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    Nitin Shantilal Muthiyan Vs Deputy Commissioner of Income-tax Ahmednagar         ITAT PUNE

    For claiming deduction under section 80E, there is no such stipulation u/s.80E of the I.T. Act that the education should be in India only.

    Had there been such an intention by the legislature it would have been definitely and specifically mentioned as had been mentioned in section 11 of the I.T. Act which provides that any income or property held for charitable purposes is exempt from tax u/s.11(1)(a) only to the extent it is applied in India.

    Therefore, if the legislature wanted education in India itself for availing of the deduction, the legislature would have specifically stated so in the section itself.

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    Tax Credit refers to granting credit of taxes deducted at source while computing the tax paid by the recipient of income.

    The Income Tax Act provides relief mechanism for foreign tax credit for the treaty countries and non –treaty countries separately.

    Provisions of section 90(2) provides for foreign tax credit in relation to the assessee to whom such agreement applies.(Bilateral Relief)

    Provisions of section 91 provides for foreign tax credit for the resident in India in respect of his income arouse outside India and on which he has paid tax in any country with which no agreement entered under section 90 of the Act.(Unilateral Relief).

    The bilateral relief seeks to provide relief by way of (i) Exemption Method; (ii) Credit Method. Exemption method:

    The country of residence has a right to tax its residence and treaties seek to mitigate double taxation in the source taxation. Country of residence can also give up their right to tax the income of its resident earned in foreign country by exempting such foreign sourced income.

    It provides for exemption either by way of full exemption or exemption with progression.

    Under full exemption method the resident country exclude the income already charged to tax in the source country while computing total income liable to tax.

    Under exemption with progression method, the country of residence take into account the exempted income sourced outside India while calculating the rate of tax applicable on the remaining income.

    Ex:- Income earned in India Rs. 80,000/- and income earned outside India Rs. 20,000/-. Tax deducted on income earned outside India is Rs. 4000/-. Tax rate in India say 35%.

    Tax in India on Global Income = (Rs. 1, 00,000 – Rs. 20,000)*35% Rs. 28,000/-. Tax Relief = Rs. 35,000 (Rs. 1, 00,000 * .35) - Rs.28,000/- = Rs. 7,000/-Credit Method:

    Country of residence includes global income in the taxable total income and computes the tax and allows credit of taxes paid in source country from such tax liability.

     

    Tax credit is either full tax credit or ordinary tax credit.

    Two more methods tax credits are “Underlying Tax Credit” and “Tax Sparing”.

    Full tax credit method provides that the country of residence allows tax paid on income earned outside India be reduced from the total tax liability in that country. This is not very commonly used method of granting tax credit.

    Ordinary tax credit method provides for deduction of taxes paid in the country of source to the extent of tax paid by the taxpayer in the country of residence in respect of doubly taxed income.

    Ex:- Indian income Rs. 80,000/- Foreign Income Rs. 20,000/-. Tax paid on foreign income is Rs. 8,000. Indian tax rate is 35%. (Ordinary tax method)

    Tax Liability:

    Details

    Amount in Rs.

    Tax Rate

    Tax Amount

    Global Income ( Indian and Foreign Income)-

    1,00,000/-

    35%

    Rs. 35,000/‑

    Less: Tax on Foreign Income paid out side India

    subject to maximum of 35% on such income

    20,000/-

    40%

    Rs. 7,000/‑

    ( least of Rs. 8,000/‑

    or Rs. 7,000/-)

    Tax liability in India

    80,000/-

    35%

    Rs. 28,000/-

    Though tax paid outside India is Rs. 8,000/- maximum credit is limited to the extent of liability @ applicable under domestic law (i.e Rs. 7,000/-) only.

    Underlying Tax Credit: India does not provide for Underlying Tax Credit. US, UK and some other countries provide for this credit. Under this method the country of residence provides for credit of taxes paid on dividend income and for corporate taxes paid on underlying profits out of which dividend has been paid.

    Ex:- A, Indian company 100% subsidiary of US Holding Co. A Ltd has earned Rs. 1, 00,000/- profit in India. Rate of taxes in India: Corporate tax @ 30% and Dividend distribution tax @ 15%. US Holding company profit is Rs. 2, 00,000/- and rate of tax @ 40%.

    Underlying tax credit is computed as follows:

    Particulars

    Amount in INR

    Amount in INR

    Profit of subsidiary in India

     

    1,00,000/‑

    Less: Tax @30%

    1,00,000*30/100

    30,000/‑

    Prof it after tax

     

    70,000/‑

    Dividend distributed

     

    70,000/‑

    Dividend distribution tax

    70,000* 15/100(ignoring

    provisions of section 115-O)

    10,500/‑

    Profit of holding company(US)

     

    2,00,000/‑

    Profit of Indian Subsidiary

     

    1,00,000/‑

    Total Income

     

    3,00,000/‑

    Tax @40% on total income

    3,00,000*40/100

    1,20,000/‑

    Underlying Tax credit Corporate Dividend tax-

    Share in Corporate tax paid on underlying profits-

    10,500 (A)

    1,00,000*30/100 (B)

    10,500/‑

    30,000/‑

    Total Tax Credit

    (A+B)

    40,500/‑

    Tax Payable after credit

    1,20,000-40,500

    79,500/-

    Tax sparing: The Source State generally grants incentives to foreign investors for the purpose of attracting foreign investments which get neutralized if the State of Residence taxes them fully on the basis of no taxation in State of Source.

    Tax Sparing is the allowing of relief by State of Residence of those foreign taxes which have been spared under the incentive program of the State of Source.

    Under this concept, the country of residence grants credit for the taxes which would have been levied by the country of source had the tax exemption been not granted by it.

    Example:

    Particulars

    No Tax Sparing

    Tax Sparing

    Income in the country of Residence

    Rs. 1,00,000/-

    Rs. 1,00,000/‑

    Income in the country of source (exempt)

    Rs. 1,00,000/-

    Rs. 1,00,000/‑

    Total Income for tax in country of residence

    Rs. 2,00,000/-

    Rs. 2,00,000/‑

    Tax Rate in the country of Residence

    40%

    40%

    Tax Rate in the country of source

    30%

    30%

    Tax payable in country of residence (A)

    Rs. 80,000/-

    Rs. 80,000/‑

    Tax Payable in country of source (B)

     

     

    Tax credit ( Tax exempted on income- country

    of source) (C)

     

    Rs. 30,000/‑

    Total Relief (B+C)

     

    Rs. 30,000/‑

    Tax payable after credit (A-B)

    Rs. 80,000/-

    Rs. 50,000/-

    Unilateral Credit: It is applicable where there is no DTAA with foreign country in which tax is paid or liability incurred. Relief is provided to the extent of lower of Indian Tax Rate or Foreign Tax Rate, whichever is least (Ordinary Tax Method).

    General documents required to claim foreign tax credit:

    • Overseas Tax Withholding Certificates;
    • Tax Payment Challans;
    • Overseas Tax Returns.
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    The legal framework for administration of foreign exchange transactions in India is provided by the Foreign Exchange Management Act, 1999. Under the Foreign Exchange Management Act, 1999 (FEMA), which came into force with effect from June 1, 2000, all transactions involving foreign exchange have been classified either as capital or current account transactions. All transactions undertaken by a resident that do not alter his / her assets or liabilities, including contingent liabilities, outside India are current account transactions.

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    INTRODUCTION:

    Incurring of reimbursable expenditure by service provider during the course of providing his services and service receiver subsequently reimbursing them is the inevitable business expediency in certain service sectors. Inclusion of this expenditure in the value of taxable service for the purpose of paying service tax seems to be never ending litigation between Revenue and taxpayer. With the recent judicial pronouncements, it appeared that this issue is settling in a manner acceptable to taxpayer and Revenue. But Revenue hascome up with a heavy punch by amending the definition of ‘Consideration’ in the explanation to Section 67 to seek the last laugh in this regard. Let us analyze how distorting the amendment is capable of!

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    1. Transfer Pricing (‘TP’) continuous to be the most controversial areas in international tax and more particularly in India. It is reported that more TP disputes arise in India vis-à-vis all other countries put together. Opinions continue to differ in India on various aspects of transfer pricing ranging from what constitutes an international transaction, who all can be considered as Associated Enterprises (‘AEs’), the factual understanding of the business of the Assessee and the international transactions, the most appropriate method in the facts & circumstances of the international transaction and finally the computation of Arm’s Length Price (‘ALP’), making TP a contentious issue between the Taxpayers/Assessee and the tax authorities.

    2. Relevant regulations

    The main legal provisions dealing with transfer pricing are Section 40A (2), Sec 92-92F, Sec 271,271AA, 271BA and 271G of the Income Tax Act, 1961, and Rule 10 to 10E of the Income Tax Rules, 1962.

    3. OECD guidelines treatment

    The Indian legislation is broadly based on the OECD guidelines. In conformity with the OECD guidelines, the legislation prescribes the same five methods to compute the arm’s length price. Further, the revenue authorities generally recognize the OECD guidelines and refer to the same for guidance, to the extent they are not inconsistent with the domestic law.

    4. Hierarchies/pricing methods

    The Indian legislation prescribes the following methods: CUP, Resale Price, Cost Plus, Profit Split and Transactional Net Margin Method. The legislation also grants the power to the Central Board of Direct Taxes (CBDT) to prescribe any other method; however, no other method has been prescribed by the CBDT to date. No hierarchy of methods exists. The most appropriate method should be applied.

    1. The past four cycles of transfer pricing audits in India have indicated the reliance of taxpayers on the

    Transactional Net Margin Method on account of the paucity of price and gross margin data in the

    public domain. The Indian Tax Authority recognizes the limitations of information available in

    databases and taxpayers’ inability to apply some of the transaction-base methods.

    1. Accountants Report – Form 3CEB
    2. a) To be obtained by every tax payer filing a return in India and having international transaction
    3. b) To be filed by due date for filing return of income (30 November)

     c)         Essentially comments on the following:

    whether the tax payer has maintained the transfer pricing documentation as required by the legislation,

     

    • whether as per the transfer pricing documentation the prices of international transactions are at arm’s length, and

     

    • certifies the value of the international transactions as per the books of account and as per the transfer pricing documentation are “true and correct”

     

    d) Procedural changes have been made by Central Board of Direct Taxes (CBDT) inrespect of mode of filing Form 3CEB w.e.f FY 12-13.

    e) Tax payers who are required to furnish reports/certificates under the Income Tax Act,1961(“Act“) are mandatorily required to e-file certain specified documents (in addition to the Return) before the relevant due date. These, interalia, includes Form 3CEB.

    1. f) CBDT has also notified the new format Form 3CEB which interalia, provides for the reporting requirements taking into account the extended scope of international transaction and the specified domestic transaction.

     

    • The scope of the term “international transaction” was expanded by the Finance Act, 2012 to include business restructuring, intragroup financing arrangements, etc.

     

    • Additionally, specified domestic transactions have also been brought under the ambit of the transfer pricing regulations.

    g) This new format of Form 3CEB also requires reporting of the following transactions:

    Transactions relating to share capital — transactions such as purchase or sale of marketable securities and issue and buyback of equity shares;

     

    • Transactions in the nature of guarantee;

     

    • International transactions arising out of/ being part of business restructuring or reorganization; and

     

    •          Specified domestic transactions

    1. Documentation requirements – TP Documentation Study /review

    A detailed list of contemporaneous mandatory documents is in Rule 10D (1). The categories of documentation required are:

    1. Documentation deadlines

    The information and documentation specified should, as far as possible, be contemporaneous and exist by the specified date of the filing of the income tax return, which has been fixed by the Indian government as 30th November following the end of the financial year.

    1. Although an Accountant’s Report must be submitted along with the tax return, the taxpayer is not required to furnish the transfer pricing documentation with the Accountant’s Report at the time of filing the tax return. Transfer pricing documentation must be submitted to the tax officer within 30 days of receipt of the notice during assessment proceedings.
    2. Transfer pricing penalties

    The Indian tax law provides for the imposition of the following transfer pricing penalties. For inadequate documentation, the taxpayer is fined 2% of the transaction value. For not furnishing sufficient information or documents requested by the tax officer, the taxpayer is fined 2% of the transaction value. If due diligence efforts to determine the arm’s length price have not been made by the taxpayer, then 100% to 300% of incremental tax on transfer pricing adjustments may be levied by the tax officer.

    Section

    Trigger

    Quantum of

    penalty

    271 (1) (c)

    In case of an adjustment post assessment, if regarded

    as concealment of income

    100-300% of the

    tax leviable on

    the amount of

    adjustments

    271AA

    Failure to maintain TP documentation, failure to report the

    transaction,  maintenance or   furnishing  of   incorrect

    information/document

    2% of the

    value of the

    transactions

    271BA

    Failure to furnish Form 3CEB

    INR 100,000

    271G

    Failure to furnish TP documentation with the tax officer

    2% of the value

    of the transactions

    1. In most cases, penalties are generally kept in abeyance until the matter is settled in appeals. The existing approach to penalties is not expected to change over the next two years.
    2. Penalty relief

    Penalties may be avoided if the taxpayer can demonstrate that it has exercised good faith and due diligence in determining the arm’s length price. This is also demonstrated through proper documentation and timely submission of documentation to the revenue authority during assessment proceedings.

    1. Transfer Pricing Assessment

    The selection of cases for TP audits in India are primarily based on materiality of the value of the international transaction. As per the CBDT instructions, the following categories of cases/returns are compulsorily selected for TP audit:

    Cases where value of the international transactions exceed Rs 15 crores;

    Cases involving addition in an earlier year on the issue of TP in excess of Rs 10 Cr, which is confirmed in appeal or pending before an appellate authority.

    Further, the AO scrutinising a return of an Assessee having international transactions with AEs, can refer the case for TP audit, if he considers it necessary or expedient, with the approval of the Jurisdictional Commissioner.

    In India, TP audits are conducted by specialist officers notified as Transfer Pricing Officers (‘TPO’) by the CBDT. The DGIT (International Taxation) and DIT(TP) distribute the work among the TPOs stationed at various cities across India.

    14. Issues and Practical challenges in TP Assessment

    • Transfer pricing in case of loss making companies challenged;
    • Transactions with AEs located in tax heavens under heavy scrutiny
    • Peers with different transfer pricing policies/significantly higher profitability used as benchmarks
    • Cost sharing /cost allocation/reimbursement /management fees transactions and payments for the use of intangibles questioned
    • Commensurate benefit expected to be demonstrated
    • Limited information provided on secret comparables/confidential information
    • Continued non-acceptance of economic adjustments (Risk adjustment, depreciation adjustment, working capital adjustment, capacity utilisation adjustment etc)
    • Insistence on segmental dataFinancial transactions looked at closely (Loans, guarantees, etc)
    • Strict comparability of product/service ignored while applying CU P method
    • Financial transactions looked at closely (Loans, guarantees, etc)
    • Insistence on segmental data

     

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