Tax DigestQuarterly newsletterSeptember 2016

2 Tax Digest

Dear readers,Dear readers,

We are pleased to present the September 2016 edition of EYs quarterly newsletter, Tax Digest, which summarizes significant tax and regulatory developments during the July to September quarter.

This newsletter is designed as a ready reckoner and covers landmark tax judgments, an update on tax treaties and alerts on topical developments in the tax arena. The In the press section includes published articles on various issues in the tax realm over the last quarter. It also details key thought leadership reports and other topics of interest to tax professionals.

We hope you find this edition, both timely and insightful.

Best regards, EY Tax Update team

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Direct tax

Verdicts

Reported decisions supported by our Litigation team

Sharing software source-code for internal operations not taxable as royalty under the India-Netherlands tax treaty

SC rules refund of excise-duty for setting up industrial undertaking not taxable as revenue receipt

Mumbai Tribunal rules expenditure for application software as revenue in nature

Share application money is not share-capital; interest thereon a revenue expenditure

Significant Supreme Court decisions

Broken period interest component of purchase price of securities held as stock-in-trade separately admissible as revenue deduction

SC rules taxpayer is eligible for interest on refund which has been adjusted against tax payable

SC rules on point of accrual of income in case of increase in rent retrospectively

SC reiterates on characterization of property rental income as Business Income

Deductibility of expenditure

Gujarat HC holds that stamp duty expense is allowable in the year in which it is incurred

Interest payment in relation to investments in group-companies allowable as a deduction

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Rulings on tax withholding

Calcutta HC holds reimbursement of freight charges is not liable for withholding

Mumbai Tribunal rules withholding not required for payments made in kind

No withholding obligation if taxability arises due to retrospective amendment in ITL

Rulings in relation to share capital

Share premium utilised in violation of Companies Act does not partake character of a revenue receipt

Forfeiture of share application money does not amount to cessation of liability

Receipt of bonus shares without consideration is not chargeable to tax

Rulings on taxation of Non-Resident Individual:

Remuneration received by non-resident directly in NRE account for services rendered on board a ship outside India is liable to tax in India

Mumbai Tribunal rules on dual residency and application of may be taxed under the India-Sri Lanka Treaty

Professional services rendered by an individual is covered by IPS Article under the India-USA tax treaty

Other Significant Decisions

Situs of trademark and brand intellectual property is at the place where its owner is located

Delhi Tribunal rules royalty income is taxable on a gross basis as it is not effectively connected with a PE in India

Transponder services considered rendered in India if the equipment is maintained in India

Applications submitted to Settlement commission prior to 1 July 2005 disclosing foreign income/ assets are maintainable

Delhi HC rejects characterisation of rental income as business income

On facts, Bombay HC rules possession date and not agreement date relevant for determining effective holding period

Bombay HC, on facts, upholds penalty for furnishing inaccurate Balance sheet particulars

Chennai Tribunal rules rendering of services from SEZ to non-resident within India not eligible for tax holiday

Issue on which Special Leave Petition (SLP) was accepted by the SC

Some key issues on which Special Leave Petition was dismissed by the SC

Decisions on royalty/ fees for technical services (FTS)

From the Tax Gatherers desk

CBDT exempts start-ups from premium taxation on issue of shares

CBDT amends Income Tax Rules to grandfather income from transfer of investments made before 1 April 2017 from application of GAAR provisions

First Indian Bilateral- Advance Pricing agreement (APA) having Rollback provision signed with Japanese companys Indian subsidiary

CBDT issues draft rules on certain aspects for determining buy-back tax in India

CBDT clarifies on age calculation if birthdate is April 1

GOI defers ICDS applicability to tax year 2016-17

http://No withholding obligation if taxability arises due to retrospective amendment in ITL

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GOI grants exemption from withholding on payments to securitization trusts

CBDT notifies new method for computation of expenditure incurred for earning exempt income

Government introduces Taxation Laws Amendment Bill to amend demerger definition and relax new employment tax holiday for apparel manufacturing sector

Rules for granting foreign tax credit (FTC) notified

Indian Equalization Levy on digital services to be effective from 1 June 2016, administrative rules notified

CBDT issues Indirect Transfer Rules

CBDT clarifies applicability of tax collection at source (TCS) provisions on sale of goods/ services where part payment received is in cash and part by cheque

CBDT issues a series of FAQs on Income Declaration Scheme

Treaty updates

Exchange of information (EoI) agreement between India and St. Kitts and Nevis enters into force

Treaty between India and Kenya signed

Cabinet approved revision to India-Cyprus tax treaty and its protocol status of Cyprus as non-cooperative jurisdiction to be rescinded retrospectively

Negotiation to India Singapore treaty underway

Protocol to treaty between India and Slovenia

Happenings across the border

Organisation of Economic Co-operation and Development (OECD) releases standardised IT-format for providing feedback on exchanged Common Reporting Standard information

US releases its final regulations on country by country reporting

OECD releases standardised IT format for the exchange on tax rulings under Base Erosion and Profit Shifting (BEPS) Action 5

BEPS updates

OECD releases discussion draft on development of a multilateral instrument to implement tax treaty-related BEPS measures

OECD Council approves changes to OECD Transfer Pricing Guidelines to incorporate BEPS reports

OECD releases discussion draft on the approaches to address BEPS involving interest in the banking and insurance sectors.

OECD releases discussion draft on Group Ratio Rule under Action 4 limiting interest-deductions

OECD releases discussion draft on Branch Mismatch Structures under Action 2 on neutralising the effects of hybrids mismatch arrangements

OECD releases additional Guidance on implementation of Country-by-Country reporting

OECD releases discussion drafts on profit splits, attribution of profits to permanent establishments and conforming amendments to OECD Chapter IX on business restructurings

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Indirect tax

Case laws

Customs

Budgetary proposals and Finance Ministers speech are not enacted laws

Interest is payable in the event the refund claims are delayed

Only certified copies of final order in original of Adjudicating Authority can be issued to the parties

TED refunds of supplies from DTA to EOU is not allowed since such supplies are ab initio exempted

Central Excise

In accordance with Rule 12B, value adopted for levying excise duty will be the value at the end of job workers premises

Dual benefit of rebate and duty drawback cannot be availed on export of goods

Loading business software in a device pre-loaded with basic software will not constitute as manufacture under Central Excise Law

CENVAT Credit

Larger bench of High Court to decide whether payment made under Rule 6 of CCR could be deemed as tax

Refund of unutilized credit on closure of factory allowed

CENVAT credit on input services and capital goods used in relation to laying pipeline for transportation of gas allowed to a company engaged in transporting gas by pipeline

Credit cannot be denied citing lack of service, for Service tax paid on services provided by sister concern

CENVAT Credit is permitted on outdoor catering after 1 April 2011, not hit by exclusion as service cannot be treated as primarily, for personal use of employee

Service tax

Writ challenging confirmation of Service tax demand by Commissioner on supply of tangible goods service without preferring statutory appeal remedy before Tribunal, dismissed

Service tax levy on short-term accommodation in hotel is outside the legislative competence of Parliament, hence unconstitutional

Service tax on manufacture of alcoholic liquor for human consumption on job work basis w.e.f. 1 June 2015 held to be constitutionally valid

Adjustment of excess tax paid in subsequent months instead of subsequent month, permitted

Tax refund upon brokerage adjustment granted; Credit notes sufficient to disprove unjust enrichment

VAT/CST

Uniform pricing cannot be a valid ground to hold that assessee was charging sales tax on sale price of goods manufactured in exempt unit

Transportation and mobilization charges separately realized by the assessee in addition to sale price, will form part of the assessable value of ready mix concrete

Lease transaction can be construed as resale in terms of Section 8(3) of CST Act and it does not amount to breach of declaration given in Form C

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Point of sale is irrelevant for determining inter-state sale of goods where sale occasions movement of goods from one State to another

Key statutory updates

Customs

Foreign Trade Policy 2015-20

Central Excise

Service Tax

VAT/CST

Regulatory

Foreign Exchange Management Act (FEMA) 1999

Foreign Currency Accounts by a person resident in India

RBI rationalized process of registration for NBFCs

Foreign Direct Investment Policy

Issuance of Consolidated FDI Policy of 2016

FDI Liberalization in various sectors

Amendment of FDI Policy for Non-Banking Financial Companies (NBFCs)

In the press

Compilation of alerts

Direct Tax

Indirect Tax

Regulatory

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Whats new Useful links

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Budget 2016

Base Erosion and Profit Shifting (BEPS)

Swachh Bharat Cess; Webcast

For the latest tax insights for business leaders, read our quarterly magazine: T Magazine

Budget webcast

Tax Insights magazine

Goods and Service Tax

India Tax Webcast

Tax Library

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Verdicts!

Direct taxReported decisions supported by our Litigation team

Sharing software source-code for internal operations not taxable as royalty under the India-Netherlands tax treaty

In case of Baan Global BV (ITA No. 7048/Mum/2010), the taxpayer, a company incorporated in the Netherlands, was engaged in the business of development and sale of computer software and provision of related services. The issue before the Mumbai Tribunal was whether consideration received on sale of computer software program (in the form of CD Rom) by the taxpayer to its Indian subsidiary can be classified as royalty under the India-Netherlands double tax avoidance agreement (treaty). In this regard, the Tribunal observed that royalty is defined under the treaty to mean consideration for the use of or right to use of of any copyright, process, patent etc. The Tribunal, therefore, held that the sale of software cannot be covered under the word use of process, since the taxpayer has not allowed the end user to use the process by using the software, as the customer does not have any access to the source code. The customer is allowed to use software product as such and not the process embedded in it. The Tribunal noted that according to the agreement between the parties, the end user is allowed to use the software only for the operation and cannot sub-license or modify it and, hence, the rights given by the taxpayer to end users in respect of the computer software do not fall within the definition of copyright as defined under the Copyright Act, 1957. Accordingly, it was concluded that this is a clear case of sale of copyrighted product and not use of any copyright and hence, it doesnt amount to royalty under the treaty.

SC rules refund of excise-duty for setting up industrial undertaking not taxable as revenue receipt

In the case of CIT v. Shree Balaji Alloys, the issue before the Supreme Court (SC) was whether subsidy by way of refund of excise duty and interest subsidy for setting up new industrial undertaking is taxable as revenue receipt.

Relying upon its rulings in the case of Ponni Sugars and Chemicals Ltd. [306 ITR 392] and Meghalaya Steels Ltd. [TS-124-SC-2016] and applying purpose test, the SC held that subsidy, which was granted for accelerating industrial development and generation of employment was a non-chargeable capital receipt. The SC also reiterated the settled proposition that the form or the mechanism through which the subsidy was received was irrelevant to determine its taxability.

Mumbai Tribunal rules expenditure for application software as revenue in nature

In the case of First Advantage Pvt. Ltd. [47 CCH 0184], the tax authority disallowed the taxpayers claim for revenue deduction for expense incurred on application software and treated the expenditure to be capital in nature. The Tribunal followed the decisions of Boots Piramal Healthcare Ltd.1 and Pennwalt Ltd.2 and held that the application software has a short life and it becomes obsolete very fast. It cannot, therefore, answer the description of capital asset. The same was, therefore, allowed as revenue deduction.

Share application money is not share-capital; interest thereon a revenue expenditure

In the case of S.R. Thorat Milk Products Pvt. Ltd. v. ACIT [TS-304-ITAT-2016(PUN)], the taxpayer was a closely held company, which incurred interest expense on share application money received from existing shareholders during the period of pending allotment. The tax authority disallowed claim for revenue deduction and held that money received toward share capital is not a borrowing, which is refundable and object was to augment share capital. The tax authority, however, did not dispute the contention of the taxpayer that the share application money was utilized for business purposes. The Tribunal relied on the Pune Tribunal ruling in the case of Rohit Exhaust Systems Pvt. Ltd.3 and held that share application money per se cannot be characterized and equated with share capital. The obligation to return the share application money is always implicit in the event of non-allotment of shares and, therefore, receipt by way of share application

1 [43 CCH 129]2 [ITA No.1752/Mum/2009 dated 24 September 2010]3 [ITA No 686/PN/2011]

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money is not receipt held toward share capital before its conversion. The Tribunal, accordingly, allowed deduction of interest paid on share application money as a revenue deduction.

Significant Supreme Court rulings

Broken period interest component of purchase price of securities held as stock-in-trade separately admissible as revenue deduction

In the case of Citibank N.A. v. CIT4 , the issue before the SC was whether broken period interest component of purchase price of securities held as stock-in-trade is separately admissible as revenue deduction. The Bombay High Court (HC), in the case of American Express Banking Corporation v. CIT5 (Amex ruling), had held that where interest income from securities is assessed under the head Profits and gains of business or profession and is accounted according to the method of accounting regularly adopted by the taxpayer, the broken period interest, forming part of purchase price can be accounted for separately and can be claimed as deduction against corresponding broken period interest income. The Bombay HC held that it is incorrect for the tax authority to tax broken period interest income while denying deduction for the corresponding expenditure forming part of purchase price. The SC, in the present case, which involved identical facts, has affirmed the conclusion and reasoning of the Bombay HC and ruled in favor of the taxpayer.

(Click here for EY Tax Alert dated 7 July 2016)

SC rules taxpayer is eligible for interest on refund which has been adjusted against tax payable

In the case of CIT v. Jyotsna Holdings Pvt. Ltd. [TS-277-SC-2016], the taxpayer was eligible for refund of taxes on account of excess payment of self-assessment tax. Refund, which was due on 28 March 1988, was adjusted against the outstanding demand payable by the taxpayer for another year on 25 July 1991. The issue before the

4 Civil Appeal No. 1549 of 2006 (Pronounced on 12 August 2008, Date of publication 6 July 2016, source: www.itatonline.org)5 [258 ITR 601][Bom]

SC was whether the taxpayer was eligible for interest on amount, which was due from the tax authority on the refund due. The SC, agreeing with the Delhi High Court order, ruled in favor of the taxpayer and held that the taxpayer was eligible for interest on the amount, which was refundable to the taxpayer from the date when refund was due till the date such refund was adjustment against the outstanding demand of the other year.

SC rules on point of accrual of income in case of increase in rent retrospectively

In the case of P.G. & W. Sawoo Pvt. Ltd. v. ACIT [TS-251-SC-2016], the taxpayer had let out a property to the Government of India (GoI). Pursuant to a letter issued by the Estate Manager of the GoI dated 29 March 1994 and a revised lease agreement for fresh period, the rent of the property was enhanced retrospectively from 1 September 1987. The tax authority sought to reassess the income of the taxpayer for September 1987-March 1989 by contending that retrospective enhancement of rent was taxable as house property income for the relevant period. The SC was concerned with the limited issue of validity of reopening of the assessment. The SC relied on its own judgement in the case of E.D. Sassoon [TS-1-SC-1954] wherein it was held that income can be said to have accrued or arisen only when a right to receive the amount in question is vested in the taxpayer. The SC opined that such right vested in taxpayer only in 1994. Since no right to receive the rent accrued to the taxpayer during the subject accounting year6 , the SC quashed the reassessment notice.

SC reiterates on characterization of property rental income as business income

In the case of Rayala Corporation Pvt. Ltd. v. ACIT7, the taxpayer was a company, which originally was in the business of manufacture of typewriters. It had ventured into real estate development with the object of leasing out the office space following the closure of its manufacturing activity. The issue before the SC was whether rental

6 However, it may be noted that by virtue of amendment made vide Finance Act 2000, if arrears of rent are received by the taxpayer, same shall be taxed in the financial year in which such arrears are received.7 Civil Appeal No.6437 of 2016

http://www.ey.com/Publication/vwLUAssets/broken_period_Int/$FILE/broken_period_Int.pdf

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income can be taxed under the head income from house property as held by the tax authority or as business income as claimed by the taxpayer. The SC referred to its ruling in the case of Chennai Properties and Investments Ltd.8 and held that with regard to the fact that the business of the taxpayer was to lease its property and to earn rent therefrom, income earned from property rental should be treated as business income. The SC reiterated once again the proposition that where sole activity of the taxpayer is leasing of properties for rental income, income may be assessed under the head of business income.

Deductibility of expenditure

Gujarat HC holds that stamp duty expense is allowable in the year in which it is incurred

In the case of Prithvi Associates v. ACIT [TS-347-HC-2016(GUJ)], the taxpayer had paid stamp duty expenses to execute contract with Maharashtra State Road Transport Corporation. The tax authority contended that the stamp duty expense was not allowable in the year in which it was incurred but was required to be spread over the period of contract. The Gujarat HC observed that stamp duty paid by the taxpayer is not for business expediency but is a compulsory statutory levy, which will not restrict the profits of future years. It is legally settled that the accounting practice cannot override the provisions of Income Tax Laws (ITL). Furthermore, referring to the SC ruling in the case of Taparia Tools Ltd.9 , the HC held that according to the ordinary rule, revenue expenditure incurred in a particular year is to be allowed in that year and the tax authority cannot deny it. However, in a case where the taxpayer itself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of matching concept is satisfied, which up to now has been restricted to cases of debentures. The HC, therefore, ruled in favor of the taxpayer and held that stamp duty expense is allowable in the year in which it is incurred.

Interest payment in relation to investments in group companies allowable as a deduction

In the case of TATA Industries Ltd. v. ITO [TS-409-ITAT-2016(Mum)], the issue before the Mumbai Tribunal was

8 [(2015) 373 ITR 673 (SC)]9 [2015] 372 ITR 605

whether the interest expenditure incurred for making investment in group companies is allowable as a business deduction. In this case, the taxpayer was an investment and finance company and had made strategic investments in group companies to gain controlling interest in group companies. The tax authority held that the investments were made with an objective of earning exempt dividend income and, hence, deduction could not be allowed against business income. The Tribunal restricted disallowance to the extent of exempt income. In relation to balance interest expenditure, Tribunal relied on the decision in the case of Phil Corpn. Ltd.10 (2011) and Eicher Goodearth11 (2015) and held that, since the expenditure was incurred for the purpose of promotion of business more specifically to retain control or as part of strategic investment, such expenses by way of interest was incurred for the purposes of the business and was allowable as deduction.

Rulings on tax withholding

Calcutta HC holds reimbursement of freight charges is not liable for withholding

In the case of Hightension Switchgears Pvt. Ltd. v. CIT [TS-375-HC-2016(CAL)], the taxpayer purchased goods from supplier wherein freight was to be borne by the taxpayer separately from purchase price of goods. The supplier reflected the actual freight charges incurred separately on the sales invoices. The taxpayer reimbursed freight charges to the seller, which in turn, paid it to the concerned transporter after withholding the taxes due. The Calcutta HC held that the supplier was the person responsible to deduct taxes on the payment of freight charges, since, as per contractual terms, the seller was required to pay the transportation charges to transporters. The HC, further held that even assuming the supplier acted as an agent of the taxpayer in making payments to the transporter of goods, since the agent has complied with the provision, the principal cannot be visited with penal consequences. For one payment there could not have been two deductions. Since the supplier had withheld taxes, the taxpayer was not liable to withhold taxes on freight payments.

10 [(2011) 202 Taxman 368]11 [(2015) 60 Taxmann.com 268 (Del)]

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Mumbai Tribunal rules withholding not required for payments made in kind

In the case of Red Chillies Entertainment Pvt. Ltd. v. ACIT [TS-336-ITAT-2016(Mum)], the taxpayer was engaged in the production of movies and for one of the movies it had given gift of certain items to its business associates as a gesture for their contribution in the movie. The Tribunal held that gift was in the nature of payment of professional fees to concerned persons for acting in the movie. Under a specific provision of the ITL, withholding is required for the payment of any sum as professional fees. Issue was whether professional fees paid in kind was disallowable under specific provision as taxpayer failed to withhold tax thereon. The Tribunal relied on the rulings in the case of H.H. Sri Rama Verma12 and Bruhat Bangalore Mahanagar Palika13 and held that withholding under the specific provision of the ITL will not be required when the payment is made in kind. Since there was no withholding required, provision, which disallows deduction for default in tax withholding did not trigger

No withholding obligation if taxability arises due to retrospective amendment in ITL

In case of TATA chemicals Ltd. [ITA No. 283/ Mum/ 2012], the issue before Mumbai Tribunal was whether the taxpayer was required to withhold taxes on payments made to a non-resident(NR) for providing technical services outside India in light of the retrospective amendment made to the definition of technical services under the ITL. Provision of the ITL dealing with taxation of fees for technical services was amended by Finance Act 2010 with retrospective effect from 1 June 1976 to provide that fees for technical services is taxable in India, if the services are utilized in a business of taxpayer in India, irrespective of situs of rendition of services.

The issue pertained to the tax year 200708 wherein the retrospective amendment was not in place. According to the law prevalent during the year, there was no obligation to withhold tax. The Mumbai Tribunal held when there was

12 [187 ITR 308]13 [ITA no.94 and 446 of 2015]

no provision for taxing an amount in India at the relevant time then the payer cannot be expected to withhold taxes on such a payment. Furthermore, a payer could not have anticipated retrospective amendment. Applying principles of impossibility of performance, the Tribunal exonerated the taxpayer from tax withholding default.

Rulings in relation to share capital

Share premium utilized in violation of Companies Act does not partake character of a revenue receipt

In the case of Credit Suisse Business Analysis v. ACIT [TS-430-ITAT-2016(Mum)], the issue before the Mumbai Tribunal was whether the amount received as share premium is chargeable to tax as revenue receipt. The tax authority contended that the taxpayer had utilized share premium amount for the day-to-day business activities, which was in violation of certain provisions of the Companies Act and, hence, the share premium would lose its character and become trading receipt. The Tribunal held that the taxability of an amount has to be decided within the four corners of the ITL and even the inclusive definition of income under the ITL does not stipulate that non-compliance of any provision of other Act would result in turning a capital receipt into a revenue receipt. The Tribunal further held that even if the taxpayer had violated the provisions of Companies Act, it will be penalized by the provisions of that Act. However, it would never turn a capital receipt in to revenue receipt or vice-versa. Furthermore, factually, since the opening and closing balance of share premium was same during the year under reference, there was no utilization of share premium in contravention of the Companies Act as alleged by the tax authority. Accordingly, the Tribunal held that amount of share premium received by the taxpayer would not be chargeable as revenue receipt.

Forfeiture of share application money does not amount to cessation of liability

In the case of ACIT v. LML Ltd. [TS-392-ITAT-2016(Mum)], the taxpayer had received share application money from its foreign collaborator pursuant to commitment given to financial institutions to infuse capital for expansion-cum-diversification project. It was disclosed as share application money to Reserve Bank of India (RBI) but was shown under the head unsecured loans in the Balance Sheet. However,

12 Tax Digest

no shares were issued to the foreign collaborator in view of disputes with Indian promoters. Subsequently, pursuant to a dispute settlement agreement between the parties, the share application money was forfeited and retained by the taxpayer. The Tribunal held that amount received as share application toward equity, which is capital in nature cannot be treated as loan or advance simply because it was shown as an advance or loan in the books. The Tribunal also held that when both parties clearly agreed that share application money was to be treated as forfeited, it did not convert a capital receipt into revenue receipt. The Tribunal further held that forfeiture of share application money cannot be taxed as income by way of remission or cessation of trading liability unless there was an allowance or deduction with respect to loss, expenditure or trading liability incurred by the taxpayer.

Receipt of bonus shares without consideration is not chargeable to tax

In the case of DCIT v. Dr. Rajan Pai [TS-299-ITAT-2016(Bang)], the taxpayer received certain bonus shares without the payment of any consideration, on the basis of holding of original shares in a company. The tax authority contended that the receipt of bonus shares by the taxpayer without any consideration, is chargeable to tax under the head income from other sources under a specific provision, which provides for taxation of gifts received by individuals and HUFs14 from non-relatives. The Tribunal held that the issue of bonus shares did not result in any increase or decrease in the taxpayers wealth because as a shareholder, taxpayers percentage in total equity shares of the company remained constant. The increase in value due to receipt of bonus shares is compensated by corresponding decline in value of original shares held by the shareholder. The provision to tax gifts was introduced

14 Hindu Undivided Family

in the ITL as an anti-abuse provision to address the lacuna created by the withdrawal of Gift Tax Act, which levied tax on donors of gifts. Even during the Gift Tax regime, allotment of bonus shares was never considered as taxable gift. Hence, the Tribunal held that the receipt of bonus shares is not taxable in the hands of the taxpayer

Rulings on taxation of NR individual

Remuneration received by an NR directly in NRE account for services rendered on board a ship outside India is liable to tax in India

In the case of Tapas Kr. Bandopadhyay [TS-310-ITAT-2016(Kol)], an NR rendered services aboard on a ship outside India and received salary income in his Non-resident External (NRE) bank account in India. The taxpayer claimed that the salary was not taxable under the ITL as services were rendered outside India and salary was received in foreign currency. The tax authority, however, taxed the income on the basis of first receipt in India.

On facts, the Kolkata Tribunal upheld the contentions of the tax authority and held that in the absence of any evidence on record to prove that the taxpayer had any control over salary income in foreign jurisdiction, the receipt in the NRE bank account in India was the first receipt by the taxpayer liable to tax under the ITL.

(Click here for EY Alert dated 13 June 2016)

Mumbai Tribunal rules on dual residency and application of may be taxed under the India-Sri Lanka treaty

In the case of Shalini Seekond [TS-366-ITAT-2016(Mum)], the issue before the Mumbai tribunal was on the taxability of capital gains arising from transfer of an immovable property located in Sri Lanka. The Tribunal held that the taxpayer is a resident in India according to the ITL as well as the treaty between India and Sri Lanka based on her habitual abode and center of vital interest present in India after her marriage to an Indian national. According to the treaty, capital gains arising from the sale of property in Sri Lanka may be taxed in Sri Lanka as source country. The Tribunal relied on the Notification No. 91 of 2008 dated 28 August 2008 issued by the GoI, which clarified that where any treaty uses the expression may be taxed in the other country, such income should be included in his/her total

http://www.ey.com/Publication/vwLUAssets/Kol_Tribunal_alert/$FILE/Kol_Tribunal_alert.pdf

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income chargeable to tax in India and relief will be granted in accordance with the method for elimination or avoidance of double taxation provided in such treaty. The Tribunal therefore, held that such capital gains should be offered to tax in India also (as the resident country), subject to relief from double taxation according to the provisions of the treaty.

(Click here for EY Tax Alert dated 11 July 2016)

Professional services rendered by an individual is covered by IPS Article under the India-US tax treaty

In the case of Susanto Purnamo [TS-438-ITAT-2016(Ahd)], the issue before Ahmedabad Tribunal was whether software development services provided by the taxpayer are covered under the Independent Personal Services (IPS) Article or Fees for Included Services (FIS) Article of the India-US treaty. The Tribunal held that software development services, which require predominant intellectual skill and are dependent on individual characteristics of the person pursuing software development, qualify as professional services. Since such professional services are rendered by an individual, they are covered by the IPS Article and not by the FIS Article. A specific carve-out in the FIS Article, which provides that once services are found to be in the nature of IPS, they would fall outside the ambit of the FIS Article, exemplifies this position.

Regarding taxability under the IPS article, the Tribunal noted the facts that taxpayer had neither a fixed base in India nor did his presence in India exceeded 90 days during the relevant year. The Tribunal, therefore, concluded that in the absence of satisfaction of the conditions prescribed in the IPS Article, income from software development will not be taxable in India.

(Click here for EY Tax Alert dated 16 August 2016)

Other significant decisions

Situs of trademark and brand intellectual property is at the place where its owner is located

In the case of CUB Pty Ltd. [TS-401-HC-2016(Del)] (formerly known as Fosters Australia Ltd.), the issue under consideration before the Delhi HC was whether

gains arising on transfer of intangible property comprising trademarks and brand intellectual property (collectively referred to as IPs) by an NR is taxable in India under the ITL. Under the ITL, any income, which arises through the transfer of a capital asset situated in India is taxable in India.

The HC held that in absence of any specific deeming provision under the ITL providing for situs of the intangible properties in India, the generally accepted international principle of mobilia sequuntur personam may be followed. Based on this principle, situs of the owner of an IP would be the closest approximation of the situs of an intangible asset which, in this case, was located outside India. Hence, income from transfer of such IP is not taxable in India under the ITL.

Delhi Tribunal rules royalty income is taxable on a gross basis, since it is not effectively connected with a PE in India

In the case of Iveco SPA Italy v. ADIT [TS-450-ITAT-2016(DEL)], the taxpayer was an Italian company and it had a branch office (BO) in India. The head office (HO) of the taxpayer entered an agreement with an Indian company for technical collaboration and license agreement to grant the Indian company certain rights to assemble diesel engines and its parts in India for which taxpayer received royalty income. The tax authority argued that employees of taxpayers India BO were equipped to render services as required under the agreement with the Indian company and were also providing business development services and after sales support services. The tax authority, accordingly, contended that the said royalty income was effectively connected with the Permanent Establishment (PE) of the taxpayer in India (i.e., its BO) and, hence, should be taxed as business income in India on net basis of taxation. On the other hand, the taxpayer contended that the BO was engaged in only specified activities as permitted by the RBI and is not at all engaged in providing any services with respect to the agreement, which is entered into by the HO directly with the Indian company and, hence, income received under the aforesaid agreement is not connected to the BO.

The Tribunal held that the tax authority had not brought any material on record to prove that services were actually

http://www.ey.com/Publication/vwLUAssets/may_be_taxed/$FILE/may_be_taxed.pdfhttp://www.ey.com/Publication/vwLUAssets/Ahem_Trib_IPS/$FILE/Ahem_Trib_IPS.pdf

14 Tax Digest

provided by the employees of the BO in India and a mere presumption on the part of tax authority is not sufficient regarding involvement of the BO in earning royalty income. The Tribunal observed that for evaluation of effective connection of royalty income with the PE, assets test should be applied such that the income arises as a result of the activities of the PE, which failed miserably in this case. The Tribunal thus held that the income had arisen to the taxpayer, because of the direct dealing of the Indian company with the taxpayer without the aid or support from its PE in India and, hence, the income under the agreement cannot be said to be effectively connected to the PE and would be taxed as royalty income.

Transponder services considered rendered in India if the equipment is maintained in India

In the case of Intelsat Global Sales and Marketing Ltd. [TS-365-ITAT-2016], the issue before the Chennai Tribunal was that of taxability of transponder payments made to the taxpayer, a company resident in the UK. In the facts of the case, an equipment is installed and maintained in India for the purpose of testing and maintaining quality of signals transmitted to India. The Chennai Tribunal held that the very objective of the arrangement between the taxpayer and the telecasting company in India is to uplink/downlink signals using the transponder capacity and for re-transmission of the signals to India. In this regard, the taxpayer is obligated to maintain proper quality of the signal, which are downlinked for re-transmission in India. The Tribunal therefore, concluded that so long as the equipment is maintained by the taxpayer in India, it has to be construed that taxpayer is rendering services in India.

Applications submitted to Settlement Commission prior to 1 July 2005 disclosing foreign income/assets are maintainable

In the case of Arun Mammen [TS-373-HC-2016(Mad)], the issue before Madras HC was whether the Settlement Commission lacked jurisdiction to deal with issues relating to undisclosed foreign income and asset filed in application before 1 July 2015 in view of the legislation of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) being introduced. The HC observed that the Black Money Act, 2015 came into effect from 1 July 2015. Accordingly,

the restriction under the Black Money Act on recourse to Settlement Commission provisions under the ITL will not be applicable to proceedings initiated prior to 1 July 2015. Accordingly, since taxpayer was otherwise eligible for Settlement Commission recourse, application submitted by the taxpayer offering undisclosed foreign income and assets before Commission was maintainable.

Delhi HC rejects characterization of rental income as business income

In the case of Ansal Housing and Construction v. CIT [TS-418-HC-2016(DEL)], the taxpayer was in the construction business and was holding constructed units as stock in trade. The issue before the Delhi HC was whether assessment of vacant units on notional annual value basis under the head income from house property requires reconsideration in the light of the SC ruling in the case of Chennai Properties & Investments Ltd.15 relied upon by the taxpayer. In the case of Chennai properties, the SC had held that where property letting was the main object of the taxpayer, rental income derived therefrom was chargeable to tax under the head business income. The taxpayer placed into service its reliance of SC ruling for the reason that if assessment is under the business income head, only real income can be taxable and there can be no notional assessment. The Delhi HC rejected the contention of the taxpayer and held that, like in the case of Chennai properties, in the present case letting out of properties was not a part of business and object of the taxpayer. There is, therefore, no reason to disturb the assessment made under the head income from house property.

On facts, Bombay HC rules possession date and not agreement date relevant for determining effective holding period

In the case of Bindiya H. Malkani and others v. CIT [TS-379-HC-2016(BOM)], the taxpayer had paid an earnest amount and had entered into an agreement in May 1980 to acquire leasehold rights in the land. Since vendor was not honoring the agreement, the taxpayer filed a suit against the land owner for specific performance. During the pendency of the suit, the taxpayer and the land owner arrived at Consent Terms in February 1988 wherein the

15 373 ITR 673 (SC)

15 Tax Digest

land owner agreed to assign the leasehold rights in the said land and handed over the possession against a lump sum price, which was higher than the agreement amount. The taxpayer subsequently sold the land to a third party in November 1988. The issue before the court was whether the resultant capital gains is to be considered as short term with regard to holding period from the date of possession or as long term, keeping the date of agreement in 1980. Under the ITL, long-term capital gains enjoys certain tax concessions. The Bombay HC held that under the agreement in May 1980, the taxpayer merely had the right to specific performance. The Taxpayer became the owner of land on receipt of possession in February 1988 on the court order being passed in the suit upon filing of the Consent Terms. The HC referred to its earlier ruling in the case of CIT v. Dr. D.A. Irani16 and held that the right to specific performance merged into the ownership rights on the order being passed in the Consent Terms. Sale of ownership right, acquired in February 1988, in November 1988 was held to give rise to short-term capital gains.

Bombay HC, on facts, upholds penalty for furnishing inaccurate balance sheet particulars

In the case of Palkhi Investments & Trading Co. P. Ltd. v. ITO [TS-333-HC-2016(BOM)], the issue before the Bombay HC was with respect to imposition of concealment penalty for furnishing inaccurate particulars in relation to an assessment as income of trading liability, which ceased to exist but was falsely shown payable in the balance sheet. On the finding of the facts by the tax authority that some creditors denied having any amount payable by the taxpayer and some were not found at the address mentioned by the taxpayer, the HC upheld levy of penalty for furnishing inaccurate particulars of income.

16 [234 ITR 850]

The taxpayer further contended that penalty for furnishing inaccurate particulars will trigger only if wrong claim is made in the Return of Income (ROI) and not in the Balance Sheet. Since, no wrong claim was made in the ROI, no penalty should be levied. The HC, however, held that balance sheet is part of ROI and non-offering of income of liabilities, which were ceased was an attempt to evade tax.

Chennai Tribunal rules rendering of services from SEZ to NR within India not eligible for tax holiday

In the case of YCH Logistics (India) Pvt. Ltd. v. DCIT [TS-383-ITAT-2016], the taxpayer had rendered warehousing and logistics services from a Special economic zone (SEZ) to a NR in India for which the taxpayer had received the consideration in foreign currency. The issue for consideration was whether the taxpayer is eligible for tax holiday in respect of these services. Under the ITL, tax holiday benefit is allowed to an SEZ unit, which is engaged in export of goods or services from SEZ to outside India. The Tribunal held that the taxpayer has provided warehousing and logistic services to an NR in India, which cannot amount to export of any article or thing or services out of India and, hence, the taxpayer was not eligible for tax holiday.

16 Tax Digest

Issue on which Special Leave Petition (SLP) was accepted by the SC

Citation of High Court rulings

Particulars Ruling of HC

DIT v. B4U International Holdings Ltd. [TS-246-HC-2015(Bom)]

Tax authority preferred an SLP against Bombay HC ruling wherein it was held that an agency PE is not triggered by activity of the Indian subsidiary, in absence of an authority to conclude a contract.

The taxpayer was a Mauritius company, which earned income from time slot collections given to advertisers from India through one of its Indian group entity (B4U India).

The HC upheld the Tribunal order, which referred to the clauses in the agreement between the taxpayer and B4U India and concluded that B4U India was not a decision maker nor did it have the authority to conclude contracts on behalf of the taxpayer. Therefore, B4U India does not constitute a dependent agency PE of the taxpayer in India under Article 5 of India-Mauritius treaty.

Furthermore, referring to the SC ruling in case of Morgan Stanley & Company Inc. [292 ITR 416], the HC held that even so no further profits can be attributed to the Indian PE where the Indian associated enterprise (B4U India) is remunerated at arms length price.

(Refer our June 2015 edition for details on HC ruling)

Wipro v. DIT [TS-565-HC-2015(KAR)]

Tax authority preferred an appeal against Karnataka HCs ruling regarding availability of foreign tax credit (FTC) relief where the income is exempt from Indian taxes under income-linked incentive scheme (ILIS)

In this case, the question before the Karnataka HC was whether the foreign taxes paid by the taxpayer (an Indian company), in a foreign country in respect of income, which is exempted under ILIS of the ITL, is eligible for FTC in India.

The HC ruled that the fact that export income is exempt under ILIS of the ITL means that such income is chargeable to tax other than exemptions. The said exemption merely suspends the collection of tax for a period of 10 years. However, such income retain the character of income chargeable to tax. Accordingly, any foreign taxes paid in respect of such income will be available for FTC, if allowed under the relevant treaty.

The HC evaluated the availability of FTC in respect of India-US treaty and India-Canada treaty.

The FTC provisions of the India-US treaty provide that, if an Indian resident derives income, which is taxed in the US, India will allow deduction of such taxes paid in the US.

On the other hand, the FTC provisions of the India-Canada treaty provide that the FTC will be available to a taxpayer in India only in respect of the doubly-taxed income from sources within Canada, and only to the extent of Indian tax, which such doubly-taxed income bears to the entire income chargeable to Indian tax.

HC noted the deviation in language of FTC provisions respectively under India-US and India-Canada treaty. It was held that FTC will be available in India for taxes paid in the US under the India-US treaty, even though no taxes are paid in India, since the treaty does not restrict claim of FTC on double-taxed income.

Whereas, with regard to the India-Canada treaty, it held that the same required income to be taxed in a foreign country as well as in India for claiming FTC in India. Hence, in this case, the taxpayer, being exempted from payment of tax in India, the benefits of FTC will not be available, since there is no payment of tax in India on the concerned income.

The HC also held that the State taxes paid in the foreign countries are to be allowed as FTC under the unilateral tax credit provision of the ITL.

(Click here for EY Tax Alert dated 7 October 2015 for details on HC ruling)

http://www.ey.com/Publication/vwLUAssets/wipro_alert/$FILE/wipro_alert.pdf

17 Tax Digest

Citation of High Court rulings

Particulars Ruling of HC

DIT v. Pride Foramer SAS [TS-623-HC-2013(UTT)]

Tax authority preferred an SLP against Uttarakhand HC ruling regarding taxability of interest on income tax refund in the hands of PE.

The issue in this case was whether the interest received on income tax refund by a PE of the taxpayer is covered under Article 12 (Interest) of India- France treaty.

The HC held that Article 12 applies when the recipient of interest does not have a PE in India. In the instant case, the taxpayer had a PE in India and, accordingly, the taxpayer offered taxes under the presumptive taxation provisions of the ITL on its income.

Basis above, the HC implied that Article 7 (business profits) will be applicable.

One may note that the HC did not discuss whether the interest income was effectively connected with PE or not.

(Refer our March 2014 edition for details on HC ruling)

18 Tax Digest

Some key issues on which Special Leave Petition was dismissed by the SC

Citation Particulars Ruling of HC

Seagrams Distilleries Pvt. Ltd. v. CIT

[TS-386-SC-2016]

Taxpayer preferred an appeal against Delhi HC order, which had disallowed provision for loss on transit-breakages made by taxpayer in the absence of a scientific basis

The taxpayer was engaged in the business of manufacture of liquor, which was transported in glass bottles, by road, to various states in the country. The taxpayer claimed that while dispatching, he made provision for breakages based on the regions past history to which the goods were transported. The provision was later reversed debiting actual breakages to profit and loss account on arrival of the goods to its destination. The tax authority considered provision as contingent liability and disallowed the same.

The HC took note of the fact that actual breakages were far lower than the amount of provision created and that amount of actual breakages was allowed as revenue expenditure in the year in which the breakages occurred.

HC therefore, ruled in favor of the Tax Authority and held that in absence of a reasonable scientific method to estimate the transit breakage, the provision will be regarded as contingent liability in terms of Accounting Standard- 29 and thus, disallowable.

HC however, held that actual transit breakages were allowable as revenue expenditure in the accounting year in which such breakages occur.

CIT v. Veerbhadrappa Sangappa & Co

[TS-381-SC-2016]

Tax Authority preferred an appeal against Karnataka HCs order invalidating penalty notice in a pre-printed form with all grounds mentioned.

The taxpayer received a notice for imposition of penalty for furnishing inaccurate particulars, which was in a pre-printed format without striking out irrelevant grounds.

Karnataka HC held that the practice of tax authority of sending format of penalty notice without striking out irrelevant grounds is not according to law. Consequently, any proceedings initiated on the basis of such notice are not valid

CIT v. N.G. Technologies (in liquidation)

[TS-255-SC-2016]

Taxpayer had preferred an appeal against the Delhi HCs order upholding levy of penalty for furnishing inaccurate particulars of income.

The taxpayer had claimed business loss on the sale of fixed assets. However, subsequently the taxpayer revised the return and claimed these as capital loss as opposed to business loss.

The tax authority levied penalty on the taxpayer for furnishing inaccurate particulars in the original return of income.

The taxpayer contended that the mistake or error had occurred due to lack of proper legal advice, which was rectified and corrected by filing the revised return.

HC noted that the taxpayers claim of treating the sale of fixed assets as business loss was totally baseless.

HC ruled that penalty cannot be deleted on the guise or pretence of legal opinion as a faade. The claim or the entry in the present case was contrary to elementary and well-known basic principles of accountancy. The HC therefore, upheld the levy of penalty on the taxpayer.

The HC also held that filing of revised return was after tax authority started investigation of various claims and was not bonafide.

19 Tax Digest

Decisions on royalty/fees for technical services (FTS)

Name of decision Description of payment Ruling

Steria (India) Ltd.

[TS-416-HC-2016(Del)]

India-UK tax treaty

Payment made for managerial services

In this case, the issue before Delhi HC was whether Most Favoured Nation (MFN) clause in the Protocol to India-France treaty could be used to apply the narrow provision of FTS under the India-UK treaty, which does not cover payment made for managerial services as FTS.

The Delhi HC, overruled the decision of Authority for Advance Rulings (AAR) in taxpayers own case, which had declined to extend the benefit of MFN clause on the ground that its scope was restricted to limiting the tax rate and that the narrow scope of India-UK treaty could not be automatically imported into India-France treaty without express notification thereof by the GoI.

The Delhi HC observed that the MFN clause of the India-France treaty is self-operational and it may cover benefit of reduced rate of tax as well as restricted scope of taxation under more than one treaties and unlike some other treaties, there is no need for separate notification for importing benefit of other treaties.

It further held that the definition of FTS under the India-UK treaty does not cover managerial services and this restrictive scope of FTS can be applied in the India-France treaty by virtue of the MFN clause.

Therefore, the payment made by the taxpayer to a French group company for managerial services is not taxable as FTS in India. Accordingly, taxpayer need not withhold tax on such payment.

Technip Singapore Pte. Ltd. [TS-301-HC-2016(Del)]

India-Singapore tax treaty

Payment for mobilization /de-mobilization services and for installation services

The taxpayer, a Singapore company, entered a contract with an Indian company (IOCL) for offshore construction work involving installation of equipment. The taxpayer received payments for mobilization/de-mobilization services and for installation services.

The issue before the Delhi HC was whether payment for mobilization /de-mobilization services can be classified as royalty and the payment for installation services can be classified as FTS under the ITL or under the India-Singapore treaty.

The HC held that work of mobilization/de-mobilization and the work of installation are not separable components and that the contract was not divisible. The payment was received for a composite contract.

Based on the factual noting that the control of the equipment throughout remained with the taxpayer and not with IOCL, the HC concluded that it is not a contract for hiring of the equipment and hence, the payment cannot be termed as Royalty.

In respect of installation charges the HC held that it would be considered as FTS under the treaty, since the taxpayer did not transfer any knowledge, skill or expertise through the services to enable IOCL to perform such services in future.

On taxability under the ITL, HC concluded that the services provided by the taxpayer would fall under the exclusionary clause to FTS definition under the ITL such as, consideration for any construction, assembly, mining or like project undertaken by the recipient.

20 Tax Digest

Name of decision Description of payment Ruling

Textures & Weaves (India) Pvt. Ltd.

[TS-372-ITAT-2016(Chny)]

India-US tax treaty

Commission paid to foreign agents for providing details on fashion forecast in the US

In this case, the taxpayer had foreign agents in the US, which communicated about the latest fashion and trends in the market and also provided details of fashion forecast.

The issue before the Chennai Tribunal was whether the fees for these services can be treated as FTS.

The Tribunal relied on the ruling of ACIT v. Kamil Leathers (ITA No. 2260/Mds/2014) where it was held that technical service is something, which goes in the manufacturing process by applying the techniques provided by the NR. In this case, no such technique was provided by non-residents agent and what was provided were changes in fashion and trend prevailing in the market outside India.

Accordingly, the Tribunal ruled that such communication of latest trend in fashion does not amount to providing technical service. Hence, it does not qualify as FTS.

21 Tax Digest

From the Tax Gatherers Desk

CBDT exempts start-ups from premium taxation on issue of shares

A specific provision of the ITL provides for taxation of premium beyond the fair market value received by a closely held company, on issue of shares to residents in India. Under this provision of the ITL, Central Board of Direct Taxes (CBDT), the apex administrative body for direct taxes in India, is empowered to notify any class of persons, paying consideration toward issue of shares to which the premium taxation would not apply.

Accordingly, a notification is issued by the CBDT for notifying such class of persons being resident persons making contribution toward shares of start-up company as defined in an earlier notification under Start up India: Action Plan.

(Source: www.startupindia.gov.in, Notification No. - 45/2016 dated 14 June 2016)

(Click here for EY alert dated 20 June 2016)

CBDT amends Income Tax Rules to grandfather income from transfer of investments made before 1 April 2017 from application of GAAR provisions

The ITL contains anti-avoidance provisions in the form of General Anti-Avoidance Rule (GAAR), which provides wide powers to the tax authority to deal with impermissible tax avoidance arrangements. GAAR provisions under the ITL are effective from financial year beginning on 1 April 2017. The CBDT issued a notification dated 22 June 2016 amending the Income Tax Rules dealing with GAAR provisions (GAAR Rules).

The Notification amends the GAAR Rules and provides for grandfathering of income from transfer of investments made before 1 April 2017 from the application of GAAR. Additionally, GAAR Rules are also amended to provide that GAAR will apply to tax benefits obtained on or after 1 April 2017.

(Source: CBDT Notification No. 49/2016 dated 22 June 2016)

(Click here for EY Alert dated 27 June 2016)

First Indian Bilateral- Advance Pricing agreement (APA) having Rollback provision signed with Japanese companys Indian subsidiary

The CBDT issued a press release on 4 August 2016 stating that it entered its first bilateral APA with a Japanese company, which has a Rollback provision in it. Overall, it is the fourth bilateral APA signed by the CBDT. Signing of such bilateral APAs is an important step toward ascertaining certainty in transfer pricing matters of multinational company cases and dispute resolution.

(Source: CBDT press release dated 4 August 2016)

CBDT issues draft rules on certain aspects for determining buy-back tax in India

The ITL provide for a levy of buy-back tax (BBT) @ 20% of the distributed income arising on buy-back of unlisted shares by a domestic company. Distributed income is defined as the difference between the consideration paid by the domestic company on buy-back of shares and the amount received by such company on issue of such shares bought back. There was a lack of clarity in determination of the amount received by a domestic company in different circumstances where shares may have been issued by the company in tranches, for different considerations, or may have been issued in lieu of existing shares of another company under a tax-neutral corporate reorganization.

In 2016, the ITL was amended to empower the CBDT to make rules for determination of the amount received by the company for issue of shares being bought back. Pursuant to that, the CBDT, vide a letter dated 25 July 2016, issued

http://www.startupindia.gov.in/http://www.ey.com/Publication/vwLUAssets/startups_alert/$FILE/startups_alert.pdfhttp://www.ey.com/Publication/vwLUAssets/Notif_49_GAAR.pdf/$FILE/Notif_49_GAAR.pdf

22 Tax Digest

draft BBT Rules to determine the amount received by the company for issue of shares bought back.

The Draft BBT Rules provide for the methodology to determine the amount received by a domestic company on issue of shares under different circumstances, including upon issue of shares at premium, upon amalgamation, demerger, conversion of debenture/debenture stock, upon part return of share capital, upon issue of shares for no consideration etc.

(Source: CBDT Letter dated 25 July 2016)

(Click here for EY Alert dated 25 July 2016)

CBDT clarifies on age calculation if birthdate is April 1

The CBDT issued a Circular for clarifying the date on which a senior citizen/very senior citizen (Senior Citizen) can be regarded as having attained age of 60 years or 80 years respectively in cases where the date of birth falls on 1 April of the relevant year under consideration.

The Circular clarifies that, having regard to ratio of Supreme Court ruling in the case of Prabhu Dayal Sesma v. State of Rajasthan (1986 AIR 1948), for the purpose of calculating the age of the Senior Citizen whose date of birth falls on 1 April, a person would be considered to have completed a particular age on 31 March, i.e, a day preceding his date of birth. The CBDT has directed the tax authorities to consider this position in ascertaining the age while computing the tax liability of the resident individual taxpayers.

(Source: CBDT Circular No. 28 dated 27 July 2016)

GOI defers ICDS applicability to tax year 2016-17

The Government of India (GOI) had notified 10 Income Computation and Disclosure Standards (ICDS) on 31 March 2015 to be effective from tax year 2015-16 for compliance by all taxpayers following the mercantile system of accounting for the purposes of computation of income chargeable to income tax under the head profits and gains of business or profession or income from other sources.

However, concerns were raised by stakeholders on various challenges arising on the implementation of ICDS. The Expert Committee (Committee), which formulated ICDS,

was reconstituted to consider these representations. The Committee recommended amendment of the notified ICDS and also issuance of clarifications on certain issues raised by stakeholders. Pending consideration of these recommendations, the GOI has announced deferment of the effective date of ICDS by one year, i.e., from tax year 201617 onwards. However, notification of amended ICDS and issue of clarifications is awaited as of now.

(Source: GOI Press release dated 6 July 2016)

(Click here for EY Alert dated 7 July 2016)

GOI grants exemption from withholding on payments to securitization trusts

GOI issued a notification, to grant exemption on payments to securitization trusts, which represent income arising from activity of securitization for such trusts. The Notification has come into effect from 17 June 2016 being the date of its publication in the Official Gazette.

(Source: GOI Notification No. 46/2016 dated 17 June 2016)

(Click here for EY Alert dated 27 June 2016)

CBDT notifies new method for computation of expenditure incurred for earning exempt income

CBDT, vide a notification, has partially substituted existing Rule for computing disallowance of expenditure incurred in relation to exempt income. The modified Rule provides for a new method for computation of disallowance of expenditure. Here, in addition to amount of expenditure directly relating to exempt income, will include an amount equal to 1% of annual average of monthly averages of the opening and closing balance of the value of investment, which gives rise or may give rise to exempt income. However, the total amount of disallowance will be restricted to total expenditure claimed by the taxpayer. The modified Rule is made effective from date of publication in Official Gazette on 2 June 2016.

(Source: CBDT Notification No. 43/ 2016 dated 2 June 2016)

(Click here for EY Alert dated 8 June 2016)

http://www.ey.com/Publication/vwLUAssets/BBT_alert/$FILE/BBT_alert.pdfhttp://www.ey.com/Publication/vwLUAssets/Government_defers_effective_date_of_ICDS_by_one_year/$FILE/Government_defers_effective_date_of_ICDS_by_one_year.pdfhttp://www.ey.com/Publication/vwLUAssets/GOI_grants_exemption_from_withholding_on_payments_to_securitization_trusts/$FILE/GOI_grants_exemption_from_withholding_on_payments_to_securitization_trusts.pdfhttp://www.ey.com/Publication/vwLUAssets/Tax_alert_Mahindra_Telcom/$FILE/Tax_alert_Mahindra_Telcom.pdf

23 Tax Digest

Government introduces Taxation Laws Amendment Bill to amend demerger definition and relax new employment tax holiday for apparel manufacturing sector

The Taxation Laws (Amendment) Bill, 2016 (Bill) was recently passed by the Lok Sabha. The Bill proposes to amend the ITL and the Customs Tariff Act, 1975. In the context of the ITL, the Bill proposes to amend the definition of demerger, to include within its ambit, the splitting up or reconstruction of an erstwhile public sector company pursuant to the condition attached to transfer of its shares by the Central Government at the time of disinvestment. The Bill also proposes to relax the minimum period of employment condition, to grant tax incentive for generation of employment, from 240 days to 150 days for the apparel manufacturing industry, considering the seasonal nature of such industry.

Both amendments are proposed to take effect from tax year 201617.

(Source: http://164.100.47.4/BillsTexts/LSBillTexts/PassedLoksabha/215C_2016_LS_Eng.pdf)

(Click here for EY Alert dated 11 August 2016)

Rules for granting foreign tax credit (FTC) notified

The CBDT, vide its Notification no. 54/2016 dated 27 June 2016, has notified rules for grant of FTC in India (FTC rules). The FTC rules are issued pursuant to a public consultation process on the draft FTC rules issued by CBDT earlier in April 2016.

The FTC rules provide for various aspects relating to FTC claims, which include, inter alia, the scope of Indian taxes and foreign taxes; claiming FTC in the year when income is offered to tax in India, etc. The FTC rules also provide that FTC will be computed separately for each source of income arising from a foreign jurisdiction and the same will also be subject to a maximum credit limit as well as the requirement that foreign taxes are paid in accordance with the treaty. In addition, it is clarified that if the foreign taxes paid are disputed, the grant of FTC in India will be subject to specified reporting compliance. The notified FTC rules also prescribe the documentation requirement to be discharged by the taxpayer claiming FTC in India.

The notified FTC rules will come into force on 1 April 2017.

(Source: CBDT Notification no. 54/2016 dated 27 June 2016)

(Click here for EY Tax Alert dated 30 June 2016)

Indian Equalization Levy on digital services to be effective from 1 June 2016, administrative rules notified

Equalization Levy (EL) was introduced in India in the Union Budget of 2016 and was enacted as part of the Finance Act 2016. EL is chargeable at the rate of 6% on gross consideration, for specified digital services and facilities, received or receivable by a non-resident (NR) who does not have a PE in India. The specified payer (being an Indian resident carrying on business or profession or a NR having a PE in India) is under obligation to deduct the EL from the amount paid or payable to the NR service provider.

Recently, the CBDT notified the effective date of EL provisions as on 1 June 2016 as well as the Equalisation Levy Rules, 2016 (the EL rules) for its implementation. The EL rules include manner of payment of EL, form for furnishing annual statement of specified service, forms for filing appeal before the appellate authorities.

(Source; CBDT Notification No. 37/2016 & 38/2016: F No. 370142/12/2016-TPL, dated 27 May 2016)

(Click here for EY Tax Alert dated 31 May 2016)

CBDT issues Indirect Transfer Rules

The CBDT, vide a notification, has issued rules and forms in relation to the indirect transfer (IDT) provisions of the ITL. The IDT provisions provide for taxation of gains arising from the transfer of share or interest in a foreign company or foreign entity whose value is derived, directly or indirectly, substantially from assets located in India.

The IDT Rules provide for valuation mechanism, determination of proportionate income, forms for reporting compliance and details of documents to be maintained by the Indian concern in respect of IDT transactions. These IDT Rules come into force from 28 June 2016.

(Source: Notification No. 55/2016 dated 28 June 2016)

(Click here for EY Tax Alert dated 30 June 2016)

http://www.ey.com/Publication/vwLUAssets/Taxation_Laws_Amendment_Bill_to_amend_demerger/$FILE/Taxation_Laws_Amendment_Bill_to_amend_demerger.pdfhttp://www.ey.com/Publication/vwLUAssets/FTC_Alert/$FILE/FTC_Alert.pdfhttp://www.ey.com/Publication/vwLUAssets/EL_Alert/$FILE/EL_Alert.pdfhttp://www.ey.com/Publication/vwLUAssets/IDT_rules_Alert1/$FILE/IDT_rules_Alert1.pdf

24 Tax Digest

CBDT clarifies applicability of tax collection at source (TCS) provisions on sale of goods/services where part payment received is in cash and part by cheque

In order to curb flow of unaccounted money and to track high value transactions, Finance Act 2016 has expanded the scope of TCS provisions under the ITL to cover sale of any other goods/services for cash exceeding INR200,000 as well as sale of high value motor vehicles.

To address some of the issues raised pursuant to this amendment, the CBDT issued clarifications in the form of FAQs vide its Circular No. 22/ 2016 dated 8 June 2016. To address additional issues on applicability of TCS provisions in relation to cash sale of other goods/services where payment is received partly in cash and partly by cheque, the CBDT, as an addendum to earlier Circular No. 22, issued another set of FAQs vide Circular No. 23/ 2016 dated 24 June 2016.

Circular No. 23 clarifies the following two issues:

TCS provisions will not trigger where cash receipt does not exceed threshold of INR200,000 even if sale consideration is more than INR200,000.

In case if TCS provisions trigger, tax @1% will be collected at source only on the cash component of the sale consideration and not on the entire sale consideration.

(Source: CBDT Circular No. 23/ 2016 dated 24 June 2016.)

CBDT issues a series of FAQs on Income Declaration Scheme

Finance Act 2016 introduced the Income Declaration Scheme (Scheme). Under the Scheme (which is operative till 30 September 2016), taxpayers who have not paid full taxes in the past can come forward and declare undisclosed income or asset. On payment of tax, surcharge and penalty, totaling to 45% of such undisclosed income or value of asset declared, taxpayers would enjoy immunity on the declared income and asset from penalty and prosecution under the ITL, the Wealth Tax Act and the Benami Transaction (Prohibition) Act.

The CBDT has issued a series of circulars in the form of frequently asked questions (FAQs) to address various issues and concerns raised by taxpayer in connection with the scope of the Scheme. So far the CBDT has issued five circulars addressing various concerns of the taxpayers as below:

The first set of 14 FAQs released on 20 May 2016 deals with issues, such as eligibility of declarant, quantification of value of asset declared, scope of inquiry, confidentiality of declaration etc.

The second set of 11 FAQs released on 27 June 2016 deals with issues, such as eligibility of declarant, requirement of valuation report, consequence of non-declaration in case of subsequent detection of undisclosed income or asset etc.

The third set of 11 FAQs released on 30 June 2016 provides clarifications on issues, such as confidentiality of information disclosed in the declaration, allowability of credit for tax deducted at source against declared income, enquiry in respect of the source of income and payment of tax and initiation of enquiry against third parties on the basis of information furnished in the declaration etc.

The fourth set of 10 FAQs released on 14 July 2016 provides clarifications on issues, such as rate of tax, surcharge and penalty to be paid in relation to declaration of undisclosed income, revision of declaration, capital gains and withholding of taxes on transfer of property from benamidar to beneficial owner, secrecy of valid declaration made under the Scheme etc.

The fifth set of 12 FAQs released on 19 August 2016 clarifies issues regarding valuation of immovable property, declaration of fictitious liability, deposit of taxes in cash in Banks etc.

(Click here for EY alerts dated 21 May 2016, 28 June 2016, 1 July 2016, 14 July 2016, 19 August 2016 respectively for details on each circular)

http://www.ey.com/Publication/vwLUAssets/IDS_FAQ.pdf/$FILE/IDS_FAQ.pdfhttp://www.ey.com/Publication/vwLUAssets/FAQ_IDS/$FILE/FAQ_IDS.pdfhttp://www.ey.com/Publication/vwLUAssets/FAQ_IDS/$FILE/FAQ_IDS.pdfhttp://www.ey.com/Publication/vwLUAssets/IDS_FAQ_Third/$FILE/IDS_FAQ_Third.pdfhttp://www.ey.com/Publication/vwLUAssets/IDS_FAQ_Fourth/$FILE/IDS_FAQ_Fourth.pdfhttp://www.ey.com/Publication/vwLUAssets/IDS_FAQ_Fifth/$FILE/IDS_FAQ_Fifth.pdf

25 Tax Digest

Treaty Updates

Exchange of information (EoI) agreement between India and St. Kitts and Nevis enters into force

On 2 February 2016, the India-St. Kitts and Nevis EOI Agreement (2014) entered into force. The agreement applies from 2 February 2016. This EOI Agreement provide for internationally accepted standards for effective exchange of information on tax matters. It also specifies that information held by banks and other financial institutions and also information regarding the legal and beneficial ownership of entities/persons may be exchanged between the two countries.

(Source: http://www.incometaxindia.gov.in/communications/notification/notification62_2016.pdf)

Treaty between India and Kenya signed

On 11 July 2016, India and Kenya signed a new treaty in Kenya for avoidance of double taxation. Once in force and effective, the new treaty will replace the India-Kenya Tax Treaty (1985). Text of the treaty is yet not available.

Source: IBFD

Cabinet approved revision to India-Cyprus tax treaty and its protocol status of Cyprus as non-cooperative jurisdiction to be rescinded retrospectively

The Ministry of Finance (MOF) released a Press Release dated 24 August 2016 announcing that the Cabinet has approved signing of revised treaty and the Protocol between India and Cyprus. According to the Press Release, the new treaty will provide for source-based taxation for capital gains as compared to residence-based taxation under the existing treaty. The Press Release further clarifies that same is in line with the recent amendment to the India-Mauritius treaty. Text of the revised India-Cyprus treaty and Protocol are awaited.

Furthermore, according to an earlier Press Release of CBDT dated 1 July 2016, it is stated that the amended tax treaty with Cyprus is likely to provide that investments made prior to 1 April 2017 will be grandfathered from the provisions of source-based taxation. Moreover, India may

consider rescinding of Cypruss notification as notified jurisdictional area (NJA) with retrospective effect from 1 November 2013.

(Click here for EY Tax Alert dated 1 July 2016)

(Source : MoF Press Release dated 24 August 2016 and CBDT Press Release dated 1 July 2016)

Negotiation to India-Singapore treaty underway

MoF, in its Press Release dated 24 August 2016 has indicated that negotiations are also going on to revise India-Singapore treaty for similar changes in line with changes to India-Mauritius and India-Cyprus treaty, i.e., source-based taxation for capital gains.

(Source : MoF Press Release dated 24 August 2016)

Protocol to treaty between India and Slovenia signed

On 17 May 2016, India and Slovenia signed a protocol to amend and update the India-Slovenia Income Tax Treaty (2003). Text of the treaty is not yet available.

Source: IBFD

http://www.incometaxindia.gov.in/communications/notification/notification62_2016.pdfhttp://www.incometaxindia.gov.in/communications/notification/notification62_2016.pdfhttp://www.ey.com/Publication/vwLUAssets/Cyprus_Renegotiation/$FILE/Cyprus_Renegotiation.pdf

26 Tax Digest

Happenings across the border

Organisation of Economic Co-operation and Development (OECD) releases standardized IT-format for providing feedback on exchanged Common Reporting Standard information

The OECD has released its standardized the IT-format for providing structured feedback on exchanged Common Reporting Standard (CRS) information the CRS Status Message XML Schema as well as the related User Guide. CRS XML Schema was earlier developed by the OECD as part of the CRS, for exchanging the information with each other and, in many instances, to receive information from their financial institutions. However, as the information to be provided through the CRS XML Schema may contain errors, caused by either an incorrect file preparation and/or by incomplete or inaccurate record information, the OECD has now developed the CRS Status Message XML Schema, as well as a User Guide setting out the practical guidelines for using the XML Schema.

Please click here to access the global alert

US releases its final regulations on country-by-country reporting

On 29 June 2016, the US Treasury Department (Treasury) and Internal Revenue Service (IRS) released much-anticipated final regulations on country-by-country (CbC) reporting (the Final Regulations). The Final Regulations apply to reporting periods of ultimate parent entities of US multinational enterprise (MNE) groups that begin on or after the first day of the tax year of the ultimate parent entity that begins on or after 30 June 2016.

Under the Final Regulations, ultimate parent entities of a US MNE group with annual revenue of US$850 million or more for the immediately preceding accounting period must file Form 8975, Country-by-Country Report, containing information, on a country-by-country basis, related to the US MNE groups income and taxes paid, together with certain indicators of economic activity within the US MNE group.

Moreover, in the preamble to the Final Regulations, Treasury and the IRS announced their intention to allow voluntary CbC reporting, under guidance to be published separately, for reporting periods that begin on or after 1

January 2016, and before the applicable date of the Final Regulations.

Please click here to access the global alert

OECD releases standardized IT format for the exchange on tax rulings under Base Erosion and Profit Shifting (BEPS) Action 5

The OECD has released the Exchange of Tax Rulings (ETR) XML Schema and its accompanying user guide to facilitate the swift and uniform implementation of the exchange on tax rulings under both the OECD and the EU frameworks. The ETR XML Schema provides the common IT-format for implementing the exchanges on tax rulings between Competent Authorities, and its related User Guide explains the information required to be included in each data element to be reported. It also contains guidance on how to make corrections of data element within a file.

Please click here to access the global alert

BEPS update:

OECD releases discussion draft on development of a multilateral instrument to implement tax treaty-related BEPS measures

On 31 May 2016, the OECD released a discussion draft requesting input on the multilateral instrument to be developed under OECD BEPS Action 15. The multilateral instruments main objective is to implement the tax treaty-related BEPS measures by modifying existing bilateral tax treaties in a consistent and efficient manner. The instrument will include OECD BEPS recommendations on hybrids, treaty abuse, PE and dispute resolution.

Comments were invited on certain technical issues and questions related to the implementation of the treaty related BEPS measures (though not on the scope or substance of the BEPS outputs), as well as on the development of a provision on mandatory binding arbitration within the mutual agreement procedure and were to be submitted by 30 June 2016.

Please click here to access the global alert

http://www.oecd.org/tax/oecd-releases-standardised-it-format-for-providing-feedback-on-received-common-reporting-standard-information.htmhttp://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--Final-US-country-by-country-reporting-regulations-analyzed-in-depthhttp://www.oecd.org/tax/beps/oecd-releases-standardised-it-format-for-the-exchange-on-tax-rulings-under-beps-action-5.htmhttp://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--OECD-releases-discussion-draft-on-development-of-a-multilateral-instrument-to-implement-tax-treaty-related-BEPS-measures

27 Tax Digest

OECD Council approves changes to OECD Transfer Pricing Guidelines to incorporate BEPS reports

On 23 May 2016, the OECD Council took the formal step of adopting a recommendation to incorporate the guidance set out in the reports on BEPS Actions 8-10 and 13 issued in October 2015, into the OECD Transfer Pricing Guidelines (TPG). Furthermore, the OECD Council adopted a Recommendation on BEPS Measures Related to Transfer Pricing, recommending that both the OECD member countries and non-member countries follow the guidance set out in the Actions 8-10 Report and the Action 13 Report.

Please click here to access the global alert

OECD releases discussion draft on the approaches to address BEPS involving interest in the banking and insurance sectors.

On 28 July 2016, the OECD released a discussion draft on the approaches to address BEPS involving interest in the banking and insurance sectors. This discussion draft is part of the follow up work on Action 4, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, and aims to identify approaches suitable for addressing the BEPS risks posed by these sectors, taking into account their particular characteristics.

The discussion draft is organized into two blocks. The first block addresses risks posed by entities engaged in banking or insurance business and subject to regulatory capital rules which differ between countries. The draft does not suggest a single approach but recommends adoption of rules targeted to actual BEPS risks faced by individual countries. The second addresses risks posed by other entities in a group with a bank or insurance company and recommends adoption of fixed ratio rule and group ratio rule with flexibility to each country to take into account particular features of its tax law and policy.

Please click here to access the global alert

OECD releases discussion draft on Group Ratio Rule under Action 4 limiting interest-deductions

On 11 July 2016, the OECD released the discussion draft on the elements of the design and operation of the group ratio rule as part of the follow up work on Action 4, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments. The discussion draft sets out different approaches to calculate a groups net third party interest expense, a definition of group-EBITDA (earnings before interest, taxes, depreciation and amortization), and approaches to deal with the impact of losses on the operation of the group ratio rule.

Please click here to access the global alert

OECD releases discussion draft on Branch Mismatch Structures under Action 2 on neutralising the effects of hybrids mismatch arrangements

On 22 August 2016, the OECD released a discussion draft on branch mismatch structures as part of follow up work on Action 2: Neutralising the Effects of Hybrids Mismatch Arrangements. The draft identifies and analyses mismatches that can arise through the use of branch structures and sets out preliminary recommendations for domestic rules, based on those in Action 2 report, which will neutralize the mismatches in tax outcomes arising from the use of these structures.

Please click here to access the global alert

OECD releases additional Guidance on implementation of Country-by-Country reporting

On 29 June 2016, OECD released additional Guidance aimed at the consistent implementation of CbC reporting under Action 13 of BEPS Action Plan. The Guidance addresses four topics:

Transitional filing options for MNEs that voluntarily file in the parent company jurisdiction

Guidance on the application of CbC reporting to investment funds

http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--OECD-Council-approves-changes-to-OECD-Transfer-Pricing-Guidelines-to-incorporate-BEPS-reports http://www.oecd.org/tax/oecd-releases-discussion-draft-on-beps-action-4-approaches-to-address-beps-involving-interest-in-the-banking-and-insurance-sectors.htmhttps://www.oecd.org/tax/aggressive/discussion-draft-beps-action-4-elements-of-the-design-of-group-ratio-rule.pdf http://www.oecd.org/tax/beps/Discussion-draft-Action-2-Branch-mismatch-structures.pdf

28 Tax Digest

Guidance on the application of CbC reporting to partnerships

The impact of exchange rate fluctuations on the agreed 750 million filing threshold for MNE groups

The Guidance also explains that given the nature of the CbC Reporting, a peer review of the implementation of CbC reporting will be conducted to ensure that the implementation is timely and in accordance with the Final Report on Action 13.Please click here to access the global alert

OECD releases discussion drafts on profit splits, attribution of profits to permanent establishments and conforming amendments to OECD Chapter IX on business restructurings

On 4 July 2016, OECD released discussion drafts on the revised guidance on profit splits (BEPS Actions 8-10) and attribution of profits to PE.

(BEPS Action 7). It also requested public review of the document containing conforming changes to Chapter IX (business restructurings) of the OECD TPG.

The discussion draft titled BEPS Actions 8, 9-10: Revised Guidance on Profit Splits is aimed at clarifying and streng