APRIL 16-30
Direct Tax
Transfer Pricing
Indirect Tax
WHAT'S INSIDE...
What’s inside…
DIRECT TAX
1. Pune Tribunal applies Treaty rate over the higher tax rate
under the ITL even in the absence ...
0505
03
under the Act for tax withholding
where the non-resident does not
furnish a valid PAN, as compared
to the lower ta...
0505
expert committee had recommended that such dividend paid by the
foreign company should be excluded from the purview o...
0505
05
based on SBI Prime Lending Rate (“PLR”) plus 300 basis points
(resulting in interest rate of 14.88%), with regard ...
0505
06
Communication Private Limited [TS-96-HC-2015(DEL)-TP].
ITAT concluded that the taxpayer had earned significantly h...
The Information provided in this document is provided for information purpose only, and should not be construed as legal a...
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Nangia & Co - Tax and Regulatory Newsletter - April 16-30, 2015

Nangia & Co - Tax and Regulatory Newsletter - April 16-30, 2015
Published on: Mar 3, 2016
Published in: Economy & Finance      
Source: www.slideshare.net


Transcripts - Nangia & Co - Tax and Regulatory Newsletter - April 16-30, 2015

  • 1. APRIL 16-30 Direct Tax Transfer Pricing Indirect Tax WHAT'S INSIDE...
  • 2. What’s inside… DIRECT TAX 1. Pune Tribunal applies Treaty rate over the higher tax rate under the ITL even in the absence of Permanent Account Number 2. CBDT circular clarifies overseas dividend not covered by indirect transfer provisions of the ITL TRANSFER PRICING 3. Tribunal grants relief, states notional interest unwarranted since taxpayer’s margin are more than working capital adjusted margins of comparables; Also held that closely linked transactions can be benchmarked together. INDIRECT TAX 4. Mandatory pre-deposit for appeal to CESTAT not applicable where lis commences pre 2014 02 1. Pune Tribunal applies Treaty rate over the higher tax rate under the ITL even in the absence of Permanent Account Number1 Under the provisions of section 206AA of the Income-tax Act, 1961 (‘the Act’), a non-resident who receives any taxable amount is required to furnish a valid Permanent Account Number (PAN) to the payer of such amount, failing which, tax is required to be withheld at the higher of the following rates: DIRECT TAX  Rate specified in the Act; or  Rate in force (lower of the rate as specified in the relevant Finance Act or DTAA); or 20%. The requirement of furnishing a PAN was to ensure reporting compliance, address concerns on refund of taxes withheld etc. However, recently the Pune Income Tax Appellate Tribunal (‘ITAT’) in the case of Serum Institute of India Ltd. (‘the assessee’), dealt with the issue of applicability of higher rate of 20% as prescribed 1 ITA No. 792/PN/2013
  • 3. 0505 03 under the Act for tax withholding where the non-resident does not furnish a valid PAN, as compared to the lower tax rate prescribed for payments in the nature of interest /royalty/fees for technical services (‘FTS’) under the relevant Double Taxation Avoidance Agreement (‘DTAA’). The ITAT held that the higher rate prescribed under the Act would not prevail over the lower rate under the DTAA on account of a specific provision which permits an resident to claim benefit under the Act only to the extent it is advantageous. Accordingly, the Act cannot override the beneficial provisions of the DTAA. Therefore, the lower tax rate prescribed under the DTAA applies, whether or not the non-resident furnishes a valid PAN. The applicability of higher withholding tax rate, in the absence of a PAN, has been a contentious/ vexed issue, wherein the Tax Authorities had aggressively targeted payers who had failed to withhold tax at the higher rate of 20% and has disallowed expenditure, initiated recovery proceedings and also levied interest. This decision of the ITAT is a welcome relief for both, the payer and the non-resident recipient. The ITAT has reaffirmed the well-settled principle that provisions of the DTAA prevail over the Act and that the Act cannot supersede the DTAA. Accordingly, where the Act provides for any onerous obligation, which is in direct conflict with the DTAA, the same would not be valid. 2. CBDT circular clarifies overseas dividend not covered by indirect transfer provisions of the ITL The Act provides for taxation of gains arising from transfer of a capital asset situated in India. Finance Act 2012 amended section 9 retrospectively to tax indirect transfer of an Indian company, by providing that a share or interest in a company or entity registered or incorporated outside India would be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from assets located in India. Since the indirect transfer provisions created fiction of deeming shares of a foreign company to be situated in India, it was apprehended that such provisions may result in taxation of dividend income declared by a foreign company outside India. It was perceived that this may cause unintended tax consequences contrary to the intent of indirect transfer provisions. This aspect was also highlighted by an expert committee set up by the Government of India, under the chairmanship of Dr. Parthasarthi Shome, which examined the scope of the indirect transfer provisions.
  • 4. 0505 expert committee had recommended that such dividend paid by the foreign company should be excluded from the purview of the indirect transfer provisions. In this regard, while presenting the Union Budget 2015, the Finance Minister of India had mentioned in his Speech that the concerns raised shall be addressed by the CBDT through a clarificatory circular. Pursuant to above, The Central Board of Direct taxes (CBDT), has now issued Circular 4 of 2015 (dated 26 March 2015), clarifying that declaration of dividend outside India by a foreign company would not be taxable in India under the provisions of section 9 of the Act regarding indirect transfer of assets located in India, since such declaration and payment of dividend does not have an effect of transfer of any underlying asset located in India. The CBDT Circular definitely dispels the foreseen controversy with respect to foreign dividend and is a welcome move since it lays down a framework for a specific application of the Explanation introduced retroactively. The Circular would also be welcomed by overseas funds having India as their investment destination. Further since the Circular expressly clarifies that declaration of dividends by foreign company does not have the effect of any transfer of underlying asset, the circular should also benefit any litigation initiated prior to the issue of such Circular via-a-via taxation of foreign dividends. 04 3. Tribunal grants relief, states notional interest unwarranted since taxpayer’s margin are more than working capital adjusted margins of comparables; Also held that closely linked transactions can be benchmarked together. Facts of the case Kusum Healthcare Private Limited, (“the taxpayer”), is a company which principally manufactures and markets pharmaceutical products. The taxpayer is engaged in export of pharmaceutical products to its overseas associated enterprise (“AE”) as well as third parties. Transfer Pricing During Assessment Year (“AY”) 2010-11, the taxpayer was involved in export of pharmaceutical products (manufactured/ traded) to its AE. The taxpayer benchmarked the aforesaid international transactions using Transactional Net Margin Method (“TNMM”) with Profit level indicator (“PLI”) of operating profit/operating cost. During the course of the assessment proceedings, the above transactions were accepted by the Transfer Pricing Officer (“TPO”) to be at the arm’s length. However, the TPO, using the Comparable Uncontrolled Price (“CUP”) method, imputed a notional interest
  • 5. 0505 05 based on SBI Prime Lending Rate (“PLR”) plus 300 basis points (resulting in interest rate of 14.88%), with regard to receivable outstanding for a period exceeding 180 days resulting into Transfer Pricing (“TP”) adjustment of INR 1,57,54,943. Accordingly, the Assessing Officer (“AO”) incorporated the above adjustment in the draft assessment order. Further, The Dispute Resolution Panel (“DRP”) held that the TPO was justified in considering the impugned transaction as an international transaction and benchmarking it separately by applying CUP method. The DRP directed the TPO to apply SBI base rate (as on 30th June of the relevant previous year) plus 150 basis points and allow relief for interest forgone on outstanding receivable balances with third parties. Accordingly, the AO revised the amount of TP adjustment to INR 9,369,275 in its final assessment order. Aggrieved by the same the taxpayer filed an appeal before the Income Tax Appellate Tribunal (“ITAT”). The ITAT ruling along with its observations is discussed as under: Notional Interest unwarranted since the taxpayer earns significantly higher margin than the comparable companies which compensates for the credit period extended to the AEs The ITAT observed that an uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the function it performs or the products it provides. However, the amount of working capital required to support these functions varies on account of the different level of inventories, debtors and creditors. The ITAT held that high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them necessitating appropriate adjustment and thus, appropriate adjustments need to be considered to bring parity in the working capital of the taxpayer and the comparable companies rather than looking at the receivables independently. ITAT further observed that the taxpayer had submitted a working capital adjustment for the comparable companies selected in its TP report. The ITAT held that the taxpayer’s analysis has demonstrated the differential impact of working capital of the vis-a-vis its comparable companies in the pricing/profitability of the taxpayer which is more than that working capital adjusted margin of the comparables. Based thereon, the ITAT held that since the pricing/profitability of the taxpayer are more than the working capital adjusted margin of the comparables, additional imputation of interest on the outstanding receivable is not warranted. For this purpose, the ITAT relied on the case of Micro Ink Ltd Vs. ACIT [ITA No. 1668/AHD./2006] wherein the tribunal upheld the above principle and deleted the adjustment on account of alleged excess credit period allowed to AE and held that any separate adjustment on the pretext of outstanding receivables while accepting the comparable companies and transfer price of underlying transaction i.e. sale of goods by application of TNMM is unjustified. Closely linked transactions can be benchmarked together In addition to above, the ITAT held that principle of aggregation is a well established rule in the TP analysis which seeks to combine all functionally similar transactions wherein the arm’s length price (“ALP”) can be determined for a number of transactions taken together. In this regard, ITAT placed reliance upon the ruling of Hon’ble Delhi High Court in case of Sony Ericsson Mobile
  • 6. 0505 06 Communication Private Limited [TS-96-HC-2015(DEL)-TP]. ITAT concluded that the taxpayer had earned significantly higher margin than the comparable companies which compensates for the credit period extended to the AEs and thus, the approach by the taxpayer of aggregating the international transactions pertaining to sale of goods to AE and receivables arising from such transactions is in accordance with the established TP principles. Accordingly, the ITAT allowed the appeal of the taxpayer. Source: Kusum Healthcare Pvt Ltd Vs. ACIT [ITA No. 6814/Del/2014] 4. Mandatory pre-deposit for appeal to CESTAT not applicable where lis commences pre 2014 M/s Muthoot Finance Ltd. [‘Assessee’] engaged in the business of lending money to customers, against gold pledged by the said customers with the Assessee. The Assessee in turn assign the loan amounts to reputed banks who pays the purchase consideration for the loan amounts as the total of the principal amount, Interest and Indirect Tax other charges. The Authorities computed the difference between the purchase price and the book value of receivables as consideration and proposed service tax demand on the same. Subsequently, order confirming demand of service tax was passed by the Authorities. Aggrieved by the same, the Assessee filed a writ before the High Court of Kerala. The High Court of Kerala observed and ruled as under –  As the Assessee has an alternate remedy under the provisions of Finance Act 1994, assessee can prefer an appeal before the CESTAT.  Relying on the prima facie view of the High Court of Telangana & Andhra Pradesh that the institution of a suit carries with it an implication that all rights of appeal then in force are preserved to the parties thereto till the rest of the career of the suit. Further, the right of appeal that is vested is to be governed by the law prevailing at the date of institution of the suit or proceeding and not by the law that prevails at the date of its decision or at the date of filing of the appeal.  As in the Assessee’s case lis commenced in 2012, the Assessee is not required to make any make pre-deposit of 7.5% of the demand, as required pursuant to the 2014 amendment. Assessee can file appeal together with the application of waiver of pre-deposit. [Source: M/s Muthoot Finance Ltd V. Union of India & CCE, Kochi In writ petition No. 6173 of 2015(V)]
  • 7. The Information provided in this document is provided for information purpose only, and should not be construed as legal advice on any subject matter. No recipients of content from this document, client or otherwise, should act or refrain from acting on the basis of any content included in the document without seeking the appropriate legal or professional advice on the particular facts and circumstances at issue. The Firm expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this document. OUR OFFICES www.nangia.com nangia@nangia.com DELHI Suite - 4A, Plaza M-6, Jasola, New Delhi–110 025 Ph: +91-11-4737 1000, Fax: +91-11-4737 1010 MUMBAI 11th Floor, B Wing, Peninsula Business Park, Ganpatrao Kadam Marg, Lower Parel, Mumbai–400 013, India Ph: +91-22-6173 7000 Fax: +91-22-6173 7060 DEHRADUN 3rd Floor, NCR Plaza, New Cantt. Road, Dehradun–248 001 Ph: +91-135-274 7081, +91-135-274 7082 Fax: +91-135-2747080 SINGAPORE 24 Raffles Place, #25-04A Clifford Centre Singapore- 048621

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