Taxmann's Direct Taxes Law & Practice with Special Reference to Tax Planning

THE compendious and complex nature of our law relating to direct taxes makes the task of students and professional practitioners, who have not only to understand it but have also to develop the ability to apply it in given situations, extremely onerous and difficult. They have to acquire a familiarity with, and awareness of, the nature and scope of the main provisions of direct taxes. At the same time, they also require an up-to-date knowledge of how a statutory provision has been interpreted by different courts of law on different occasions. As such, they need a book on direct taxes which not only is comprehensive and up-to-date on both the law and its judicial interpretations but which also explains the difficult subject lucidly and through appropriate illustrations so as to render the study of direct taxes simple and easy.

Unlike other text books available on this subject, this book makes a fresh and novel approach to the study of direct taxes keeping in view the specific requirements of the candidates appearing in CA, CS, ICWA, MCom., LLB and MBA examinations as well as those appearing in the income-tax departmental examination. The chief aim of the book is to enable the students to cut the time spent by them in preparing for the examination, while, at the same time, giving them the most precise and up-to-date information on the subject of their study.

The present edition of the book has several unparalleled features which make it distinct from other available text books. These are :

The present edition is thoroughly revised with a view to making it more reader-friendly.

The treatment of the subject is lucid, to-the-point and the matter is painstakingly arranged in paras and sub-paras with distinct numbers to save time and energy. Besides, debatable issues have been deliberated to their logical conclusion.

Theoretical discussion is suitably supplemented by illustrations (over 600 in number and covering an exhaustive range of issues) providing solutions to the knotty problems with reference to the latest case law.

Hints are given wherever tax planning can be resorted to.

Latest circulars, notifications, amendments and the case laws ( i.e., up to May 31, 2023) are included in the discussion. All recent citations of court rulings, circulars and notifications have been highlighted.

In a nutshell, law is lucidly enumerated and its practical application is adequately explained.

A few words from the authors I-6

All questions set for CA (Final) examination for last 10 years are given along with their solutions (of theory as well as practical questions) as per law applicable for the assessment year 2023-24. Besides, questions set at various post-graduate and professional examinations are also included at the end of each chapter.

Our grateful thanks are due to Shri Rakesh Bhargava for his guidance and suggestions and for extending various facilities during the preparation of the manuscript of this book.

Readers’ views, comments and criticism relating to the present work are most welcome.

22 Deepali, Pitampura, VKS

Delhi - 110034. KS

Email : vks@taxmann.com

Phone : 27015500, 27016686, 9810008160

Dr. Vinod K. Singhania got his Ph.D. from the Delhi School of Economics in 1976. His fields of special interest include all facets of corporate legislation and corporate economics especially the tax laws. Associated in different capacities with several professional institutes and business houses in India and abroad, Dr. Singhania is author of many popular books and software published by Taxmann. He has to his credit more than 300 research articles which have appeared in leading journals. He has been a resource person in over 800 seminars in India and abroad. He can be reached at vks@taxmann.com.

Dr. Kapil Singhania, a Fellow of the Institute of Chartered Accountants of India and belonging to the alumni of Shri Ram College of Commerce, has completed his research work for which he has been awarded Ph.D. in 2003. His fields of involvement in research work in form of articles in various reputed journals and analytical studies span across from corporate laws to direct and indirect taxation. He has authored a variety of acclaimed books on direct and indirect taxes published by Taxmann. Dr. Singhania is providing tax consultancy to a number of business organizations, which include multinational and public sector companies.

1

2

9

21

payment of tax

23

collection at source

Transfer pricing

33 Business restructuring

34 Alternative tax regime

Advance Pricing Agreement (APA) [Secs. 92CC and 92CD]

514. Advance Pricing Agreement is an agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future. The APA offers better assurance on transfer pricing methods and are conducive in providing certainty and unanimity of approach.

Sections 92CC and 92CD provide a framework for advance pricing agreement under the Act. These provisions provide the following—

■ Board may enter into APA - Section 92CC empowers the Board (with the approval of the Central Government) to enter into an advance pricing agreement with any person to determine the –

a. arm’s length price (or specifying the manner in which arm’s length price is to be determined) in relation to an international transaction;

b. (with effect from April 1, 2020) income referred to in section 9(1)( i) (or specifying the manner in which said income is to be determined) as is reasonably attributable to the operations carried out in India by (or on behalf of) a non-resident.

■ Purpose of APA - Such APA shall include determination of the arm’s length price or specify the manner in which arm’s length price shall be determined, in relation to an international transaction to be entered into, by that person.

■ How to compute ALP - The manner of determination of arm’s length price in such cases shall be any method including those already provided in section 92C(1), with necessary adjustments or variations.

■ APA to supersede provisions of section 92C or 92CA - The arm’s length price of any international transaction, which is covered under such APA, shall be determined in accordance with the APA so entered into. The provisions of section 92C or 92CA which normally apply for determination of arm’s length price will be modified to this extent. As a consequence, arm’s length price shall be determined in accordance with APA.

■ Validity of APA - The APA shall be valid for such previous years as are specified in the agreement which in no case shall exceed five consecutive previous years.

■ Roll back provisions - APA scheme is in operation in many countries. In many countries, the APA scheme provides for “roll back” mechanism for dealing with ALP issues relating to transactions entered into during the period prior to APA. The “roll back” provisions refer to the applicability of the methodology of determination of ALP, or the ALP, to be applied to the international transactions which had already been entered into in a period prior to the period covered under an APA. However, the “roll back” relief is provided on case to case basis subject to certain conditions. In the original scheme of APA as inserted by the Finance Act, 2012, there was no provision of “roll back”. The Finance (No. 2) Act, 2014, however, amended the provisions of section 92CC (with effect from October 1, 2014) to provide roll back mechanism. The APA may, subject to such prescribed conditions‡, procedure and manner, provide for determining the arm’s length price or for specifying the manner in which arm’s length price is to be determined in relation to an international transaction entered into by a person during any period not exceeding 4 previous years preceding the first of the previous years for which the advance pricing agreement applies in respect of the international transaction to be undertaken in future.

■ Effectiveness of APA - The APA shall be binding only on the person and the Commissioner (including income-tax authorities subordinate to him) in respect of the transaction in relation to which the agreement has been entered into. The APA shall not be binding if there is any change, in law, or facts having bearing on such APA.

■ APA obtained by fraud - The Board is empowered to declare, with the approval of Central Government, any such agreement to be void ab initio, if it finds that the agreement has been obtained

by the person by fraud or misrepresentation of facts. Once an agreement is declared void ab initio, all the provisions of the Act shall apply to the person as if such APA had never been entered into. For the purpose of computing any period of limitation under the Act, the period beginning with the date of such APA and ending on the date of order declaring the agreement void ab initio shall be excluded. However, if after the exclusion of the aforesaid period, the period of limitation referred to in any provision of the Act is less than 60 days, such remaining period shall be extended to 60 days.

■ Procedures - The Board is empowered to prescribe* a scheme providing for the manner, form, procedure and any other matter generally in respect of the advance pricing agreement.

■ Pending proceedings - Where an application is made by a person for entering into such an APA, proceedings shall be deemed to be pending in the case of the person for the purposes of the Act like for making enquiries under section 133.

■ Modified return within 3 months† - The person entering into such APA shall necessarily have to furnish a modified return within a period of 3 months from the end of the month in which the said APA was entered into in respect of the return of income already filed for a previous year to which the APA applies. The modified return has to reflect modification to the income only in respect of the issues arising from the APA and in accordance with it.

■ Pending assessments - Where the assessment or reassessment proceedings for an assessment year relevant to the previous year to which the agreement applies are pending on the date of filing of a modified return, the Assessing Officer shall proceed to complete the assessment or reassessment proceedings in accordance with the agreement, taking into consideration the modified return so filed and the normal period of limitation of completion of proceedings shall be extended by 1 year.

■ Modification of completed assessment - If the assessment or reassessment proceedings for an assessment year relevant to a previous year to which the agreement applies has been completed before the expiry of period allowed for furnishing of modified return, the Assessing Officer shall, in a case where modified return is filed, pass an order modifying the total income of the relevant assessment year determined in such assessment or reassessment, having regard to and in accordance with the APA. To such order, all the provisions relating to assessment shall apply as if the modified return is a return furnished under section 139. The period of limitation for such order is 1 year from the end of the financial year in which the modified return is furnished.

■ Case study - For the assessment year 2015-16, X Ltd. submits return of income on November 10, 2015. On November 18, 2015, it enters into an advance pricing agreement (APA) with the Board pertaining to determination of arm’s length price in connection with import of semi-finished goods from its holding company situated in the Netherlands. The agreement provides ALP for the transactions pertaining to the assessment years 2014-15 and 2015-16. The assessment of 2014-15 has already been completed but the assessment for 2015-16 is pending on the date of entering into APA. In this case, X Ltd. will have to submit a modified return for the assessment year 2014-15 (and also for the assessment year 2015-16) on or before February 28, 2016 (i.e., within 3 months from the end of the month in which APA is made).

On February 28, 2016, the assessment for the assessment year 2014-15 has already been completed. For the assessment year 2014-15, the Assessing Officer will reassess or modify the income keeping in view the provisions of APA. This order can be completed on or before March 31, 2017 (i.e., within 1 year from the end of the financial year in which modified return is submitted).

On February 28, 2016, the assessment for the assessment year 2015-16 is pending. Normally, the assessment for the assessment year 2015-16 should be completed before April 1, 2018. In this case,

*Rules 10F to 10T inserted by Notification No. 36/2012, dated August 30, 2012.

† If the time-limit expires during March 20, 2020 and December 31, 2020, it has been extended to March 31, 2021 by virtue of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.

the Assessing Officer can complete the assessment for the assessment year 2015-16 (keeping in view the provisions of APA) at any time before April 1, 2019.

Secondary adjustment in certain international transactions [Sec. 92CE]

514A. Section 92CE was inserted with effect from the assessment year 2018-19.

514A.1 Secondary adjustment in common parlance - Secondary adjustment means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee. As per the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD transfer pricing guidelines), secondary adjustment may take the form of constructive dividends, constructive equity contributions, or constructive loans.

The provisions of secondary adjustment are internationally recognised and are already part of the transfer pricing rules of many leading economies in the World (countries like Canada, France, Korea, South Africa, USA have adopted this kind of adjustment in their transfer pricing legislations). While mode of secondary adjustments in different countries is different, yet there can be no case of secondary adjustment in the absence of primary adjustment. Deemed dividend, deemed equity contribution or deemed loan are different approaches adopted by different countries. However, the object of different approaches is to align the economic benefit of the transaction with the arm s length position.

514A.2 When section 92CE is applicable - Under section 92CE, the assessee is required to carry out secondary adjustment where the primary adjustment to transfer price has been made.

■ What is primary adjustments - Primary adjustment to a transfer price means the determination of transfer price in accordance with the arm s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee.

■ What is secondary adjustment - Secondary adjustment means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise is consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.

■ When secondary adjustment will be applicable - Secondary adjustment will be applicable in the following situations

1. Where a primary adjustment to transfer price has been made suo motu by the assessee in his return of income.

2. Where a primary adjustment to transfer price made by the Assessing Officer has been accepted by the assessee.

3. Where a primary adjustment to transfer price is determined by an advance pricing agreement entered into by the assessee under section 92CC on or after April 1, 2017.

4. Where a primary adjustment to transfer price is made as per the safe harbour rules framed under section 92CB.

5. Where a primary adjustment to transfer price is arising as a result of resolution of an assessment by way of the mutual agreement procedure under DTAA entered into under section 90/90A.

■ Threshold limit - When secondary adjustment is not applicable - If the following two conditions are not satisfied, secondary adjustment is not required

a. the amount of primary adjustment made in the case of an assessee in any previous year does not exceed Rs. 1 crore; or

b. the primary adjustment is made in respect of the assessment year 2016-17 (or any earlier assessment year).

■ Quantification of secondary adjustment - The relevant provisions are as follows

1. As a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee.

2. The difference between the arm’s length price determined in primary adjustment and the price at which the international transaction has actually been undertaken, is “excess money”.

3. The excess money is not repatriated to India by the associated enterprise within the prescribed time (given by rule 10CB) (in general terms, repatriation means effectively reversing the funds so that the accounts of the parties involved are in line with the economic intend of the primary adjustment). The excess money (or part thereof, which is not repatriated to India) shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance shall be computed as the income of the assessee in the manner as is prescribed by rule 10CB.

■ Prescribed time-limit as per rule 10CB - CBDT has notified rule 10CB which prescribes computation of interest income pursuant to secondary adjustment. Rule 10CB also provides that repatriation of excess money shall be made on or before 90 days from –

-Due date of filing of return, if primary adjustment to TP has been made suo motu by the assessee.

-Date of order of Assessing Officer or appellate authority, if primary adjustment determined in the order has been accepted by assessee.

-Due date of filing of return in case assessee had entered into advance pricing agreement (if the advance pricing agreement has been entered into on or before the due date of filing of return for the relevant previous year).

-The end of the month in which the advance pricing agreement has been entered into (if the said agreement has been entered into after the due date of filing of return for the relevant previous year).

-Due date of filing of return in case assessee opted for safe harbour rules.

-The date of giving effect by the Assessing Officer under rule 44H to the resolution arrived at under mutual agreement procedure (MAP), where the primary adjustment to transfer price is determined by such resolution.

The following points should be noted –

1. If the repatriation of excess money is not made within 90 days from the dates given above, interest would be chargeable from the dates given above (without excluding 90 days).

2. The time-limit of 90 days for repatriation of excess money shall begin only when the primary adjustments exceeding Rs. 1 crore made in respect of assessment year 2017-18 (or later), attains finality. Where the transfer pricing order is appealed against by the taxpayer, the time-limit for repatriation shall commence only after the appeal is finalized by the appellate authority

■ Prescribed rate of interest as per rule 10CB - With regard to the rate of interest to be computed in the case of failure to repatriate the excess money within the prescribed time given above, rule 10CB provides for separate interest rates for international transactions denominated in Indian rupee and those denominated in foreign currency. The rate of interest is on annual basis and shall be computed as follows –

-At one year marginal cost of fund lending rate of SBI as on April 1 of previous year plus 325 basis points in case international transaction is denominated in Indian rupees.

-At six-month LIBOR as on September 30 of previous year plus 300 basis points in the case international transaction is denominated in foreign currency.

When section 92CE is applicable Para 514A.2

The rate of exchange for the calculation of the value in rupees of the international transaction denominated in foreign currency shall be the telegraphic transfer SBI buying rate of such currency on the last day of the previous year in which such international transaction was undertaken.

■ Additional income tax - In a case, where the excess money (or part thereof) has not been repatriated in time, the assessee has an option (with effect from September 1, 2019) to pay additional incometax at the rate of 18 per cent on such excess money (or part thereof). It is subject to surcharge of 12 per cent and health and education cess of 4 per cent (effective tax rate : 20.9664 per cent). The following points should be noted –

-If the assessee pays the additional income-tax, he is not required to make secondary adjustment or compute interest from the date of payment of such tax. However, he is required to make secondary adjustment pertaining to interest till the date of payment of additional tax.

-The tax so paid shall be the final payment of tax and no credit shall be allowed in respect of the amount of tax so paid.

-The deduction in respect of the amount on which such tax has been paid, shall not be allowed under any other provision.

Provisions pertaining to thin capitalisation

514B. A company is typically financed or capitalized through a mixture of debt and equity. The way a company is capitalized often has a significant impact on the amount of profit it reports for tax purposes as the tax legislations of countries typically allow a deduction for interest paid or payable in arriving at the profit for tax purposes while the dividend paid on equity contribution is not deductible (in some countries, dividend distribution attracts additional tax). Therefore, higher the level of debt in a company (and thus the amount of interest it pays), the lower will be its taxable profit and tax liability. For this reason, debt is often a more tax efficient method of finance than equity. Multinational groups are often able to structure their financing arrangements to maximize these benefits. For this reason, country’s tax administrations often introduce rules that place a limit on the amount of interest that can be deducted in computing a company’s profit for tax purposes. Such rules are designed to counter cross-border shifting of profit through excessive interest payments, and, thus, aim to protect a country’s tax base.

514B.1 Limitation on interest deductible [Sec. 94B] - Section 94B was inserted with effect from the assessment year 2018-19.

■ Conditions - Section 94B is applicable if the following conditions are satisfied

1. The assessee (i.e., borrower) is an Indian company or a permanent establishment of a foreign company in India.

2. It incurs any expenditure by way of interest (or of similar nature) in respect of any debt (or deemed debt). The debt is issued by a non-resident (being an associated enterprise of the borrower). Where the debt is issued by a lender (which is not associated with the borrower) and an associated enterprise either provides an implicit or explicit guarantee to such lender (or deposits a corresponding and matching amount of funds with the lender), such debt shall be “deemed” to have been issued by an associated enterprise. “Debt” means any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible.

3. Interest is deductible while computing income chargeable under the head “Profits and gains of business or profession”.

4. For the aforesaid debt, interest (which is otherwise deductible for computing business/professional income of the borrower for the previous year) is more than Rs. 1 crore.

5. The borrower is not engaged in the business of banking or insurance or (with effect from the assessment year 2024-25) such class of non-banking financial companies as may be notified by the Central Government.

6. With effect from the assessment year 2021-22, interest is not paid in respect of a debt issued by a lender which is a PE of a non-resident (being a person engaged in the business of banking) in India.

■ Limitation on deduction of interest under section 94B - If the above conditions are satisfied, interest shall not be deductible while computing income under the head Profit and gains of business or profession to the extent it arises from excess interest Excess interest , as per section 94B(2), is

a. interest paid or payable in excess of 30 per cent of earnings (before interest, taxes, depreciation and amortization) (EBITDA) of borrower in the previous year; or

b. interest paid or payable to associated enterprises for that previous year, whichever is less.

■ Carry forward of the excess interest - The excess interest of the current year (which is not allowed as deduction) shall be carried forward to the following assessment year. In the next assessment year, it shall be allowed as a deduction against business/profession income of the borrower to the extent of maximum allowable interest expenditure in accordance with section 94B(2). This carry forward is allowed for 8 assessment years (immediately succeeding the assessment year for which the excess interest was first computed).

1437

Important judicial rulings

Important judicial rulings

514C. One should also keep in view the following judicial rulings –

Para 514C

■ When same persons participate, directly or indirectly or through an intermediary, in management or control or capital of two or more enterprises, such enterprises are required to be treated as ‘associated enterprise’. Thus, the true test of associated enterprise is control by one enterprise over other, or control of two or more associated enterprises by common interests— Diageo India (P.) Ltd. v. CIT [2011] 47 SOT 252 (Mum.).

■ Rule 10B(4) clearly states that the data to be used in analyzing the comparability of uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Proviso to rule 10B(4) provides an exception to the effect that the data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer price in relation to transactions being compared. Thus, according to the law, the data relating to relevant financial year is only the contemporaneous data and the proviso is applicable only in some specified cases—Geodis Overseas (P.) Ltd. v. CIT [2011] 45 SOT 375 (Delhi).

■ In case of transaction of lending money in foreign currency to foreign subsidiary, London Inter Bank Offered Rate (LIBOR) should be taken as benchmark rate for computing ALP of interest— Cotton Naturals (I) (P.) Ltd. v. CIT [2013] 32 taxmann.com 219 (Delhi).

DIRECT TAXES LAW & PRACTICE WITH SPECIAL REFERENCE TO TAX PLANNING

AUTHOR : VINOD K. SINGHANIA , KAPIL SINGHANIA

PUBLISHER : TAXMANN

DATE OF PUBLICATION : JULY 2023

EDITION : 69th Edition

ISBN NO : 9789357782005

NO. OF PAGES : 1770

BINDING TYPE : PAPERBACK

DESCRIPTION

Rs.2275 USD 71

Taxmann's flagship publication on Direct Taxes has been the 'go-to-guide' for Students & Professional Practitioners for over 40 years. This book aims to make the reader understand the Law and develop the ability to apply the Law. In other words, this book aims at providing the reader with the following:

• Acquire familiarity with the direct tax provisions

• Awareness of the direct tax provisions

• The nature and scope of the direct tax provisions

• Up-to-date knowledge of how different courts of Law have interpreted a statutory provision on different occasions

This book is written in simple language, explaining the provision of the Law in a step-by-step & to-the-point manner with the help of suitable illustrations, without resorting to paraphrasing sections and legal jargon.

This book will be helpful for students appearing in CA, CS, ICWA, M.Com., LL.B., and MBA examinations. It will also be helpful for those appearing in the income-tax departmental examination.

The Present Publication is the 69th Edition for A.Y. 2023-24 (amended up to 31st May 2023), authored by Dr Vinod K. Singhania & Dr Kapil Singhania. The noteworthy features of this book are as follows:

• [Self-Learning/Practice Book] Features learn-yourself-technique enabling students to learn & apply the Law faster

• [Treatment of Text is To-The-Point] The matter is arranged in paras and sub-paras with distinct numbers to save time and energy. Also, debatable issues have been deliberated to their logical conclusion

• [Well-Thought-Out-Original-Problems] Each para starts with analytical discussions supported by 600+ 'well-thought-out-original-problems'. A unique style of illustrating all complex provisions has been adopted. Hints are also given wherever tax planning can be resorted to

• [Most Amended] Latest Circulars, Notifications, Amendments & Case Laws (up to May 31st 2023) are included in all discussions. All recent citations of Court Rulings, Circulars and Notifications have been highlighted

• [Past Exam Questions with Answers] Question set for CA (Final) (from Nov. 2012 to Nov. 2022), the post-graduate and professional examination is given along with their solutions (of theory and practi cal questions) as per the law applicable for A.Y. 2023-24

• [Follows Six-Sigma Approach] to achieve the benchmark of 'Zero-Error'

ORDER NOW