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Discussion on Budget Updates – Direct Taxes CA Ramprasad by CA Mallikarjuna Rao CA Mithilesh

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Presentation on theme: "Discussion on Budget Updates – Direct Taxes CA Ramprasad by CA Mallikarjuna Rao CA Mithilesh"— Presentation transcript:

1 Discussion on Budget Updates – Direct Taxes CA Ramprasad by CA Mallikarjuna Rao CA Mithilesh Date: 18 th March 2015

2 Personal & Corporate Tax Proposal ► Rates of Tax ► Domestic taxation – AP and Telangana ► Domestic taxation – deductions ► Domestic taxation – others ► International taxation – clarification on indirect transfers ► International taxation – others ► Measures against Black Money 2

3 Changes in Surcharge No change in tax rates and the income slabs Surcharge rate has been increased from 10% to 12% for individual taxpayers having income exceeding INR 10 Mn Tax payable to increase due to the increase in surcharge – maximum marginal tax rate % 3

4 Personal Tax - Rates 4 PERSONSLAB RATESSURCHARGE TOTAL INCOME (Rs)RATE Individual/AOP/BOI/HUF/AJP/ NR( Individual) Up to Rs. 2.5 lakh 2,50, lakh 5,00, lakh Above 10 lakh NIL 10% 20% if Total Income exceed `1 crore Senior Citizen ( 60 yrs above less than 80 years) Up to Rs lakh 3,00, lakh 5,00, lakh Above 10 lakh NIL 10% 20% if Total Income exceed `1 crore Very Senior Citizen ( 80 years or above) Up to Rs. 5 lakh 5,00, lakhs Above 10 lakh NIL 20% if Total Income exceed `1 crore

5 Allowances and Deductions 5 Deduction for medical treatment (u/s 80DD, 80DDB and 80U) Increase in limit for medical treatment with respect to certain diseases to INR 80,000 in the case of very senior Citizens (80 years or more). Tax payer is also required to obtain a prescription from a specialist doctor in order to claim this deduction instead of a certificate from doctor of a Government hospital Increase in limit for medical treatment for a person with disability to INR 75,000 and INR 125,000 for severe disability Infrastructure bonds Proposal to re-introduce tax free infrastructure bonds New Pension Scheme Overall cap limit for employee contribution is 10% of Salary or GTI Additional deduction of INR 50,000 ( not included in limit of Rs. 1,50,000 U/S 80CCE.

6 Allowances and Deductions 6 Deduction for medical treatment (u/s 80DD, 80DDB and 80U) Increase in limit for medical treatment with respect to certain diseases to INR 80,000 in the case of very senior Citizens (80 years or more). Tax payer is also required to obtain a prescription from a specialist doctor in order to claim this deduction instead of a certificate from doctor of a Government hospital Increase in limit for medical treatment for a person with disability to INR 75,000 and INR 125,000 for severe disability Infrastructure bonds Proposal to re-introduce tax free infrastructure bonds New Pension Scheme Overall cap limit for employee contribution is 10% of Salary or GTI Additional deduction of INR 50,000 ( not included in limit of Rs. 1,50,000 U/S 80CCE.

7 Other Changes 7 Wealth tax abolished! Assets reported under wealth tax return will now be required to be reported in income tax return – return forms to be notified Income tax return filing obligation even if no taxable income Forms for investment/exemption/deduction declaration by employees Section 192 amended to enable CBDT to prescribe form and manner in which employer need to obtain evidential proof for any claim by employee Detailed rules awaited – likely more diligence expected from employers! Withholding on PF withdrawal PF withdrawals which are taxable will be subject to 10% if amount exceeds INR 30,000. If PAN not furnished, maximum rate to be applied Possibility of submitting Form 15G/H to avoid TDS if total income is below the basic exemption threshold limits

8 Corporate Tax Rates – Rates of Tax 8 ► No change in corporate tax rates proposed for Financial Year (‘FY’) ► Proposal to levy additional surcharge of 2% on corporates having taxable income of over INR 1 crore. Accordingly, applicable surcharge for corporates having taxable income over INR 1 crore but less than INR 10 crores is 7%, and applicable surcharge for corporates having income over INR 10 crores is 12%. ► Effective tax rate for Companies for FY will be %. ► Surcharge on DDT and Buyback tax also increased to 12%. Wealth Tax Proposal to abolish wealth tax (in lieu of which, an additional surcharge of 2% on taxpayers having taxable income of over INR 1 Crore is proposed to be levied). Information relating to assets currently forming part of wealth tax return shall now be captured by way of modification in the income tax return.

9 Rates of Tax (wef. AY ) 9 ParticularsCurrent effective rate 1 (Upto A.Y ) Proposed effective rate 1 Domestic company ► Income > 1crore, but <10 crore ► Income > 10 crore 32.45% 33.99% 33.06% % 3 Company other than domestic Company ► Income > 1crore, but <10 crore ► Income > 1 crore 42.02% 43.26% 42.02% 43.26% Non-corporate assessees ► Income > 1 crore33.99%34.61% 3 MAT rate for domestic companies ► Income > 1crore, but <10 crore ► Income > 10 crore 20.01% 20.96% 20.39% % 3 AMT rate for non-corporates ► Income > 1 crore20.96%21.34% 3 TDS on royalty & FTS payment to NR ► Income > 1crore, but <10 crore ► Income > 1 crore 26.27% 27.04% 10.51% % 4 1. With applicable surcharge and 3% Education Cess 2. Due to increase in surcharge from 5 to 7% 3. Due to increase in surcharge from 10 to 12% 4. Due to decrease in basic rate from 25% to 10%

10 Tax on Distribution of Income (W.e.f A.Y ) 10 ParticularsRecipientCurrent effective rate 1 (Upto A.Y ) Proposed effective 1 rate DDT rate u/s. 115 –O19.99%20.36% 2 Buyback tax rate u/s. 115-QA22.66%23.07% 2 Distribution by mutual fund u/s 115-R Individual or Hindu Undivided Family28.33%28.84% 2 Any other person33.99%34.61% 2 Distribution by Infrastructure Debt Fund (IDF) u/s 115-R Non-residents5.67%5.77% 2 Distribution by securitization trust u/s 115-TA Individual or Hindu Undivided Family28.33%28.84% 2 Any other person33.99%34.61% 2 Tax exempt entities (Mutual funds)Nil 1. With applicable surcharge and 3% Education Cess 2. Due to increase in surcharge from 10 to 12%

11 Domestic Taxation – AP & Telangana 11 Additional investment allowance of 15% proposed on new plant and machinery (new section 32AD) Undertaking is engaged in the manufacture of article or thing on or after 1 April 2015 in notified backward area of AP and Telangana Investment is made during the period 1 April 2015 to 31 March 2020 (eligible period) New assets are acquired and installed during the said period The said deduction shall be in addition to Normal depreciation Existing investment based allowance as per section 32AC New assets acquired cannot be transferred within a period of 5 years from date of installation except in certain circumstances Further, in respect of such notified areas, the additional depreciation of eligible plant and machinery shall be at the rate of 35% instead of the current rate of 20%

12 Domestic Taxation – AP & Telangana - Illustration 12 ParticularsFormulaAmount (INR) Cost of assetA100 Deductions - Investment allowance u/s 32AC (15%)*B = A*15%15 - Investment allowance u/s 32AD (15%)C = A*15%15 - Depreciation u/s 32 (15%)D = A*15%15 - Additional Depreciation u/s 32 (35%)E = A*35%35 Total Deduction available for the yearF = B + C + D + E80 Written Down value of the assetG = A - (D + E)50 * Subject to satisfaction of investment threshold limits

13 Domestic Taxation – Deductions 13 Mandate introduced to fulfil the conditions with regard to maintenance of audit and accounts along with furnishing of prescribed reports to DSIR for the purpose of claiming weighted deduction u/s 35(2AB) The DSIR shall now be required to send the report to Principal Chief Commissioner or Chief Commissioner having jurisdiction over the Company in addition to DGIT (Exemptions) Deduction u/s 80JJAA in respect of additional wages paid to new workmen is extended to all type taxpayers (including LLP, Partnership Firm, Individuals, etc.) engaged in manufacturing of goods in factory Further, the minimum number of workers employed is reduced from the existing 100 to 50 for claiming the deduction 100% deduction u/s 80G for Swachh Bharat Kosh, Clean Ganga Fund.

14 Domestic Taxation – Others 14 Threshold limit for applicability of transfer pricing rules to specified domestic transactions increased to INR 20 crores from erstwhile INR 5 crores Provisions of 40A(2) and others still applicable on transactions below threshold limit Corporate laws may still require compliance Share of a member in AOP on which income tax is not payable shall be excluded for MAT purpose Accordingly, corresponding expenditure, if any, shall be added back in computing the book profit as per MAT

15 Changes in TDS 15 Section 194DA of the Act provides for deduction of tax at from payments under life insurance policy, which are chargeable to tax. The benefit of non-deduction of tax from any sum paid to transport contractor referred to in U/S 194C(6) is restricted to only to those owning ten or less goods carriage at any time of previous year and declaration to this effect is furnished. (WEF 01/06/2015 ). Tax has to be deducted at source on payment of interest on time deposits to members by co- operative banks U/S 194A. Time deposits include “Recurring Deposits”…. Interest referred to in Section 194A shall be made with reference to income credited of paid by banking company or co-operative bank or public company adopting core banking solutions. Deduction of tax at source U/S 194A from payment of interest on the compensation amount awarded by the Motor Accident Claim Tribunal if such payment or aggregate of payments during the financial year exceeds Rs. 50,000/-

16 Changes in TDS 16 Sec 200A provides for computation of fee payable U/S 234E at the time of processing of TDS/TCS statement. Sec 206CB provides for processing of TCS statement including correction statement. No interest will be charged U/S 220 if the interest for delay in collection of tax at source is levied U/S 206C(7) in the intimation issued U/S 206CB. Tax deduction or collection made by the government deductor without production of challan, the person responsible for crediting the sum to the credit of the Central Government shall furnish a statement within the prescribed time and format. Failure to do so attract a penalty of Rs. 100/- U/S 272A till default continues

17 Domestic Taxation - Others 17 The formulae for computation of tax sought to be evaded has been amended to also provide for the levy of penalty in situations where, income has been assessed as per MAT, but additions are made to income under regular provisions as well. Either by way of same addition or separate addition Orders are now proposed to be deemed ‘erroneous in so far as prejudicial to the interests of the revenue’ if, in the opinion of the Principal Officer or Commissioner: The order is passed without making any inquires or verification; The order is passed allowing any relief without inquiring into the claim The order has not been made in accordance with any order, direction or instruction by the Board The order has not been passed in accordance with any decision, prejudicial to the assessee, rendered by the Jurisdictional HC or the SC

18 International Tax 18 ► Indirect Transfer ► Place of Effective Management (POEM) ► GAAR deferral ► Reduced tax rate on royalty / FTS ► Foreign Tax Credit ► Residential status of Indian citizen as crew member on ‘foreign’ ship ► Reporting requirements u/s 195(6) ► Taxability of offshore funds managed by fund managers in India ► Interest Source Rule

19 Reporting Requirements u/s 195(6) (wef. 1 st June 2015 Present law Any payment* made to a NR which is chargeable under the ITA, will attract withholding under S.195(1) By the FA 2008, a new sub-section (6) was inserted in S. 195, providing that the person referred in S.195(1) is required to electronically furnish the information relating to such payments in form and manner as may be prescribed. As per the present position, the reporting requirement under S. 195(6) applies only in cases where remittance made to NR is chargeable to tax under the ITA. For the purpose, Rule 37BB was introduced in the Income-tax rules, 1962(IT Rules) prescribing Form 15CA /CB for furnishing the information electronically. Rule 37BB and related forms were amended in September 2013 which increased the scope of reporting to cover various other payments made to NRs subject to withholding under other sections of the ITA*. Presently, no specific penalty for default of non reporting u/s. 195(6) 19

20 Reporting Requirements u/s 195(6) (wef. 1 st June 2015 Proposals in the FB 2015 Amendment to S.195(6) To amend S. 195(6) to provide that person responsible for paying any sum whether chargeable to tax or not, to a NR is required to furnish the information in such form and manner as may be prescribed. Memorandum explains that mechanism of 195(6) reporting is to attain twin objectives - Ensuring deduction of tax at appropriate rate from taxable remittance Identifying remittances on which tax was deductible but the payer has failed to deduct Present provisions of 195(6) which cover only taxable payments which defeat object of identifying TDS defaults 20

21 Reporting Requirements u/s 195(6) (wef. 1 st June 2015 New Penalty provision introduced Penalty under new S. 271I of INR 1 Lakh for non-submission or inaccrurate submission of information under 195(6) Will penalty apply for each default? No penalty imposable if it is proved that there was ‘reasonable cause’ for the default (S. 273B) 21

22 Place of Effective Management (POEM) [ S.6(3)] [w.e.f ] S. 6(3) of ITL: A Company is ‘resident in India’ in a previous year if: it is an Indian company or During that year, the control and management of its affairs is situated wholly in India Apprehension: Very high threshold of residency leads to creation of overseas shell companies controlled in India but hold one board meeting outside India In order to align the ‘residency’ concept with International standards (Article 4(3) of OECD MC and India’s DTAA’s with other countries) the concept of Place of Effective Management (POEM) is now sought to be introduced by FB2015 Meaning of POEM  A place where key management and commercial decisions are made  Place where decisions are, in substance  Decisions are necessary for the conduct of the business of an entity as a whole  Decisions may be made at any time in the relevant year FB 2015 seeks to provide that a company shall be a resident in India if:  it is an Indian company; or  its place of effective management, at any time in that year, is in India 22

23 S. 115A – Reduced tax rate on royalty / FTS (w.e.f.1 April 2016 i.e. Tax Year and AY ) S. 115A provides for a tax rate, inter alia, In respect of income by way of royalty and fees for technical services (FTS), which is not effectively connected to a PE of a non-resident taxpayer (NR) in India and Received by an NR from Government or an Indian concern 1 after 31 March 1976 S. 115A currently provides for a tax rate of 25% on gross amount of royalty/FTS The tax rate of 25%* was introduced by Finance Act 2013, considering that majority of tax treaties allowed India to levy tax on gross amount of royalty at rates ranging from 10% to 25%, whereas the tax rate as per section 1 115A then was 10%* The FB 2015 now proposes to amend the section to revert back to the tax rate to 10%* Reduced rate applies also to past continuing transactions Objective of amendment: to reduce hardship faced by small entities due to high rate of tax of 25% and to facilitate technology inflow to small businesses at low costs Treaties providing for a tax rate of 10% will still be relevant since, it is inclusive of surcharge and education cess, and is thus, the final tax rate If an NR taxpayer is eligible for treaty rate of 10% (which is inclusive of SC and Cess), higher withholding rate of 20% may be applicable under S. 206AA (if NR recipient does not possess/ furnish a valid PAN) 23

24 Indirect transfer [S.9(1)(i)] [w.e.f. A.Y ] Indirect transfer provisions will apply only if, as on “specified date”, the following conditions are satisfied cumulatively - Value of assets located in India > INR 10 Cr and Value of assets located in India is at least 50% of the value of all assets owned by the company which is subject of transfer Gross value of all assets (tangible or intangible) to be considered No reduction for liabilities, if any, in respect of the assets (Refer further slides on impact of liabilities) Valuation of assets based on FMV of assets - But, method for determining FMV (e.g. DCF, NAV) to be prescribed in the rules Taxation in proportion to the value of Indian assets Method for determination of proportionality proposed to be prescribed in the rules Amendment has no impact on relief by virtue of treaty provisions 24

25 Specified Date Specified date for FMV valuation is generally - the end of the “accounting period” of FCo preceding the date of transfer. But it is date of transfer if the book value of assets of F Co / FE as on date of transfer exceeds the book value at preceding year end by 15% Specified date relevant for determining FMV proportion of Indian assets Specified date not for relevant for determining ‘small’ shareholder exemption “Specified date” values are based on book value Will Book value exclude revaluation? Arguably, book value is net of amortization and depreciation Determination of whether >15% value threshold is breached will necessarily require preparation of balance sheet of F Co as of the date of transfer Profits / losses during intervening period will impact calculation Indirect transfer trigger arises if FMV of Indian assets as of the “specified date” is ≥50% of the total FMV of assets of F Co Not clear if ‘book value’ of assets needs to be reckoned with or without value of liabilities 25

26 International Taxation – Clarification on Indirect transfers Exemption available in certain cases for: Small shareholders (not having management or control and holding less than 5% of voting power/ share capital) Foreign amalgamations and demergers, subject to certain conditions Reporting obligations exist on Indian concerns through or in which Indian assets are held by foreign company/entity (S.285A) Detailed reporting requirements proposed to be prescribed in the rules Reporting is for the purpose of determination of any income accruing or arising in India Apparently, the information is to be furnished after the transaction is completed and tax trigger is attracted Failure to report attracts penalty (S.271GA) 2% of the transaction value, if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern INR 5,00,000, in any other case Considering the levy of 2% penalty, S. 285A may impliedly cover such transactions which result in direct or indirect transfer of management or control right of an Indian concern 26

27 GAAR Deferral (Chapter X-A and Sec 144BA) GAAR deferred by two years i.e. applicable to income earned from 1 April 2017 The deferment is stated to be in the wake of OECD BEPS project and India’s active participant in the project GAAR provisions are implemented as part of a comprehensive regime to deal with BEPS and aggressive tax avoidance No other changes have been announced Grandfathering benefits extended to investments made till 31 March 2017 Rules will need to be amended to reflect grandfathering 27

28 Taxability of offshore funds managed by fund managers in India- S.9A Where a business connection or PE is constituted in India, income attributable to operations/ PE in India becomes taxable in India Income earned offshore may also be attributed to such operation/PE in India and hence may be taxed in India! Fund managers are hence hesitant of locating in India In the budget speech relating to Finance (No.2) Bill, 2014, finance minister highlighted the need to encourage fund managers to shift to India FB 2015 has now proposed a specific regime based on international best practices to encourage fund managers to locate in India As per the specific regime provided under newly inserted S.9A Eligible investment fund carrying on fund management activity through an eligible fund manager will not constitute business connection in India Such a fund shall not be treated as a resident of India, merely because fund management activities are undertaken by an eligible fund manager on its behalf in India Specific regime, is applicable only in case of eligible investment fund managed through an eligible fund manager. 28

29 Source rule for taxation of interest paid by banks to HO’s [w.e.f. 1 April 2016] Under the ITL, S. 9(1)(v) provides the source rule for taxation of interest paid to a NR. Introduced as a part of Rationalization measure New Explanation to be inserted in sub clause (c) to section 9(1)(v), (a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly; (b) “permanent establishment” shall have the meaning assigned to it in clause (iiia) of section 92F.’. 29

30 Interest paid by bank PE to HO [w.e.f. 1 April 2016] In the case of a taxpayer in banking business, interest paid by Indian PE to its HO outside India or any other PE / Branch outside India to be deemed to accrue or arise in India and accordingly taxable in India This is over and above the income otherwise attributable to PE under Article 7 of the applicable tax treaty Creation of a deeming fiction between HO and PE being separate entities for the purpose of (a) computation of income; (b) determination of tax, (c) collection and recovery of tax Memorandum to FB 2015 explains, Based on judicial rulings, PE were claiming deduction of interest paid under the computation mechanism under tax treaty, but the income was not taxable in the hands of NR Bank being payment to self. This leads to base erosion in India contrary to legislative intent. Certain DTAAs (India- Us) recognize that interest paid by PE to HO is payment sourced in India and hence, should be taxable in India. Mumbai SB in the case of Sumitomo noted that in absence of specific provision in the ITA, such interest was not taxable. The proposed amendment is to bring in clarity and certainty on the issue. PE obligated to deduct tax and failure leads to disallowance, interest and penal consequences 30

31 International Taxation – Other Important Issues Capital gains earned by FII on sale of Indian securities shall be excluded in computing the book profit as per MAT CBDT to make rules to provide the manner of granting tax credit on income tax paid in the foreign countries 31

32 Measures against Black Money Curbing Black Money Bill to be introduced to enact a comprehensive new law on black money to specifically deal with such money stashed overseas Concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of rigorous imprisonment up to 10 years The offence shall be non compoundable, not permitted before Settlement Commission and subjected to penalty of 300% of the tax amount Non/ In -accurate filing of particulars in return of income shall be liable to rigorous imprisonment up to 7 years Beneficial owner of foreign assets to mandatorily file return of income irrespective of taxable income Date of opening of foreign account to be furnished in return of income Amendments to be made in Prevention of Money Laundering Act and FEMA for actions to be taken New Benami Transactions Prohibition Act proposed to be introduced 32

33 Transfer pricing 33

34 Concept of Transfer Pricing 34 International transactions - goods - services - intangibles - loans Independent entity Resident Associated enterprise Resident Transfer price Arm’s length price

35 Increasing Transfer Pricing Disputes 35 Financial Year Number of TP Audits Completed Number of Adjustment Cases % of Adjustment cases Amount of Adjustment (in Rs crore) , , , , , , , , , , , ,3011, , ,6381, ,531 Source : White Paper on Black Money, Ministry of Finance, GOI May 2012 Adjustment during FY estimated to cross INR 64,000 crores based on draft orders* * as per article published in Taxsutra

36 36

37 37

38 Applicability 38 ► The provisions of Section 92 to 92F of the Act are applicable only if: There are two or more enterprises (defined in Sec 92F) The enterprises are Associated enterprises (defined in Sec 92A)Associated enterprises The enterprises enter into a transaction (defined in Sec 92F) The transaction is an International transaction (defined in Sec 92B)International transaction ► Provisions do not apply in certain cases (Section 92(3)) ► Further w.e.f. 1 April 2012, TP provisions shall also apply to specified domestic transactions (SDT) (defined in Sec 92BA)

39 Applicability & Consequences of these provisions 39  Computation of income/ expenses having regard to the Arm’s length price (Section 92(1))Arm’s length price  Maintenance of prescribed Documentation (Section 92D read with Rule 10D)Documentation  Obtaining of Accountant’s report (under Form 3CEB) (Section 92E)Accountant’s report  To ensure compliance with the arm’s length principle, stringent Penalties have been prescribedPenalties

40 Applicability 40 Section 92(1) – Any income (or expense or interest) arising from an international transaction shall be computed having regard to the arm’s length price Section 92(3) – The provisions are not intended to be applied in case determination of arm’s length price reduces the income chargeable to tax or increases the loss as the case may be

41 Meaning of Associated Enterprises (Section 92A) 41 A C B A C BE Both A and B are associated enterprises of C D and E are also associated enterprises of C since they have a common ultimate parent (A) D Direct or indirect participation (through one or more intermediaries) in management, control or capital

42 Deemed Associated Enterprises (Section 92A(2)) 42 Equity HoldingManagementActivitiesControl 1. >= 26% direct / indirect holding by enterprise OR 2. By same person in each enterprise 3. Loan >= 51% of Total Assets 4. Guarantees > = 10% of debt 5. > 10% interest in Firm / AOP / BOI. Appointment > 50% of Directors / one or more Executive Director by an enterprise OR 7. Appointment by same person in each enterprise % dependence on use of intangibles for manufacture / processing / business 9. Direct / indirect supply of > = 90% Raw Materials under influenced prices and conditions 10. Sale under influenced prices and conditions 11. One enterprise controlled by an individual and the other by himself or his relative or jointly 12. One enterprise controlled by HUF and the other by - a member of HUF -his relative or -Jointly by member and relative

43 International Taxation (Section 92B) 43 Transactions between two or more associated enterprises Either or both of whom are non-residents Transaction relates to: purchase, sale or lease of tangible or intangible property; or provision of services; or lending or borrowing money; or any other transaction having a bearing on the profits, income, losses or assets of the enterprises; or mutual agreements or arrangements for allocation or apportionment of, or any contribution to, any cost or expense incurred Scope expanded in Finance Act, 2012 to include - intangibles like marketing intangibles, human capital, Business restructuring, inter-company guarantees, capital funding, etc.

44 Deemed International Transaction (Sec 92B(2)) 44 Transaction between A and 3rd party also subject to transfer pricing norms, if: − a prior agreement exists between A’s parent and 3 rd party (both non-residents) in relation to services rendered by A to the 3 rd party; or − terms of transaction are determined in substance by A’s parent and 3rd party A’s Parent 3rd party A Prior agreement Services A’s Parent 3rd party A Services Determination of terms Transactions with non-group companies deemed to be international transactions subject to transfer pricing regulations

45 Specified Domestic Transactions (SDT) 45 Scope of transfer pricing provisions expanded Applicable to specified domestic transactions if aggregate value of such transactions exceeds INR 20 crores Transactions that could be impacted include Transfer of goods/services between related domestic companies wherein either of them is eligible for tax holiday benefit Transfer of goods / services between tax holiday eligible business / units and other businesses / units of the taxpayer in India Payments made to persons specified u/s 40A(2)(b) [definition amended] All provisions applicable for determination of ALP for international transactions would apply in case of SDT also. Also penal provisions applicable to international transactions would apply to SDT

46 Arm’s Length Price 46 Determination of arm’s length prices using one of the Prescribed methodsPrescribed methods Whether you arrive at a single price ? The price thus determined is the arm’s length price The arithmetic mean of such prices which varies from transfer price (not exceeding 3% (upper ceiling) is the arm’s length price (92C(2)) YesNo Price applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions

47 The Arm’s Length Range – How it works?? 47 In most cases, it is not possible to identify a single price that can be considered to be an uncontrolled price. It may be that a number of different comparables are equally comparable. Several comparable transactions can therefore define an arm’s length range of possible transfer prices Overall range may contain extremes. Indian legislation recognizes only arithmetic mean (with a +/-3% variation) though statistically and internationally an inter-quartile range may be more appropriate. If transfer price falls within a +/- 3% range, pricing should be defendable as arm’s length from tax authority audit perspective

48 Comparables ► All methods require comparables ► Transfer price is set/ defended using data from comparable companies ► Comparable company should be independent and similar to an associated enterprise. ► Following factors are generally used in judging comparability (Rule 10C(2)): nature of transactions undertaken (i.e. type of good, service etc.) company functions risks assumed contractual terms (i.e. similar credit terms) economic and market conditions 48

49 Documentation – Rule 10D Entity relatedPrice relatedTransaction related  Profile of industry  Profile of group  Profile of Indian entity  Profile of associated enterprises  Transaction terms  Functional analysis (functions, assets and risks)  Economic analysis (method selection, comparable benchmarking)  Forecasts, budgets, estimates  Agreements  Invoices  Pricing related correspondence (letters, s etc) Contemporaneous documentation requirement – to be maintained by November 30 of relevant Assessment Year Documentation to be retained for 9 years from financial year Comprehensive Documentation is not required to be maintained if the aggregate value of all international transactions does not exceed one crore rupees 49

50 Accountant’s Report – Rule 10E ► Obtained by every tax payer filing a return in India and having international transaction ► To be filed by due date for filing return of income (30 November) ► Essentially comments on the following: whether the tax payer has maintained the transfer pricing documentation as required by the legislation, whether as per the transfer pricing documentation the prices of international transactions are at arm’s length, and certifies the value of the international transactions as per the books of account and as per the transfer pricing documentation are “true and correct” 50

51 Revised Form 3CEB – CA Certificate as per Sec 92E Revised Form 3CEB has been bifurcated into following 3 parts: Part A – Details of taxpayer ► Taxpayer is required to mention its nature of business in point No. 4 of Part A of Form 3CEB. Codes for nature of business to be filled in as per instruction for filing Form ITR 6. ► This code may be considered by the tax office while allowing range benefit (i.e. for wholesale traders range of 1 percent is applicable) ► Aggregate value of international transactions and SDT as per book of account to be specified in clause 8 and 9 of Part A respectively  Part A: Details of taxpayer  Part B: Details of International Transactions  Part C: Details of Specified Domestic Transactions 51

52 Revised Form 3CEB Part B: Details of International Transactions ► Clause 15 of the new Form requires disclosure regarding transactions in the nature of guarantee. Details like name of AE, nature of guarantee agreement, currency and compensation/fee charges are to be disclosed in addition to method used for determining ALP ► Clause 16 deals with international transaction of purchase and sale of marketable securities, issue and buyback of equity shares, optionally convertible/ partially convertible/ compulsorily convertible debentures/ preference shares ► Clause 18 deals with international transactions relating to business restructuring and reorganization ► Clause 19 deals with any other transaction including a transaction which has a bearing on profits, income, losses or assets of the assessee ► Clause 20 requires disclosure about deemed international transactions 52

53 Revised Form 3CEB Part B: Details of International Transactions ► Clause 15 of the new Form requires disclosure regarding transactions in the nature of guarantee. Details like name of AE, nature of guarantee agreement, currency and compensation/fee charges are to be disclosed in addition to method used for determining ALP ► Clause 16 deals with international transaction of purchase and sale of marketable securities, issue and buyback of equity shares, optionally convertible/ partially convertible/ compulsorily convertible debentures/ preference shares ► Clause 18 deals with international transactions relating to business restructuring and reorganization ► Clause 19 deals with any other transaction including a transaction which has a bearing on profits, income, losses or assets of the assessee ► Clause 20 requires disclosure about deemed international transactions 53

54 Revised Form 3CEB Part C: Details of Specified Domestic Transactions ► Clause 22 deals with expenditures for which payment made to persons specified u/s 40A(2)(b) ► Clause 23 deals with inter-unit transfer of goods and services u/s 80A(6), 80IA(8) or 10AA. Sub-clause A deals with transfer by eligible unit/business undertaking to other units while sub- clause B deals with acquisition of goods/ services by such eligible unit/business undertaking from other businesses carried on by the assessee ► Clause 24 deals with business transacted as specified u/s 80-IA(10) and Sec. 10AA. ► Clause 25 deals with any residual SDT 54

55 TP – Penal Provisions Adjustment related penalty not leviable where taxpayer has acted in ‘good faith’ and exercised ‘due diligence’ TP documentation serves as a good basis to demonstrate good faith and due diligence SectionTriggerQuantum of penalty 271(1)(c)In case of an adjustment post assessment, if regarded as concealment of income % of the tax leviable on the amount of adjustments 271AAFailure to maintain TP documentation, failure to report the transaction, maintenance or furnishing of incorrect information/document 2% of the value of the transactions 271BAFailure to furnish Form 3CEBINR 100, GFailure to furnish TP documentation with the tax officer2% of the value of the transactions 55

56 Approach to Transfer Pricing Fact gathering Functional analysis Economic analysis Documentation/ Accountants report Mapping of international transaction Analysis of Functions, Risks, and Intangibles Industry Analysis Selection of Best Method Selection of Comparables Calculation of arms length result Report writing/ Accountants report Our proposed approach for transfer pricing review will be based on the following phases of work as described in detail below: 56

57 Steps in a Transfer Pricing study 1 Investigation & data collection Questionnaire Interview 2 Documentation Industry overview Functional analysis Economic analysis 3 Others Assist in implementation Litigation support 57

58 Assessment Procedure U/s 92CA the AO may refer determination of ALP to the TPO, with prior approval of Commissioner 1 TPO would then notify the taxpayer to produce evidence supporting transfer price as arm’s length 2 TPO would determine ALP by passing an order based on information gathered from the assessee/ other sources and intimate the AO & taxpayer 3 AO would proceed to compute income of the taxpayer in conformity with ALP determined by the TPO and pass a draft order 4 58

59 Dispute Resolution Panel  The AO to provide “draft” order to assessee, in case any adjustment is proposed.  The assessee has to file the objections within 30 days of receipt of the draft order;  Directions of the DRP to be issued within 9 months of the end of month draft order forwarded to Assessee;  The directions issued by the DRP Panel are appealable in the ITAT by the Assessee.  The department can appeal against the DRP directions for objections filed after 1 July TPO’s order AO’s draft order No response AO’s order ITAT File Objections with DRP Within 30 days of receipt of draft order DRP Order Within 9 Months from end of the month in which draft order was forwarded to Assessee Appeal AO Order CIT(A) Show cause notice 59

60 APA Overview Any “person” who has undertaken or who is contemplating to undertake an international transaction can apply for an APA Pre-filing consultation mandatory to determine scope of APA, identify issues, determine suitability and discuss broad terms of the APA Anonymous filing permitted but it shall not bind the applicant or the CBDT to enter into an agreement Application can be made after pre-filing consultation and can be for unilateral, bilateral or multilateral APAs. Withdrawal and amendment to application permitted Fees varies in accordance with value of international transaction Value of international transaction in respect of which APA is proposed Filing fees (INR Million) Less than INR 1 billion1 INR 1-2 billion1.5 More than INR 2 billion2 60

61 APA Overview Process ► Industry overview ► Supply chain overview ► FAR analysis ► Proposed economic analysis ► Proposed term ► Field work (functional interviews, review financial statements) ► Government-to-government process ► Position papers – face to face meetings ► Critical assumptions ► Drafting and concluding APAs ► Unilateral vs bilateral ► Pre-filing meeting (anonymous?) ► Pricing study and strategy ► Annual report, record- keeping ► Audit ► Revocation, cancellation or revision ► Renewal Execution and monitoring Evaluation and negotiation – Agreement APA requestPre-filing 61

62 APA – Pros and Cons Pros – Proactively avoids TP controversy - Provides certainty and enhances predictability – Discussion at the “right level” – Solution to complex/ difficult TP issues – Eliminates/reduces risk of economic double taxation – Can reduce compliance cost – Concerns around domestic tax law process Cons – Strain on resources for taxpayers personnel and expenses – Fairly detailed forms/ information request during pre-filing and application stage - normally not a practice in an audit 62

63 Read our monthly e-Journal SBS And Company LLP Chartered Accountants /6-9, Flat No. 103 & 104, Veeru Castle Durga Nagar Colony, Panjagutta, Hyderabad Telangana, India. Our Presence in Telangana: Hyderabad (HO) Andhra Pradesh: Nellore, Kurnool, TADA (Near Sri City), Vizag / / CA Ram Prasad CA Mallikarjun Rao CA Mithilesh Thanks for your patient hearing!!!


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