- The Chamber of Tax Consultants

The Chamber of Tax Consultants
FINANCE BILL, 2015
DIRECT TAX PROVISIONS
YOGESH THAR
BANSI S. MEHTA & Co.
Chartered Accountants
Residential status of crew member
– Clause 4(i)

Tests for determining the period of stay in India of an individual, being a citizen of India and
a member of the crew of a foreign bound ship leaving India, in respect of such voyage , shall
be laid down in rules to be prescribed.

This is with a view to avoid “uncertainties” as regards such determination.

This amendment is retrospective w.e.f. A.Y. 2015-16.
Residential status of crew member
– Clause 4(i)

Section 9 of General Clauses Act, 1897 – First day to be excluded and last day to be
included.

Advance ruling 7 of 1995, In re (224 ITR 462) – Both days of entry and exit to be included
in period of residence.

Date of entry to excluded and date of exit to be included.

Manoj Kumar Reddy vs. ITO (34 SOT 180)(Bang Trib)

Pravin Kumar vs. Sunder Sing Makkar [PS(05)No. 1239/2005(Del HC)]
Residential status of a company
- Clause 4(ii)

Presently, a company is regarded as resident in India, if it is an Indian Company or if its control
and management is wholly situated in India.

Test of “Control and management wholly in India” is replaced by the test of “Place of Effective
Management in India”.

Two tests laid down:


Indian Company – always a resident
POEM in India – will be regarded as a resident in that year

Intention is to ensure that by merely holding board meetings outside India, a company should
not be regarded as a non-resident although, in substance, its effective management is in India.

CBDT is expected to issue guiding principles in due course in this behalf.
Residential status of a company
- Clause 4(ii)

The expression place of effective management (POEM) has been defined to mean 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.

As per the Explanatory Memorandum, the concept and the definition of ‘place of effective
management’ has been taken from the OECD commentary.

Hence, the commentary of OECD on the meaning of the said expression should be
considered as a valid guideline for interpreting the same under the Act.
Residential status of a company
- Clause 4(ii)

Klaus Vogel, in his commentary on ‘Double Tax Conventions’, laid down the following principles for
determining POEM:
 POEM is where management’s important policies are actually made.

What is decisive is not the place where the management decisions take effect, but rather the place
where they are formed.

Place where the person authorized to represent the company carries on his business managing
activities. A place from which business is merely supervised would not qualify.

If commercial and non-commercial sites of business are managed from different places, location of
commercial management will be relevant.

If above criteria are not enough to determine POEM in a given case, the “Top Managers Residence”
will be relevant.
Residential status of a company
- Clause 4(ii)
Issues :
 Residency for non-corporate entities continues to be based on ‘control and management’
test.
 Expression ‘at any time’ is very wide.
 Multiple POEMs in India and abroad : Application of tie-breaker test in tax-treaty?
Indirect Transfer – Clause 5(A)
THE VODAFONE CASE – Simplified Structure
SPA for
VIH B.V.
(Netherlands) Share sale

HTIL
(CI)
Intermediate
holding cos
HTI (BVI) Hldgs
(BVI)
 Vodafone International Holdings B.V. (VIH) (Dutch
company) – Purchaser
CGP
(CI)
 CGP Investments Holdings Ltd. (‘CGP’) (Cayman
Islands company) – Target
3GSPL
(India)
Preferred
shares
Mauritius Cos
Indian Cos
51.96%
Options to
acquire
15.03%
Key parties
 HTI (BVI) Holdings Ltd. (British Virgin Islands
company) – Seller
HEL
(India)
 Hutchison Essar Ltd (HEL) (now Vodafone Essar
Ltd.) - Indian Telecom company
 Hutchison Telecommunications International Ltd.
(HTIL) (Cayman Islands company) – Indirect parent
of HTI (BVI) Holdings
 3 Global Services Private Ltd. (‘3GSPL’) (Indian
indirect subsidiary) - holding options on HEL shares
8
Indirect Transfer – Clause 5(A)
THE VODAFONE CASE

The Bombay High Court dismissed the writ petition of Vodafone and the court rejected the
argument of Vodafone that what was transferred was only shares of an Cayman Island
Company i.e. , CGP, and therefore , the argument that no capital gains will arise on sale of
shares in CGP was rejected.

Vodafone filed an appeal to the Supreme Court and Supreme Court in January, 2012
reversed the Bombay High Court decision. Supreme Court held that Assessing Officer in
India had no jurisdiction to tax the transaction which took place outside India and what was
transferred was the shares of a foreign company namely CGP of Cayman’s Island and not
Indian Business.
Indirect Transfer – Clause 5(A)
THE VODAFONE CASE

The Finance Act, 2012 made retrospectively amendment in the definition of:
 Transfer under section 2(47);
 Capital asset under section 2(14);
 Deemed accrual of income under Section 9.
to affirm the judgement of Bombay High Court in the case of Vodafone and to nullify the
Supreme Court judgement in the said case.
Indirect Transfer
– Clause 5(A)

Under section 9, vide Finance Act, 2012 , Explanation 5 to section 9(1)(i) was inserted
with retrospective effect from April 1, 1962. The said explanation 5 read as under:
“Explanation 5.—For the removal of doubts, it is hereby clarified that an asset or a capital asset
being any share or interest in a company or entity registered or incorporated outside India shall
be deemed to be and shall always be deemed to have been situated in India, if the share or
interest derives, directly or indirectly, its value substantially from the assets located in India;”

Previously, there was no indication or formula to determine “value substantially from
assets in India.

In DIT (IT) v. Copal Research Ltd., (226 Taxman 226)(Del) it has been held that
shares of a company incorporated overseas, which derives 50 per cent or more of its
value from assets situated in India would be regarded as deriving its value substantially
from assets situated in India.

Now a mechanism has been provided to determine “value substantially from assets in
India”.
Indirect Transfer
– Clause 5(A)
Determining value substantially from assets located in India
Share or interest of F1 in F2, shall be
deemed to derive its value substantially
from the assets located in India, if, on the
specified date*, the FMV of such assets –
 exceeds Rs. 10 crores, and
 represents at least 50% of all assets
owned by F2 without reducing its
liabilities
* Specified date means last day of the
accounting period preceding the date of
transfer, or the date of transfer, if book
value exceeds 15%
`
Foreign Co. 1
(F1)
Foreign Co. 2
(F2)
Subsidiary
Indian Co./
Assets
Indirect Transfer
– Clause 5(A)
Foreign Co. 1
(F1)
Transfer
of Shares

Foreign Co. 3
(F3)
Income not deemed to accrue or arise in
India if F2 directly owns assets situated in
India and F1 does not hold
 the right of management or control, or
Foreign Co. 2
(F2)
 voting power, share capital or interest
exceeding 5% of total voting power, share
capital or interest
in relation to F2, at any time in the twelve
months preceding the date of transfer
Indian Co.
(Assets)
13
By virtue of holding right in
F2 – entitle to management /
control in F3
Indirect Transfer
– Clause 5(A)
Foreign Co.
1 (F1)
Transfer of
Shares
Foreign Co.
4 (F4)

Income not deemed to accrue or arise in
India if F2 indirectly owns assets situated
in India and F1 does not hold
 the right of management or control, or
Foreign Co.
2 (F2)
Foreign
Co. 3 (F3)
 voting power, share capital or interest
exceeding 5% of total voting power, share
capital or interest
Indirect holding of
assets of Indian Co.
in relation to F3, at any time in the twelve
months preceding the date of transfer
Indian Co.
(Assets)
14
Indirect Transfer

If the shares in the foreign shareholding entity are transferred in an amalgamation or a
demerger taking place outside India, such transfer would enjoy exemption from capital gains
subject to certain conditions. (Clause – 13)

Correspondingly, the cost of acquisition in the hands of the amalgamated /resulting company
shall be the cost of acquisition of previous owner. (Clause – 13)

Furnishing of information or documents by the Indian concern – Section 285A (Newly
inserted). (Clause – 76)

Penalty for failure to furnish information or document under section 285A – Section 271GA
(Newly Inserted). (Clause – 72)

No penalty if reasonable cause exists - under section 273B. (Clause – 75)
Interest paid by foreign Banks to HO/ other branches
– Clause 5(B)

Interest payment by Indian branch of foreign Banks to H.O. or to a foreign branch deemed Income in
India.

Such interest chargeable to tax in India in the hands of the foreign bank. PE deemed to be a separate
person

This is in addition to taxation of the branch profits in India.

The CBDT in its Circular No. 740 dated April 17, 1996 had clarified that a branch of a foreign
company / concern in India is a separate entity for the purposes of taxation.

Sumitomo Mitsubishi (136 ITD 66)(Mum SB) – after considering the said Circular, held that interest
paid by branch to HO is not chargeable to tax in the hands of the recipients, all being a single entity.

Hence, the proposed amendment seeks to nullify existing decisions.

However, benefit under the DTAA would still be available in such cases.
Fund Manager – No business connection
(Section 9A) – Clause 6

Eligible fund manager (“fund manager”) acting on behalf of an eligible investment
fund (“fund”) which is incorporated outside India, shall not constitute a business
connection of such fund in India.

The fund shall not be said to be a resident in India merely because the fund manager
undertaking fund management activities in India on its behalf, is situated in India.

There are several conditions specified in this behalf that have to be complied with
by the fund and the fund manager for claiming the proposed benefit.
Fund Manager – No business connection
(Section 9A) – Clause 6

Certain document have to be furnished in the prescribed form.

Non-furnishing of documents would lead to penalty of Rs. 5,00,000/- under section 217
FAB.(Clause 71)

No penalty if reasonable cause exist under section 273B. (Clause – 75)
Business Trust

Business trust means a trust registered as Infrastructure Investment Trust (IIT) or a
Real Estate Investment Trust (REIT), the units of which are required to be listed on a
recognised stock Exchange in accordance with SEBI.

Requirement of Central Government Approval done away with. (Clause 3)

Previously, business trust were governed by SEBI (AIF) Regulations, 2012.

On September 26, 2014, SEBI has notified specific regulations for IIT and REIT.
Now, such trust will be governed by the specific regulations.

A pass through status has been granted to Business Trust.
Business Trust – Income earned by Trust
Income Earned by Trust
Rentals(REIT)
Interest
Other/
Business
Income
No Tax u/s
10(23FCA)
No Tax u/s
10(23FC)
Taxable u/s
115UA(2) at
MMR
No TDS u/s
194I
No TDS u/s
194A(3)(xi)
Capital Gains
of a trust
Taxable u/s.
111A or 112
Business Trust – Income earned by Investors
Income of Unit Holder
Interest
Other/
Business
Income
Capital Gains
Taxable u/s
115UA(3)
Taxable u/s
115UA(3)
Exempt u/s
10(23FD)
Exempt u/s.
10(23FD)
TDS
TDS
Rentals in
case of REIT
Resident
194LBA(1)
@ 10%
Non-Resident
194LBA(3) at
Rates in force
Resident
194LBA(1)
@ 10%
Non-Resident
194LBA(2)
@ 5%
Alternate Investment Funds
– Chapter XII-FB
 Investment funds mean funds established in the form of trust/company/LLP/body
corporate registered as Category I and Category II AIF regulated by SEBI (AIF)
Regulations, 2012.
 Income accruing or arising to or received by a unit holder from investment fund shall be
chargeable to tax in the same manner as if the investment were made directly by him.
 If investment fund does not pay / credit income to unit holders in that year, such income
shall be deemed to have been credited to their accounts in the proportion of their
entitlement.
 Income included in the total income of the unit holder on accrual basis shall not be
included in the total income in the year of actual receipt.
 Loss under any head of income before giving effect to exemption provision [i.e.
10(23FBA)] shall be carried forward and set-off in accordance with Chapter VI by the
investment fund. Such loss shall be ignored in the hands of unit holders.
Alternate Investment Funds
– Chapter XII-FB
 Income distribution by Investment Fund will not attract DDT.
 Statement of income paid or credited to unit holders shall be furnished by the person
responsible for making payment or crediting income in the prescribed manner to unit
holders and to prescribed income tax authority.
 Alternate Investment Funds which may otherwise be not required to file return of
income, now required to file.
Alternate Investment Funds – Chapter XII-FB
Income
earned by
AIF
Profits &
Gains from
Business and
Profession
Other Income
Taxable u/s
115UB
Exempt u/s
10(23FBA)
Company or Firm taxable at rates
specified in Finance
Act
Other cases - taxable
at MMR
Alternate Investment Funds – Chapter XII-FB
Income distributed or deemed to be
distributed to Unit Holders
Profits &
Gains from
Business and
Profession
Other Income
Exempt u/s
10(23FBB)
Taxable
TDS u/s
194LBB @
10%
Domestic Transfer Pricing
– Clause 24
 The threshold limit for applying the provisions of Domestic Transfer Pricing - proposed
to be increased from Rs.5 crores to Rs.20 crores.
 This amendment is effective from April 1, 2016. prospectively.
 As per the Explanatory memorandum, the reason for increase of threshold is to address
the issue of compliance cost in case of small businesses.
General Anti-Avoidance Rule
– Clause 25
 Applicability of the provisions of GAAR proposed to be deferred to Assessment Year
2018-19.
 FM in his speech stated that GAAR would be applicable for transactions on or after April
1, 2017, though, there is no amendment in the proposed Bill.
 Sole Trustee, Lok Shikshana Trust V. CIT (101 ITR 234) – while interpreting a
provision, resort can be made to the speech of the Finance Minister.
Royalty and Fees for Technical Services
– Clause 27
• Existing provisions provide tax rate of 25% for a non-resident taxpayer, where the total
income includes any income by way of Royalty and FTS.
• In order to reduce the hardship faced by small entities , it is proposed to reduce the rate
of tax provided under section 115A on royalty and FTS payments made to non-residents
to 10%.
• It may be noted that in the absence of PAN of the non-resident recipient, provisions of
section 206AA would continue to apply and tax rate of 20% would apply.
Global Depository Receipts
– Clause 28
• When an employee of the foreign subsidiary of an Indian company who has earned
GDRs of the Indian company under ESOPs, becomes a resident in India and earns
dividend on those GDRs or earns long term capital gains on sale thereof, he enjoys
concessional tax treatment under section 115ACA.
• This tax regime was introduced when the earlier GDR scheme was in force, which
permitted GDR issue only for listed shares.
• Under the new GDR scheme, GDRs can be issued even for unlisted shares.
• Definition of GDR in section 115ACA is proposed to be amended to clarify that the
concessional tax treatment will be available only for GDRs issued in respect of listed
shares.
Section 153C - Assessment of income of a person other
than the person in whose case search has been initiated
– Clause 36
 To initiate any action under section 153C it is essential that any money bullion jewellery
etc, or documents ceased or requisitioned should “belong to” a person other than the
assessee:
 Kamleshbhai Dharamshi Bhai Patel v. CIT (214 Taxmann 558)(Guj HC)
 ACIT v. Global Estate (142 ITD 740)(Agra)
 Tanvir Collections Pvt Ltd v, ACIT (54 Taxmann.com 379) (Del Trib)
 Proposed to amend section 153C, nullifying the above decisions by providing that
assessment of other assessee can be re-opened, if any, books of account or documents
seized or requisitioned “pertain to or any information contained therein relates to”
another assessee.
 SSP Aviation Limited v. DCIT (346 ITR 177) (Del HC)
 Pepsi Foods Private Limited v. ACIT(52 Taxmann.com 220) (Del HC)
Special provision for avoiding repetitive appeals
– Clause 39

There is presently no provision (similar to section 158A for the assessee), for the Revenue

It is now proposed to insert a new section 158AA to provide the procedure when in an
appeal by the revenue, an identical question of law is pending before Supreme Court

Prior approval of the Assessee would be necessary before making such application.

This amendment will be effective from June 1, 2015.
Section 253 – Appealable Order
– Clause 63
 Orders passed by the prescribed authority under section sub-clauses (vi) and (via) of clause (23C)
of section 10 denying exemption under section 10(23C) is proposed to be made appealable before
Income-tax Appellate Tribunal.
 Clause (vi) of section 10(23C) deals with any university or other educational institution existing
solely for educational purposes and not for purposes of profit and clause (via) deals with any
hospital or other institution for the reception and treatment of persons suffering from illness and
mental defectiveness.
Single Member Bench
– Clause 64
• The limit for cases which a single member of Tribunal can dispose, has been increased
from Rs. 5 Lakhs to Rs. 15 Lakhs of assessed income.
Foreign Tax Credit Rules
– Clause 78
 Currently section 91 (1) provides that an Indian resident is entitled to a deduction from
the Indian income-tax of a sum calculated on such doubly taxed income, at the Indian
rate of tax or the rate of tax of said country, whichever is lower.
 The manner of granting credit of such taxes is not provided.
 CBDT has now been empowered to prescribe the procedure for granting relief /
deduction of any income-tax paid in any country or specified territory outside India,
under section 90 / 90A / 91, against the income-tax payable under the Act.
Thank You!