CBDT vide Circular No. 13/2016 granted one more opportunity to taxpayers to furnish their ITR V even after lapse of 120 days from the date of filing of their return of income to avoid consequences of non-filing of income tax return. The circular can be downloaded by clicking –> cbdt-circular-13-2016-evc-verification-of-itrs-pending-for-itr-v
CBDT has taken a big step in digitizing the functions of the the income-tax department which will remove human interface, reduce paperwork and decrease the transaction cost for the taxpayer by making efiling of appeals before the Commissioner of Income-tax (Appeals) mandatory for persons who are required to efile their return of income.
As per the press release issued by the CBDT, existing Form 35 will be replaced and the new form is claimed to be more structured, objective, systematic, and aligned with the current provisions of the Income-tax Act.
Press release can be downloaded by clicking –> cbdt-mandates-e-filing-of-appeal-before-cita-for-taxpayers-who-are-liable-to-e-file-tax-return
Place of Effective Management:
Prior to Finance Act 2015:
Section 6(3) of the Income-tax Act: provided that a company is said to be resident in India in any previous year, if it is an Indian company or if during that year, the control and management of its affairs is situated wholly in India.
Controversy: This allowed tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and management outside India.
Post Amendment by Finance Act 2015:
Section 6(3) of the Income-tax Act and provided that a company is said to be resident in India in any previous year, if-
(i) it is an Indian company; or
(ii) its place of effective management in that year is in India
Draft Guidelines issued by CBDT:
- Place of Effective Management (PoEM) means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.
Explanation: It is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognize the concept of ‘place of effective management’ for determination of residence of a company as a tie-breaker rule for avoidance of double taxation.
Any determination of the PoEM will depend upon the facts and circumstances of a given case. The PoEM concept is one of substance over form. It may be noted that an entity may have more than one place of management, but it can have only one place of effective management at any point of time. Since “residence” is to be determined for each year, POEM will also be required to be determined on year to year basis. The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India.
The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
However, if on the basis of facts and circumstances it is established that the Board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person (s) resident in India, then the place of effective management shall be considered to be in India.
For the purpose of determining whether the company is engaged in active business outside India the average of the data of the previous year and two years prior to that shall be taken into account. In case the company has been in existence for a shorter period, then data of such period shall be considered.
- Head Office of a Company: would be the place where the company’s senior management and their direct support staff are located or, if they are located at more than one location, the place where they are primarily or predominantly located. A company’s head office is not necessarily the same as the place where the majority of its employees work or where its board typically meets.
- Senior Management: Person(s) who are generally responsible for developing and formulating key strategies and policies for the company & for ensuring or overseeing the execution and implementation of those strategies on regular and on-going basis
- Managing Director or Chief Executive Officer
- Financial Director or Chief Financial Officer
- Chief Operating Officer
- The heads of various divisions or departments (eg. Chief Information or Technology Officer, Director of Sales or Marketing, etc.)
- Passive Income: of a company shall be aggregate of the following
- Income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and
- income by way of royalty, dividend, capital gains, interest or rental income;
- Active Business Outside India: A company shall be said to be engaged in active business outside India if the passive income is not more than 50% of its total income and
- Less than 50% of its total assets are situated outside India; and
- Less than 50% of its total number of employees are situated in India or are resident in India; and
- Its payroll expenses incurred on such employees is less than 50% of its total payroll expenses.
- Companies other than companies engaged in active business outside India: Determination of PoEM shall be a two stage process:
- First Stage: Identification or ascertaining the person(s) who actually make the key management and commercial decisions for the conduct of the company as a whole;
- Second Stage: Determination of place where these decisions are in fact being made
The place where these management decisions are taken would be more important than the place where these decisions are implemented. Form the purpose of determination of PoEM, substance shall be more conclusive rather than the form.
Some Guiding principles to be taken into account for determining PoEM:
- The location where a company’s board regularly meets and makes decisions may be PoEM provided the board:
- Retains and exercises the authority to govern the company; and
- In substance, makes the key management and commercial decisions necessary for the conduct of the company’s business as a whole.
Mere formal holding of board meetings at a place would by itself not be conclusive for determination of PoEM being located at that place. If the key decisions by the directors are in fact taken in a place other than the place where formal meetings are held then such other place would be relevant for PoEM.
If a board has de facto delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder and does nothing more than routinely ratifying the decisions that have been made, the company’s place of effective management will ordinarily be the place where these senior managersor the other person make those decisions.
- A company’s board may delegate some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management. In these situations, the location where the members of the executive committee are based and where that committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered to be the company’s place of effective management.
The delegation of authority may be either de jure (by means of a formal resolution or Shareholder Agreement) or de facto (based upon the actual conduct of the board and the executive committee).
- The location of a company’s head office will be a very important factor in the determination of the company’s place of effective management because it often represents the place where key company decisions are made. The following points need to be considered for determining the location of the head office of the company
- If the company’s senior management and their support staff are based in a single location and that location is held out to the public as the company’s principal place of business or headquarters then that location is the place where head office is located.
- If the company is more decentralized (for example where various members of senior management may operate, from time to time, at offices located in the various countries)then the company’s head office would be the location where these senior managers:
- are primarily or predominantly based; or
- normally return to following travel to other locations; or
- meet when formulating or deciding key strategies and policies for the company as a whole;
- Members of the senior management may operate from different locations on a more or less permanent basis and the members may participate in various meetings via telephone or video conferencing rather than by being physically present at meetings in a particular location. In such situation the head office would normally be the location, if any, where the highest level of management (for example, the Managing Director and Financial Director) and their direct support staff are located.
- In situations where the senior management is so decentralised that it is not possible to determine the company’s head office with a reasonable degree of certainty, the location of a company’s head office would not be of much relevance in determining that company’s place of effective management.
- Day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of PoEM.
- Place where main and substantial activity of the company is carried out; or
- Place where the accounting records of the company are kept.
- The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. Therefore physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. In such cases the place where the directors or the persons taking the decisions or majority of them usually reside may also be a relevant factor.
- If the above five factors do not lead to clear identification of PoEM the following secondary factors must be considered:
- Determination of PoEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on isolated facts. Eg:
- The fact that a foreign company is completely owned by an Indian Company will not be conclusive evidence that the conditions for establishing PoEM in India have been satisfied;
- The fact that one or some of the Directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing PoEM in India have been satisfied;
- The fact that local management being situated in India in respect of activities carried out by a foreign company will not be be conclusive evidence that the conditions for establishing PoEM in India have been satisfied;
- The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing PoEM in India have been satisfied
- Where the Assessing Officer proposes to hold a company incorporated outside India, on the basis of PoEM, as being resident in India, then such finding shall be given by him after seeking prior approval of the Principal Commissioner or Commissioner as the case may be, in this regard. The Principal Commissioner or Commissioner shall provide an opportunity of being heard to the company before deciding the matter
The above principles for determining the PoEM are for guidance only. No single principle will be decisive in itself. The above principles are not to be seen with reference to any particular moment in time rather activities performed over a period of time, during the previous year, need to be considered. In other words a “snapshot” approach is not to be adopted. Further, based on the facts and circumstances if it is determined that during the previous year the PoEM is in India and also outside India then PoEM shall be presumed to be in India if it has been mainly /predominantly in India
Vide Income-tax (18th Amendment) Rules, 2015, Rule No. 127 shall be inserted – Service of Notice, Summons, Requisition, Order and Other Communication (‘Communication’).
For Physical Delivery of Communications, the addresses shall mean
(a) address available in PAN Database of the addressee; or
(b) the address available in the income-tax return to which the communication relate; or
(c) the address available in the last income-tax return furnished by the addressee; or
In the case of addressee being a company, address of registered office as available on the website of Ministry of Corporate Affairs.
Provided that the communication shall not be delivered or transmitted to the address mentioned in item (i) to (iv) where the addressee furnishes in writing any other address for the purposes of communication to the income-tax authority or any person authorised by such authority issuing the communication.
For Communication transmitted Electronically, the addresses shall mean
(a) email address available in the income-tax return furnished by the addressee to which the communication relates; or
(b) the email address available in the last income-tax return furnished by the addressee; or
(c) in the case of addressee being a company, email address of the company as available on the website of Ministry of Corporate Affairs; or
(d)any email address made available by the addressee to the income-tax authority or any person authorised by such income-tax authority.
Notification No.89/2015/F. No. 133/79/2015-TPL
CBDT vide F.No.225/207/2015/ITA.II clarified that the due date for obtaining and E-filing of audit reports under various provisions of the Income-tax Act for assessees covered under clause(a) of Explanation 2 sub-section (1) of section 139(1) also stands extended to 31 October 2015.
Clarification can be downloaded by clicking –> extended-due-date-of-oct-31-2015-is-also-applicable-for-e-filing-of-audit-reports-cbdt-clarifies
CBDT vide notification no.86/2015/F.No.500/1/2014-APA-II, notified the tolerance limits for international transactions / specified domestic transaction entered into by the assessee’s with associated enterprises as under:
- Wholesale Trading : 1%
- Others cases : 3%
For the purpose of this notification: Wholesale trading means an international transaction or specified domestic transaction of trading in goods which fulfills the following conditions:
- purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities;
- average monthly closing inventory of such goods is 10% or less of sales pertaining to such trading activities
The notification can be downloaded by clicking –> govt-notifies-old-tolerance-limit-of-1-and-3-under-new-tp-rule
Reserve Bank of India has released a press release requesting the General Public and Banking Institutions not to write number, name or messages, etc. on the watermark window of banknotes citing the security reasons.
Source: Press Release: 2015-2016/152 The same can be downloaded by clicking here –>RBI Press release – Inscribing on Bank Notes
Advance Pricing Agreement provisions were introduced by Finance Act 2012 through insertion of Section 92CC & 92CD in the Income-tax Act, 1961 (‘Act’) and the scheme was notified vide S.O. 2005(E), dated 30.08.2012 by way of insertion of Rule 10F to 10 T and Rule 44GA in the Income Tax Rules, 1962 (‘Rules’)
Roll-back provisions were introduced by insertion of sub-section (9A) in Section 92CC by Finance (No.2) Act, 2014 and the scheme was notified vide S.O. 758 (E) date 14.03.2015 by way of insertion of Rules 10MA and 10RA in the Rules.
In view of various queries raised by the professional, CBDT decided to clarify those issues vide Circular No. 10/2015 (F.No. 500/7/2015-APA-II) by way of question answer form. The clarifications provided are tabulated hereunder:
|Sr. No.||Question||Extracts from Clarification|
|1.||Rule 10MA(2)(ii) – Whether Applicants who have filed their return under sec. 139(4) or 139(5) of the Act would be eligible for roll-back provisions||Sec 139(5) – If there is a return which is filed under sec. 139(5) of the Act to revise the original return before the due date specified in Explanation 2 to Sec. 139(1), the applicant would be eligible / entitled for roll-back provisions on this revised return.
Sec 139(4) – Applicant filing belated return under sec. 139(4) are not eligible / entitled for roll-back provisions as a return is not filed before the due date of filing return of income
|2||Rule 10MA(2)(i) mandates that the roll-back provisions shall apply in respect of Intl. Transactions that is same as Intl. Transactions to which the agreement applies. Clarification is required for the words ‘Same” and whether the restriction also applies to FAR Analysis||The term same Intl. Transaction implies that the transaction in the roll-back years has to be of the same nature and undertaken with the same AE, as proposed to be undertaken for future years.
Restriction with reference to FAR analysis shall operate to ensure that roll-back provisions would apply only if FAR analysis of roll-back years don’t differ materially from the FAR validated in respect of Intl. Transactions to be undertaken for future years.
|3||Rule 10MA(2)(iv) – Clarification is required as to whether roll-back provisions has to be requested for all four years or applicant can choose the years out of block of four years||The applicant does not have the option to choose the years for which it wants to apply for roll-back. Applicant has to apply for all the four years or not apply at all.
If covered transactions did not exist or there was some dis-qualification in roll-back years, the applicant can apply for rollback provisions for remaining years.
If applicant fails the test of rollback conditions contained in various provisions in a particular year, he shall be denied benefit of roll-back provisions for that year, however, applicant can still apply for rollback for remaining years
|4||Rule 10(MA)(3) & Rule 10MA(4) – Clarification required for the phrase “Tribunal has passed an order disposing of such appeal” and on mismatch, if any, between Rule 10MA(3) & 10MA(4)||Where tribunal has passed an order disposing the appeal, finality has already reached in that year. However, where tribunal has set aside the order for fresh consideration, roll-back provisions can be given.
Further there is no mismatch between Rule 10MA(3) & 10MA(4)
|5||Rule 10MA(3)(iii) – Whether roll-back provisions can be applied if it has the effect of reducing the total income or increasing the loss of the applicant as declared in the return of income. Clarification is required so as to ensure that the returned income is accepted as final income or loss after applying the roll-back provisions||The ALP would get modified to the extent that it does not result in reducing the total income or increasing the loss, as the case may be, the returned income. Accordingly, roll-back provisions could be applied
|6||Rule 10RA(7) In case of failure on the part of the applicant to comply with the provisions of roll-back, whether the entire agreement gets cancelled or only that year in which roll-back fails||The entire agreement shall stand cancelled. Roll-back provisions are introduced for the benefit of the applicant and is applicable at its option.|
|7||If there is a Mutual Agreement Procedure (MAP) application pending for the roll-back year, what would be the stand of the APA authorities? Further, what would be the view of the APA Authorities if MAP has already been concluded for roll-back year?||
|8||Rule 10MA(1) & Rule 10MA(4): As per Rule 10MA(1), agreement shall provide the manner for determination of ALP & as per Rule 10MA(4) specifies that manner of determination of ALP shall be same as in the APA term. Does that mean that ALP could be different||Yes, ALP could be different for different year. However, manner for determination of ALP (including Method, comparability analysis, tested party) would be same|
|9||Will there be compliance audit for roll-back? Would critical assumptions have to be validated during compliance audit||ALP would be agreed after dull examination of facts, including validation of critical assumptions. Hence compliance audit would be necessary to check if the agreed price or methodology has been applied in modified return|
|10||Whether applicant has the option to withdraw its roll-back application? Can the applicant accepting the APA for the future years?||Yes. Applicant may withdraw the application even while maintaining the application for future years. However fees for application of rollback application shall not be refunded upon withdrawal.|
|11||For already concluded APA, will new APAs be signed for rollback or earlier APAs could be revised||APAs already concluded to include rollback provisions as per second proviso to Rule 10MA(5)|
|12||For already concluded APA, where the modified return has already been filed for first year of the APA term, how will the time-limit for filing modified return for roll-back years be determined?||The time to file the modified return for roll-back years will start from the date of signing of the revised APA incorporating the roll back provisions|
|13||In case of merger of companies, where one or more of those companies are APA applicants, how would the roll back provisions be allowed and to which company or companies it would be allowed||The principle to be followed is that the person who makes the APA application would only be entitled to enter into the agreement and be entitled for roll back provision. Other companies who have merged with this person would not be eligible for roll-back provisions|
|14||In case of demerger of an APA applicant or signatory into two or more companies, who would be eligible for the roll-back provisions||The person who makes the APA application would only be entitled to enter into the agreement|
The Clarificatory Circular can be downloaded by clicking here –> circular_no_10_2015
The CBDT has issued a letter on 01.06.2015 stating that in many cases the deductor has deducted tax at source from payments made to them in accordance with the provisions of Chapter XVII of the Income-tax Act but the deductor has failed to deposit the same into the Government Account.
Under section 205 of the Act, the assessee shall not be called upon to pay the tax to the extent that tax has been deducted from the income. The Act puts a bar on direct demand against the assessee in cases where tax is deducted but not deposited by the deductor.
CBDT instructed the assessing officer that demand on account of tax credit mismatch cannot be enforced coercively and has asked all assessing officers not to put the assessees to any inconvenience on account of the default of tax info into the Government account by the deductor.
This will be a welcome relief as the assessee cannot be penalized or put to inconvenience for the default committed by the deductor of tax at source. The letter issued by CBDT can be downloaded by clicking here –>CBDT_Letter_TDS_Coercive_Recovery
Concept of “Range” and Use of “Multiple Year Data” for computation of arm’s length price (‘ALP’) are proposed to be introduced in Indian Transfer Pricing Regime for transactions undertaken by the person on or after 01 April 2014 by way of Amendment in Income Tax Rules, 1962. In this regards, Ministry of Finance has published Scheme_ALP_InternationalTran21052015 on www.finmin.nic.in for comments and suggestion of the stakeholders and general public.
Salient Features of the Draft Scheme for Computation of ALP is as under:
A) Adoption of Range Concept:
- Concept of Range to be applicable in cases where ALP is determined by application of Transaction Net Margin Method (‘TNMM’), Resale Price Method (‘RPM’) or Cost Plus Method (‘CPM’);
- Minimum 9 entities shall be required to be selected as comparable entities based on Functions, Assets and Risk Analysis (‘FAR Analysis’);
- 3 years weighted average data 9 or more entities would be considered to construct the set and in certain circumstances such as Start-Up Operations in any of the previous two year or closure of operation in the current year, two years data could be used;
- For Calculation of Weighted Average, the numerator and denominator of Chosen Profit Level Indicator (‘PLI’) would be aggregated for all the years for every comparable entity and margin would be computed accordingly;
- Data points lying between the 40th to 60th Percentile shall be of the series shall constitute the arm’s length range; If the transfer price falls outside the range, median of the of the range would be taken as ALP and no range adjustment shall be allowed. Further, there shall not be two different sets for testing and making adjustment
B) Use of Multiple Year Data:
- Concept of Use of Multiple Year Data to be applicable in cases where ALP is determined by application of Transaction Net Margin Method (‘TNMM’), Resale Price Method (‘RPM’) or Cost Plus Method (‘CPM’);
- Three years shall comprise of the year in which the International Transaction or Specified Domestic Transaction has been undertaken and two preceding years.
- In case off non-availability of data for three years i.e. data for current year not available at the time of filing of Transfer Pricing Audit Report in Form 3CEB or a comparable may fail to clear quantitative filter in one of the three years or comparable has commence operations in the last two years or comparable has closed down its business operations in the current year, then use of two years data of the relevant three years shall be allowed.
- Data for current year can be used by the tax-payer as well as the department at the time of transfer pricing scrutiny
C) Continued used of Arithmetic Mean
- Where the range concept does not apply, the arithmetic mean concept shall continue to be applied in the same manner as it applied before amendment to Section 92C of the Income Tax Act, 1961 by Finance (No.2) Bill 2014 along with benefit of tolerance range.
- Further, in cases where multiple year data is to be used, the arithmetic mean of the multiple year data of comparable shall be considered for computation of ALP.