ associate companies or permanent establishments in India, the Finance Act 2017 introduced a new section 94B under the Income-tax Act, 1961 (‘the Act’), in line with the recommendations of OECD BEPS Action Plan 4, from the FY 2017-18, to provide that   interest expenses claimed by an entity to its associated enterprises shall be restricted to:

  • 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) (or)
  • Interest paid or payable to associated enterprise

whichever is less.

Relaxations provided by this section

  • A threshold limit of interest expenditure of INR 1 crore (INR 10 million) is provided to carve-out entities which have a low level of interest expense on the borrowings from their non-resident associated enterprises.
  • Further, to reduce the impact of earnings volatility on the ability of an entity to deduct interest expense, the interest expense which is disallowed can be carried forward up to 8 immediately succeeding tax years.
  • Moreover, taxpayers engaged in the business of banking or insurance are excluded from the scope of this provision keeping in view their specific sector-related features.

Where this clause is applicable to the assessee, following details are required to be reported in TAR:

  • Amount of interest expenditure
  • EBITDA during PY
  • Amount of interest expense over 30% of EBITDA
  • Interest expenditure brought forward
  • Interest expenditure carried forward

H. Serial no. 30C – New clause introduced for section 96 of the Act (‘GAAR’)

Section 96 (impermissible avoidance agreement) falls under the Chapter X-A (General Anti Avoidance Rule). This section was inserted to curb such arrangements where an agreement creates such rights between the parties to the agreement, by misuse of the provisions of the Act, which would not have been created in normal course between parties dealing at arm’s length. Under this clause, where the tax auditor is of the view that a particular arrangement falls under this provisions of the act then they are supposed to state the nature of such arrangement and the tax benefit created in the previous year to all parties in aggregate.

I. Serial no. 31 – Clause (ba), (bb), (bc) and (bd) introduced after clause (b) to serial no. 31 of TAR pertaining to section 269ST of the Act

Pursuant to introduction of section 269ST by Finance Act 2017, the TAR has been amended to include disclosure under this provision whereby there is a restriction on receiving by any person of an amount exceeding INR two lakh in aggregate from a person in a day; or in respect of a single transaction; or in respect of one event otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system. Where this section of the act is applicable only to the recipient, the disclosure requirements even mandate the payer to make the relevant disclosures along with the name, address and PAN of the party involved.

J. Amendments have been made to the language of clause 31 (c), (d) and (e) of the TAR with regard to the provision of section 269T of the Act

K. Serial no. 34 – Clause (b) Details of eTDS returns

Earlier this provision required only reporting of the fact as to whether the eTDS statement submitted contains all details/ transactions (Yes/ No). Now with the amendment to this clause, the TAR requires reporting of such details/ transactions which have not been reported in the eTDS return. This will be a task for the assessee with huge volumes of transactions which will require reporting of all such entries. It would be ideal that the assessee reports all transactions in the eTDS returns and in case of differences they should maintain proper reconciliations.

L. Serial no. 36A – New clause for details regarding deemed dividend u/s 2(22)(e) of the Act

Under the provisions of this section where any company, in which public are not substantially interested, makes any payment by way of loan or advance, to any person who holds not less than 10 percent voting power or to any other person in which such shareholder has substantial interest, then such payment to the extent of accumulated profits, will be treated as deemed dividend.

M. Serial no. 42 – New clause for details regards Form no. 61, 61A and 61B

This requires reporting of details of submission and due date of the respective forms with the income-tax. It also requires the auditor to ensure if all the required details have been submitted and if not, then the unreported details/ transactions are required to be reported in Form 3CD. The details required to be submitted in respective forms have been given hereunder:

  • Form 61 – this form requires details of all Form 60 to be submitted. Where transactions specified under Rule 114B of the Income-tax Rules, 1962 (‘the Rules’) have been undertaken by the assessee and document with that regard has been collected by the assessee without the PAN of the person giving the document, then the assessee is required to collect declaration in Form 60.
  • Form 61A – Statement of specified financial transactions as given in Rule 114E of the Rules which mandates reporting of certain financial transactions undertaken during a particular financial year, before due date (31 May).
  • Form 61B – Statement of reportable accounts in accordance with FATCA and CRS for a calendar year.

N. Serial no. 43 – New clause with regard to Country by Country Reporting (CbCR) u/s 286 of the Act

Section 286 r.w.r 10DB specifies the Companies liable to comply with CbCR requirements. Entities to whom CbCR is applicable need to comply with reporting requirements of Form 3CEAC and 3CEAD, wherever applicable. The details of parent entity, alternate reporting entity and date of furnishing of these reports are to be mentioned under this clause of TAR.

O. Serial no. 44 – New clause of expenditure with respect to registered/ unregistered entities under GST

This clause requires breakdown of entire expenditure debited to Profit & Loss a/c into the following heads:

  • Relating to goods or services exempt under GST
  • Relating to entities falling under composition scheme
  • Relating to other registered entities
  • Relating to entities not registered under GST

Conclusion

These additional disclosure requirements under TAR indicate that the CBDT has sifted majority onus relating to verification of compliances and income computation from assessing officers and GST auditors to tax auditors and have widened the scope to include international tax and other compliances such as CbCR, FATCA & CRS reporting, etc. Considering this, the reliability of tax officers on the tax audit reports have increased thereby increasing the documentation and verification requirements by the auditors.

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