PRE-BUDGET MEMORANDUM 2014-15 Direct Tax Issues

Transcription

PRE-BUDGET MEMORANDUM 2014-15
Direct Tax Issues
June 2014
Executive Summary
The IT sector is characterized by fast changing technologies leading to new business models, service
delivery methods and platforms. These have far reaching implications not only on business operations,
lives but also the policy and resulting business environment. It is therefore critical that India keeps pace
with the dynamic nature of the technology, businesses and governance. We urge the Government to
consider adopting collaborative approach with the Industry as policies and rules need to be tweaked and
modified, framed anew and revisited for its relevance.
Entrepreneurship and innovation are critical for the growth in an increasingly competitive and volatile
world. The IT sector in India has been at the forefront on enabling entrepreneurship in the country,
building global success stories and contributing to Indian exports, employment and image. With over
15000 technology Start-up and IT SMEs today, it is the second largest hub globally, after China.
A Government-Industry partnership is critical for helping build this emerging opportunity for technology
entrepreneurship in the country. Leading countries like US, UK, Singapore, and Chile have launched
several start-up focussed programs. We propose a India Technology Entrepreneurship Mission (ITEM)
should` enable local and global companies to set up in their country and build intellectual property. There
is a need for appropriate budgetary allocation to enable and ensure funding and ease of doing business
for small businesses and start-ups.
IT-led interventions can bring about transformation and bridge developmental gaps in the country.
Adoption of IT and technology services is critical, particularly in education, healthcare, governance. While
IT/ITeS can provide solutions, effective adoption requires close engagement between Government and
industry bodies, focused financial investments and supporting procurement and implementation
policies.
While the industry has created a strong focus on sustaining growth, there are a number of tax issues that
are creating hurdles in doing business for companies, increasing litigation, uncertainty and impacting
future investment. These prevailing issues need immediate resolution.
TARC has been constituted with a mandate to simplify and streamline the existing processes under the
existing provisions, but there should be an effort to go beyond existing rules to enable simplification.
We should not shy away from adopting substantially different approach from the past top achieve the
collective objective of economic growth and business friendly environment.
It is very important that approach to taxation of the IT sector be carefully considered. The business models
are significantly different and flexible. We recommend that there be a platform for regular GovernmentIndustry interaction on various new developments and emerging trends in businesses with a focus on
its implication on both direct and indirect taxation. Further, IT serves to overcome geographical distances
and boundaries, and this is a critical success factor for the sector, but also complicates the tax
administration. Therefore, a collaborative approach should be primary. Several advisory councils currently
support interaction, and this should be maintained.
Several issues are elaborated in subsequent pages. Many of these issues have been in discussion for a
couple of years now, and the Industry is hopeful for a closure on these. The issues of software product
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companies need attention as they are primarily SMEs, struggling with funding constraints and cash flow
issues arising due to tax liabilities.
The explanations inserted in the Finance Act 2012 retrospectively are unfair to the Industry. TDS liabilities,
associated penalties arising out of royalty implications are a cause of concern. Further, implications of
royalty on Internet downloads of software and ancillary services like maintenance and upgrade, as well as
on telephone and telecom services is altering tax consequences. This needs to be withdrawn and aligned
to International practices.
Indian IT companies are increasingly going global. There is a need to re-examine the foreign tax credit
provisions and initiate a discussion to ensure that it is abreast with business trends and supportive of
global Indian Industry, a significant change from the past, where MNCs hardly emanated from India.
The Indian IT Industry has been facing several unwarranted assessments on account of transfer pricing
adjustments. While the APA program has taken off, and companies are considering adoption, the Safe
harbour notifications have had limited uptake. Consequently, most companies have opted for the TP
assessment and audit option, and subjective assessments of Arm’s Length Price (ALP) continued leading
to high mark-up contrary to market conditions and inconsistency for lack of guidance. As apprehended,
Industry sub-categorisation in the safe harbour notification was seen to influence the audits, and in a
majority of the cases, the safe harbour margins were seen to be the base instead of the outside limit in
the assessments.
There is a need to re-examine the safe harbour notifications to reflect the business conditions and
evaluate reasons as to why companies have not adopted it despite of the certainty that it offers. Rules
and guidance should be framed to notify the metrics for transfer pricing adjustments. Further the Act
maybe amended to allow use of Interquartile Range Method and Multiple Year Data for ALP computation.
The IT service exporters are entitled to service tax refund paid on input services used in the export of IT
services. However, there has been significant denial / pendency in service tax refunds to SEZ and STPI
units on one pretext or the other (as enumerated in the detailed memo) which the exporters of IT services
are entitled to. While clarifications have been issued, and process simplification has been attempted,
obtaining these refunds continue to be a challenge. We request the Government to focus on the issue for
a smooth and predictable refund process. We have in our recommendations also proposed a duty
drawback scheme for software services in line with duty drawback allowed for goods. This has the
potential to simplify and also reduce the work load of revenue if implemented with suitable safeguards.
There is ambiguity on treatment of software being “goods” or “services” resulting in dual taxation. Both
Central and State authorities have been demanding taxes on supply of software. Further introspection is
required to remove such duality.
There are various issues related to filing of taxes, verification, form generation etc. that impose
administrative and procedural burden. We have suggested some procedural changes and simplification
most of which have been discussed with the TARC as well, for your consideration.
There has been a complete overhaul of the Service Tax regime with the introduction of the Negative List
and Place of Provision of Services Rules. Several teething problems have cropped up and there are
serious apprehensions related to treatment of head office and branch office transactions and
unnecessarily burdening the refund mechanism, R&D testing services not being treated as exports even if
the clients are overseas etc.
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The IT sector is technology intensive with rapid evolution of information technology platforms, business
delivery models and services. Companies invest in training and R&D. Currently R&D incentives in India are
targeted towards the manufacturing sector. There is ambiguity on treatment of production of computer
software as a manufactured product. The sector therefore is denied access to various existing R&D
promotion schemes. There is a need to develop a tailored incentive model for R&D in the IT/ITeS sector.
Further, disregarding investments in IT and associated efficiency enhancement tools for investment
allowance is detrimental to their adoption and will have long term impact on the competitiveness of the
Indian manufacturing sector. This barrier can be easily removed.
The IT/ITeS sector is driven by people and talent. The sector would be at a disadvantage in leveraging
proposed investment linked incentives. With 20% MAT on SEZ profits, and the phasing out of tax benefits
of the STPI, there is currently no sector focused incentive for the Industry.
It is important to note that with over 15000 technology start-up and IT SME’s, second only to China, it is
imperative that technology driven companies are supported and incentivized to operate from India, as
they continue to address global markets. Many countries are actively wooing technology driven start-ups
and offer a more business friendly environment in addition to bringing them closer to the market. The
Government therefore should evaluate and design support and incentive schemes demonstrated to be
effective around the world.
Exports from IT sector continue to fill the large gap in India’s external trade balance. Promotion of Tier
II/III cities would be key to inclusive growth, and the sector can largely benefit from this movement with
enabling support of the Government in terms of infrastructure and easing of business process
compliances.
The new companies Act introduced the revolutionary concept of mandatory CSR. However, there are
doubts on treatment of CSR expenses in accounting terms. As companies are still formulating the
programs and details, there is a need for immediate clarification to safeguard against confusion and
litigations at a later date.
Ecommerce is now a growing Industry, with several Indian entrepreneur led organisations having emerged
leaders. Business models are evolving and there is need to understand online marketplaces which is a
platform to Merchants/ Manufacturers to sell their products, for tax implication. Levying excise duty on
order fulfilment services by ecommerce companies is not manufacturing and there should be suitable
clarifications to ensure that the field officers are updated and understand the new evolving business
models.
We request the Government to consider the NASSCOM recommendations as positioned in the PreBudget Memorandum 2014-15.
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Pre-budget Memo for IT/ITeS Industry, 2014-15
Contents
JOINT GOVERNMENT-INDUSTRY EFFORTS FOR STRATEGIC GROWTH ....................................................................1
SUMMARY .................................................................................................................................................................3
SOFTWARE PRODUCT TAXATION ISSUES ............................................................................................................... 5
1.
2.
3.
4.
5.
6.
DUAL LEVIES ON SOFTWARE-VAT AND SERVICE TAX ........................................................................................5
PENDING TDS REFUNDS – IMPACT OF 10% TDS ON SOFTWARE PAYMENTS.....................................................6
INCREASE THRESHOLD LIMITS OF SECTION 194J OF THE INCOME TAX ACT, 1961 ............................................6
CLARIFICATION ON REQUIREMENT TO DEDUCT TDS ON UPGRADE AND SUBSCRIPTIONS. ..............................6
INADEQUATE ABATEMENT FOR PACKAGED/CANNED SOFTWARE FOR PAYMENT OF EXCISE DUTY.................7
REVISIT THRESHOLDS FOR SMES EVERY 2 YEARS ..............................................................................................7
SUMMARY - DIRECT TAXES .................................................................................................................................... 8
DIRECT TAX ISSUES .............................................................................................................................................. 22
POLICY ISSUES...................................................................................................................................................... 22
7. INVESTMENT ALLOWANCE EXCLUDES IT PRODUCTS U/S 32AC ......................................................................22
8. WEIGHTED DEDUCTION U/S 35(2AB) FOR IT SECTOR .....................................................................................22
9. NO SPECIFIC TAX DEDUCTION FOR CSR EXPENSE ............................................................................................23
10.
MINIMUM ALTERNATIVE TAX (MAT) ..........................................................................................................24
High MAT rate ........................................................................................................................................24
MAT on Dividend Income from foreign companies only ........................................................................25
11.
CASCADING EFFECT OF DDT ON DIVIDEND RECEIVED FROM FOREIGN COMPANIES..................................25
12.
CONSOLIDATED TAX RETURN FILING ..........................................................................................................26
13.
ISSUES RELATED TO FOREIGN TAX CREDITS ................................................................................................27
14.
RE-NEGOTIATION OF DOUBLE TAXATION AVOIDANCE AGREEMENTS .......................................................28
15.
SOCIAL SECURITY AGREEMENTS.................................................................................................................29
16.
CONCERNS RELATED TO INCENTIVES STRUCTURE IN DTC BILL, 2013 .........................................................29
17.
LIABILITIES DUE TO AMENDMENTS IN ROYALTY DEFINITION .....................................................................30
18.
HIGH TAX RATE ON ROYALTY OR FEES FOR TECHNICAL SERVICES ..............................................................32
19.
DISALLOWANCE U/S 40(A)(I) HARSH COMPARED TO SECTION 40(A)(IA) ...................................................32
20.
SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE TO BE TREATED AS INCOME ...................................33
21.
TAXATION OF UNLISTED SHARES ................................................................................................................34
22.
ADDITIONAL INCOME TAX ON DISTRIBUTED INCOME FOR BUYBACK ON UNLISTED SHARE ......................34
23.
CLARIFICATIONS REQUIRED ON THE INDIRECT TRANSFER RULE IN SECTION 9 ..........................................35
24.
TAXABILITY OF IMMOVABLE PROPERTY .....................................................................................................36
No provision for cases of property for inadequate consideration ..........................................................36
Issues related to Individual and joint Properties ....................................................................................36
25.
NON AVAILABILITY OF DEDUCTION FOR SKILL DEVELOPMENT EXPENSES (U/S 35CCD) .............................37
PROCEDURAL ISSUES ........................................................................................................................................... 38
26.
DENIAL OF DEDUCTION UNDER SECTIONS 10A/10B/10AA ........................................................................38
Restriction on the transfer of employees to claim deduction under Section 10AA ................................38
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27.
28.
29.
30.
31.
32.
Denial of Benefits on Delayed Realization of Export Sale Proceeds .......................................................39
Denial to newly formed undertakings formed under same license u/s 10AA / 10A/ 10B ......................40
Clarification on circular 1 / 2013 based on Rangachary Committee Recommendation ........................40
Inconsistency in the definition of “export turnover”/ “total turnover” ..................................................41
SET-OFF OF LOSSES, UNABSORBED DEPRECIATION U/S 10A/10B/10AA .....................................................42
SET OFF OF UNABSORBED DEPRECIATION, ACCUMULATED LOSS IN MERGER .........................................43
CARRY BACKWARD OF BUSINESS LOSSES TO BE ALLOWED ........................................................................44
FRAMING RULES TO RECOGNIZE ECONOMIC EMPLOYER/SECONDMENT ..................................................44
CONTRIBUTIONS TO SUPERANNUATION FUND .........................................................................................45
SIMPLIFICATION OF PROCEDURES..............................................................................................................45
Perpetuating tax demands for meeting collection targets ....................................................................45
Suggestion to map internal processes and monitor performance dashboard .......................................46
Need for industry consultation to bring in new tax laws /amendments in existing provisions .............46
Lack of automated facilities ...................................................................................................................46
32.4.1
32.4.2
No automatic generation of Form 27A ......................................................................................................... 46
No automated facility for deductor to check the correct PAN...................................................................... 47
Simplification in online procedures ........................................................................................................47
32.5.1
32.5.2
32.5.3
32.5.4
32.5.5
Improving Navigating facilities in the RPU .................................................................................................... 47
Auto computation of interest in TDS returns ................................................................................................ 47
Form 16A not generated for deductees having no PAN ............................................................................... 48
Providing disclosures with online returns ..................................................................................................... 48
Issues in obtaining Tax residency certificate ................................................................................................. 48
Issues in claiming TDS credit ..................................................................................................................49
32.6.1
32.6.2
32.6.3
32.6.4
Compliance error on the part of Deductor ................................................................................................... 49
TDS credits following statutory re-organization ........................................................................................... 50
Credit for TDS for the purposes of Section 199............................................................................................. 50
Difficulties while making correction in TDS Challan details .......................................................................... 51
Changes in Authority of Advance Rulings ..............................................................................................51
32.7.1
32.7.2
Single Bench of Authority of Advance Rulings (AAR) .................................................................................... 51
Dissenting views of AAR on similar set of facts ............................................................................................. 51
Miscellaneous Applications before ITAT ................................................................................................51
Issues with appeal procedure ................................................................................................................52
32.9.1
32.9.2
32.9.3
32.9.4
32.9.5
Priority in disposing appeals before Commissioner (Appeals) ...................................................................... 52
Delays in giving effect to Appellate Orders ................................................................................................... 52
No time limit for refund of tax as a consequence of appellate order favourable to the assesse ................. 52
Penalty proceedings u/s 271(1) (c) despite favourable orders ..................................................................... 53
Prolonged litigation for common issues........................................................................................................ 53
Issues in the functioning of Large Tax Payer Units (LTUs) .................................................................53
TDS related issues ..............................................................................................................................54
32.11.1
32.11.2
32.11.3
32.11.4
32.11.5
Application for certificate for deduction at lower rate ................................................................................. 54
TDS from manpower supply .......................................................................................................................... 55
Frequent Issuance of TDS certificates under Form 16A ................................................................................ 55
Lack of guidelines to reply to intimation u/s 156 of the Act ......................................................................... 56
PAN of the deductor not appearing in 26AS statement ................................................................................ 56
Requirement of additional disclosure in personal Income Tax Return Forms....................................56
Issues with transfer of cases and change in tax jurisdictions ............................................................57
Adjustment of refunds without prior intimation ...............................................................................57
Modes prescribed under section 269SS, 269T for loans and deposits outdated ...............................57
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Delay in issue of refunds to foreign companies with no bank account/presence in India .................58
Delay in processing of NIL/lower withholding applications ...............................................................58
ANNEXURE I: ........................................................................................................................................................ 59
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JOINT GOVERNMENT-INDUSTRY EFFORTS FOR STRATEGIC GROWTH
The IT sector is characterized by fast changing technologies leading to new business models, service
delivery methods and platforms. These have far reaching implications not only on business operations,
lives but also the policy and resulting business environment. It is therefore critical that India keeps pace
with the dynamic nature of the technology, businesses and governance. We urge the Government to
consider adopting collaborative approach with the Industry as policies and rules need to be tweaked and
modified, framed anew and revisited for its relevance. Our specific recommendations are:
Recommendation
1. Taxation
It is very important that approach to taxation of the IT sector be carefully considered. The business
models are significantly different and flexible. We recommend that there be a platform for regular
Government- Industry interaction on various new developments and emerging trends in
businesses with a focus on its implication on both direct and indirect taxation. Further, IT serves
to overcome geographical distances and boundaries, and this is a critical success factor for the
sector, but also complicates the tax administration.
Separate Advisory Councils on International Tax and Indirect Taxes were constituted in 2012,
chaired by the Revenue Secretary, with participation from senior officials and industry members
including trade associations. Such consultative groups should continue to operate. While the TARC
has been constituted with a mandate to simplify and streamline the existing processes under the
existing provisions, there should be an effort to go beyond existing rules to enable simplification.
2. Entrepreneurship and small business
Entrepreneurship and innovation are critical for the growth in an increasingly competitive and
volatile world. The IT sector in India has been at the forefront on enabling entrepreneurship in
the country, building global success stories and contributing to Indian exports, employment and
image.
With major technology shifts taking place – adoption of cloud, mobility, social media, big data,
there is an opportunity to enable and build the next set of technology leaders. These companies
would focus on building intellectual property that leverage such technology disruptions and
create solutions for India and the global market. With over 15000 technology Start-up and IT SMEs
today, it is the second largest hub globally, after China.
A Government-Industry partnership is critical for helping build this emerging opportunity for
technology entrepreneurship in the country. Leading countries like US, UK, Singapore, and Chile
have launched `Start-up programs’ that enable local and global companies to set up in their
country and build intellectual property. The following recommendations would enable the
facilitating of a vibrant technology entrepreneurial ecosystem in India:
a. Set up India Technology Entrepreneurship Mission (ITEM), whose sole focus is to establish
a vibrant entrepreneurial ecosystem in India. The Mission’s mandate, as one single entity
within the Governments both at the National and State levels, will require it to pursue the
task of facilitating entrepreneurs and entrepreneurship, exclusively.
b. Partnership with industry to provide access to seed capital funding, incubation, market
access etc.
c. Create a Rs. 5000 crore `Fund of Funds’ to seed early stage ventures
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d. Enable ease of doing business for small businesses and start-ups and revise the threshold
limits for SMEs in the Income Tax Act, making it relevant in the prevailing business
conditions
e. Enable small businesses to participate in government projects at central and state levels
without compromising on quality and specifications.
f. Evaluate existing tax treaties and remove any differential tax treatment that puts the
domestic investor at a disadvantage and encourages ‘round-tripping’ of investments
g. Create a separate regulatory approach for Angel investments, which are a lifeline for the
technology start-up community due to lack of support of public financial institutions.
Specific recommendation on additional income tax on distributed income for buyback on
unlisted share is detailed in the document.
h. Encourage setting up in Tier II/III locations
o Policy framework to encourage new companies to emerge in tier 2 / 3 cities, thus
balancing the regional development objective.
o Structural inefficiencies like power, transportation should be compensated for,
by defraying expenses incurred to overcome infrastructural constraints. E.g.
weighted deduction for expenses like need to generate power on account of lack
of availability or providing transportation for employees and expenses made for
security due to lack of reliable transportation facilities. A reimbursement model
has limitations based on experience in the past, therefore, weighted expense
deductions maybe considered.
3. Domestic IT Adoption: There is scope for IT-led interventions to bridge developmental gaps of the
country, particularly in rural India
a. Education: plagued by lack of infrastructure and teachers;
b. Healthcare : lack of access and high cost
c. Governance: address Information asymmetry, lack of transparency, lack of credible
citizen information and stakeholder participation
d. Ensure e-enabled delivery of citizen services
e. Ensure last mile connectivity to increase access to internet from current rate to globally
accepted standards.
While IT/ITeS can provide solutions, effective adoption requires close engagement between
Government and industry bodies, focused financial investments and supporting policies.
4. Cyber security: For globalization, just as it is an imperative to gain trust in the nation’s capability
of securely exporting goods and services, similarly it is equally important to secure the electronic
transformation of economy. Cybersecurity therefore is an important component of national
security, from the perspective of economic contribution and its potential adverse impact to critical
assets of the nation. Increasing reliance of critical sectors on information technology for improving
productivity, efficiency and governance on the flip side add to worries related to security. This is
also true for the Government as it relies on ICT for delivery of its services and outreach.
This warrants dedicated and significant allocation of budgetary resources to enhance national
capability to address challenges of cyber security, establish required institution framework,
facilitate efforts of securing economic and strategic assets, carry research and development and
enhance skills & competence in the area. We recommend that the current budget makes optimal
allocation for the 4 key areas outlines above, while the details are worked out separately.
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SUMMARY
S.no
Issue and Recommendations
Justification
SOFTWARE PRODUCT TAXATION ISSUES
1.
Dual levies on software-vat and service tax
For all Internet downloads (license, product key, upgrades etc.), and
other forms of services like maintenance contracts, there is a dual levy
of both VAT and Service Tax.
Recommend clarification such that VAT and Service tax dual burden is
removed. For software transactions which involve both a product and
associated services, the services component should be subject to
service tax alone, and the product value should be subject to VAT only.
2.
Pending TDS refunds
SMEs and start-up software companies suffering TDS @ 10% Actual tax
liability on profits is far lower than the TDS liability.
Recommend Lower TDS rates for software SMEs and start-up
companies. Consider adjusting pending refunds to future TDS liability.
3.
4.
Banks to consider offering loans to companies based on pending TDS
refunds, as if it is a book debt.
Increase threshold limits of section 194J
TDS @ 10% on payments made for acquisition of software for amount
greater than Rs. 30,000 in a financial year
Recommend This amount be increased to Rs. 3.00 lakh in a financial
year. We request that the criteria of setting the limits be shared and
Industry can share relevant data to update the limit regularly.
Clarification on requirement to deduct TDS on upgrade and
subscriptions
Payment for Software Ancillary Services such as AMC’s, Upgrade Fees,
Subscriptions, etc. is “Royalty” u/s 194J r/w 9(1)(iv) Explanation 2
Software companies, primarily SMEs face an uncertain and unfair tax
environment that is blocking capital.
As software products from India emerge, and companies develop a
business model where services are also bundled with the product, this
issue of duality will impair competitiveness. Many software SMEs, for lack
of clarity are advised to pay both VAT and Service Tax to avoid penalties.
VAT is also levied on the Service tax component.
Profitability of SMEs and software product companies are lower. Further,
product development requires investment and time before they are
launched. A 10% TDS on every transaction is high for such companies.
Financing difficulties for SMEs and start-up companies due to low asset
base and non-consideration of technology as an asset to offset risk further
compounds the issue of blocked capital.
Threshold limit is low and does not reflect current business environment
in terms of pricing trends
They do not involve transfer of rights, or grant of license but involve only
payments of consideration for services
Recommend Clarify for Payments towards services like AMC’s, Upgrade
Fees, Subscriptions, etc. there is no “Royalty”
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5.
6.
Inadequate abatement for packaged / canned software for payment
of excise duty
Abatement of 15% is allowed from RSP to arrive at the value of
Packaged Software. The taxes on the product amount to 22% of the
RSP and the notified abatement of 15% is not adequate
Recommend abatement be increased to 30%.
Revisit thresholds for SME’s every 2 years
This notified abatement of 15% does not take into account the incidence
of taxes on the product - VAT/CST rates - 5.5% to 6.6%; excise duty 10%
and Education Cess
To ensure that the thresholds are revisited at predefined frequencies and
suitably changed to be realistic and relevant with time
Recommend Periodic review mechanism be institutionalized,
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SOFTWARE PRODUCT TAXATION ISSUES
1. DUAL LEVIES ON SOFTWARE-VAT AND SERVICE TAX
Software can either be a customized software developed as per the specific requirements of the
customer or a packaged software which is an “off-the-shelf” software available to be used by a number
of users.
•
The definition of the term “service” as per section 65B (44) is wide enough to cover any activity and
excludes sale of goods and other deemed sale transactions as per Article 366(29A) of the
Constitution, like for example transfer of right to use goods. Hence, all transactions which are
treated as “sale” shall be outside the ambit of service tax.
•
Historically, while packaged software has been treated as “goods”, customized software has been
treated as “services”. Accordingly, packaged software has been subjected to Sales Tax, VAT,
Customs Duty and Excise Duty (depending upon the exact nature of the transaction), customized
software has been subjected to Service Tax.
•
In cases when software / licenses are supplied electronically VAT and Service Tax are levied but
there is no levy of Customs Duty or Excise Duty since the same does not qualify as “goods” for the
purposes of Customs / Excise laws.
Issue
•
Over the years there have been conflicting views on the applicability of VAT and/or Service tax on
the software transactions particularly sale of software either electronically or through media. This
has resulted in dual levies of VAT and Service Tax and has impacted the overall viability of business.
•
Often, the customers / clients (including Government departments) deny the payment of dual taxes
and insist on payment of either VAT or Service Tax. This results into an additional cost for the
companies since the tax component cannot be passed on to end customer.
•
As software products from India emerge, and companies develop a business model where services
are also bundled with the product, this issue of duality will impair competitiveness. Many software
SMEs, for lack of clarity are advised to pay both VAT and Service Tax to avoid penalties
•
SMEs do not have the luxury of large teams and dedicated personnel. A key technology person is
often required to spend substantial time with tax authorities. This increases the overall cost and
burden for companies. SMEs are not in a position to litigate given the resource constraints, long
time taken to settle such disputes and the fact that they would rather concentrate on their core
product and business development
Recommendation
It is recommended that CBEC clarify the following
1. Provision of standard software, including license to use such software, whether electronically or on
a media, should not be subject to dual levies, and in case VAT is applied, it would not be liable to
Service tax.
2. Given the stand taken by the Central Government on the treatment of software supplied
electronically, it may be clarified that service tax is applicable on sale of software which is
downloaded electronically and Central Sales Tax is not applicable on the same if the transaction is
interstate transaction.
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3. For software transactions which involve both a product and associated services, the services
component should be subject to service tax alone, and the product value should be subject to VAT
only.
2. PENDING TDS REFUNDS – IMPACT OF 10% TDS ON SOFTWARE PAYMENTS
Issue
SMEs and start-up software companies are suffering TDS @ 10%, since their actual tax liability on profits
is far lower than the TDS liability. Thus, the situation of refund of TDS arises. TDS refunds remain
pending hence these companies face an uncertain tax environment that is blocking their working capital
and leading to serious operational difficulties.
Promoters have to augment capital since SMEs and start-up companies face hurdles in getting loans
even in the SME category because their asset base is low and technology is not considered as an asset
that can offset risk.
The Government decision to notify 10% TDS for software transaction maybe in line with the profit
margins of the large and well established service providers of the IT sector. However, there is a need to
recognize the niche technology driven small enterprises, and acknowledge that the margins and cost
structures of such companies are different.
Recommendation

Government has notified lower TDS rates for certain payments like payment transfer of immovable
property (1%) and contractual payments (2%). TDS rate for software companies should also be
reduced in consultation with the Industry. Ideally, the sector would request the Government to
consider completely exempting Indian software companies from TDS u/s 194J.

Government may consider adjusting pending refunds to future TDS liability.

Banks may consider offering loans to companies based on pending TDS refunds, as if it is a book
debt.
3. INCREASE THRESHOLD LIMITS OF SECTION 194J OF THE INCOME TAX ACT, 1961
In terms of Section 194 J of the Act, TDS @ 10% is required to be deducted on payments made
for acquisition of software when the amount exceeds Rs. 30,000 in a financial year.
Recommendation
This threshold limit is low, it is recommended that this amount be increased to Rs. 3.00 lakh in a
financial year. Alternatively, the Board may share the criteria of setting the limits and we could
share relevant data to update the limit.
4. CLARIFICATION ON REQUIREMENT TO DEDUCT TDS ON UPGRADE AND
SUBSCRIPTIONS.
Software Ancillary Services such as AMC’s, Upgrade Fees, Subscriptions, etc. which do not involve
transfer of rights, or grant of license but involve only payments of consideration for services is
“Royalty” for the purposes of Section 194J r/w 9(1)(iv) Explanation 2 of the Income Tax Act, 1961.
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Recommendation
Clarification may be issued that AMC’s, Upgrade Fees, Subscriptions, etc. which do not involve
transfer of rights, or grant of license, but involve only payments of consideration for services is
not “Royalty” for the purposes of Section 194J r/w 9(1)(iv) Explanation 2 of the Income Tax Act,
1961 and that such transaction are not liable for TDS u/s 194 J of the Income Tax Act, 1961.
5. INADEQUATE ABATEMENT FOR PACKAGED/CANNED SOFTWARE FOR PAYMENT OF
EXCISE DUTY
Issue
Abatement of 15% is allowed from RSP to arrive at the value of Packaged Software or Canned Software,
falling under CETH 8523 of CETA 1985 for payment of excise duty. This was notified in 2008. (Serial No
93A of Notification No 49/2008-CE (NT) dated 24.12.2008, for valuation under Section 4A of the CEA,
1944)
This notified abatement of 15% does not take into account the incidence of taxes on the product VAT/CST rates ranging from 5.5% to 6.6%; Octroi/Entry Tax of 5.5% in State of Maharashtra; excise duty
from 10% ad valorem and Education Cess.
The taxes on the product amount to ~22% of the RSP and the notified abatement of 15% is not adequate
Recommendation
The abatement of 15% allowed under the said notification be increased to 30%.
Packaged/Canned software products are sold through a multilayer dealer/distribution chain through
which they are delivered to the ultimate consumer high trade discounts on MRP are offered.
6. REVISIT THRESHOLDS FOR SMES EVERY 2 YEARS
The IT Act in recognition of the compulsions and limitations of the SME and start-ups have notified
several thresholds below which provisions are not applicable. Unfortunately, these are not revised and
lose their relevance in the evolving business environment.
We request that a periodic review mechanism be institutionalized, which will ensure that the thresholds
are revisited at predefined frequencies and suitably changed to be realistic and relevant with time.
7|Page
S.no.
Issue and Recommendations
Justification
SUMMARY - DIRECT TAXES
DIRECT TAX-POLICY ISSUES
7.
Investment allowance excludes IT products u/s 32AC
“New asset” eligible for tax benefit does not include office appliances
including computers or computer software.
Recommend computers and computer software be regarded as “new
asset” for the purposes of Section 32AC.
Computers and computer software enhance efficiencies and
have a critical role in modern day manufacturing in process
monitoring, application engineering and quality checks.
Weighted Deduction u/s 35(2AB) for IT Sector
8.
Recommended Section 35(2)(AB) may be amended to include
‘Information technology” along with biotechnology so that there is
clarity that the weighted deduction would be available to an assessee
engaged in production of computer software and business of
information technology so that all R&D activities are enabled for
weighted deduction.
No specific tax deduction for CSR expense
Significant uncertainty and concern on tax treatment of amount spent
on CSR.
9.
Recommend specific provisions be inserted to grant deduction for CSR
expenditure incurred pursuant to section 135 of Cos Act 2013. Tax
relief with respect to the CSR expenditure be introduced, specifically
covering critical areas like education, health, animal husbandry, water
management, women's empowerment, poverty alleviation and rural
development.
Several judicial precedents have upheld tax deductibility of
CSR expenditure incurred on voluntary basis in pre-Cos Act
2013 era. Also, CSR is viewed as charge against profits under
Cos Act 2013 which requires reflection of CSR expenditure in
statement of Profit & Loss under Part II of Schedule III (Refer
para 5(1)(k) of General Instructions
Parliamentary Standing Committee on Finance
recommended that specific provisions be inserted in DTC for
CSR expenditure in backward regions and districts to
encourage more CSR activities in places where it is required.
8|Page
Minimum Alternative Tax
10.
10.1.
High MAT rate
MAT rate has been rising steeply over the years
Recommend that MAT rate to be reduced to 10%.
MAT on Dividend Income from foreign companies only
Dividend received from foreign companies taxed u/s 115JB
MAT rate of 20% is too high in relation to the normal tax
rate at 30%. It may create hardship on the cash flow position
for the companies; Currently MAT credit available under
Income Tax Act does not mention carry forwards.
Dividend received from domestic companies are exempt
from paying the tax.
10.2.
Recommend removal MAT on such dividend income or levying
concessional MAT tax rate in line with the normal tax rate.
Cascading effect in DDT on dividend received from foreign companies
11.
12.
13.
Recommend Section 115O be changed such that the DDT base should
be reduced by dividend received from specified foreign company i.e.
where the Indian company has 26% or more equity shareholding instead
of dividend received from foreign subsidiary.
Consolidated Tax Return Filing
Recommendations
Provide an option for filing a “consolidated tax return”.
any company incorporated in India may opt to file a consolidated tax
return including all its direct and indirect subsidiaries in India and
overseas with an effective shareholding in excess of 75%
A more beneficial provision would be to allow consolidation by the
parent company incorporated in India of only those direct or indirect
subsidiaries (with an effective holding of 75% or more), which the Indian
parent company elects to disregard as a separate legal entity.
Issues related to Foreign Tax Credits
No aggregation /pooling of the credit allowed
DTAA relief denied by tax authorities in India on the local taxes. The FTC
restricted to tax liability in India resulting into partial grant of FTC.
Conflicts of either Residence or Source or Residence and Source causes
of international juridical double taxation.
This would help in aligning with the 26% or more equity
shareholding provided in Section 115BBD and in removing
the cascading effect of DDT in cases where the Indian
company holds 26 percent to 50 percent equity shares in the
foreign company.
Serves to facilitate ease of compliance, anti-avoidance,
transfer pricing, residency test and revenue neutrality
Indian IT industry are now global and have extensive
operations abroad.
There is need to re-examine the current FTC provision.
Recommended Policy changes be considered. Assesses be allowed to
carry forward the “unutilised” foreign tax credit for 5 years. Sourcing
rules be adopted in line with international principles.
9|Page
14.
Re-negotiation of Double Taxation Avoidance Agreements (DTAA’s)
The DTAAs, being bi-lateral in nature, would have the same force when
overseas clients pay for the IT / ITES services received by them from
exporters in India. Taxation of offshore services provided from India,
either as a direct levy or as a withholding in foreign countries, would
have a base erosion effect. Further, cost competitiveness of India’s
export of technical services will decline significantly.
There is a deemed accrual of income in India, characterized
under the DTAAs as fees for technical services, which
requires withholding of tax.
Recommended The DTAAs, especially the developed countries, be renegotiated so that only services which are physically performed in a
contracting state are liable to tax in that State.
Social Security Agreements
1.
2.
Ensure implementation in “good faith” through Protocol.
15.
Notify the dates of entry into force of 5 agreements already concluded.
3.
employment is organized to meet local
compliances;
Certificate of Coverage (“CoC”) issued by the
competent authority (“EPFO”) is required
upfront with no time relaxation;
EPFO has not automated the issuance of CoC
Widen the network of SSAs
Concerns related to incentive structure in DTC bill, 2013
Tax incentive to be linked to factors that enhance employment.
16.
17.
Further, India has a very small network of SSAs.
IT industry labour intensive and generate employment. The
profit based incentive as proposed in DTC will not be
beneficial to the IT/ITES industry or to the country.
Recommend in the DTC bill, grandfathering provision maybe extended
to 2 years from the passage of the bill for SEZ Developers and 4 years for
SEZ units for commencing operations.
Liabilities due to amendments in royalty definition
Retrospective implications
Definition widened retrospectively. All ancillary services provided on
top of the license under the definition of ‘royalty’
Recommended On-line sales of ancillary services like maintenance
should not attract TDS.
Inclusions resulting into interpretation issues
Payment made for basic services like purchasing ticket and basic
telephone service may be treated as Royalty,
Recommended to delete Explanation 4, 5 and 6. y.
a.
b.
c.
Difficulty for payers to pass on the tax incidence to
foreign supplier
Ancillary services like maintenance or upgrades fees
liable to TDS
Explanation 5&2 conflict-imposing tax on Royalty even
when there is no transfer of right to use, while
explanation 2 regards only 3 circumstances in the
context of intangible property to be regarded as Royalty
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Compliance issue
A non-resident receiving consideration, with no tax liability in India, is
also required to apply for a PAN. The enhanced scope of “royalty “not
consistent with international norms.
Recommend that furnishing PAN to the deductor by a non-resident
deductee should apply only where a tax liability in India and scope of
“royalty” be aligned to international understanding.
High tax rate on royalty or fees for technical services
Tax on Royalty / FTS increased to 25% (from 10%).
18.
19.
20.
21.
Recommend that withholding tax rate u/s 115A be restricted to 10%, as
earlier.
Disallowance u/s 40(a)(i) harsh compared to section 40(a)(ia)
Section 40(a)(ia) allows extended time upto the due date of filing the
Return of Income for depositing the TDS. U/s 40(a)(i) dealing with
specified payments to non-residents no such benefit is available
Recommend This discrimination between payments to residents and
non-residents should be removed.
Share premium in excess of fair market value treated as income
Taxing under the head “income from other sources” for excess
consideration received by a company (in which public is substantially
interested) from a resident for issue of shares over the face value or
their fair market value has a negative impact on Angel investors and
start-up
Recommend Angel investors should be exempted from this. Criteria for
exemption to be developed. Till then any investment made by a
domestic investor (individual or corporate entity), be exempted from
this provision provided that the investment is below Rs. 5 crores and the
company does not collectively receive more than Rs. 10 crores within 6
months of such an investment
Taxation of Unlisted Shares
The tax rate for all assessees in respect of long term capital gains from
unlisted companies be reduced to 10% to maintain parity.
d.
Basic services such as telephone / mobile charges and
broadband / data communication link / internet
connectivity charges be outside the ambit of Royalty
e.
Amendments not as per international guidelines
The enhanced rate of tax on royalty and fees for technical
services in Section 115A will significantly increase the cost of
importing technology.
Harmonise provision
Angels invest at an early stage where the concept of a fair
market valuation is virtually impossible as they are driven by
the track record of the team, their personal view of the
potential of the company and the market and the space in
which it operates, etc. The valuation is less systematic and
driven more by gut feel and negotiation between the
investor and the entrepreneur. Definition of fair market
value cannot be determined by any valuer. Angel Investors
are critical for entrepreneurship in any country. They invest
at a startup stage when there is almost nothing on the
ground, mostly an idea and the risk is extremely high and no
finance is available from recognized sources such as Banks,
VC Funds, etc.
Residents are more onerously taxed than non-residents,
though the nature of income is identical. Causing domestic
investors being less competitive than international investors
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Additional income tax on distributed income by company for buyback
on unlisted share
Withholding tax rate of 20% on profits distributed by unlisted companies
to shareholders through buyback of shares.
22.
Recommend to withdraw blanket rate of 20% on all buy backs.
Clarifications on indirect transfer rule in section 9
Explanation has been added to section 9(1)(i) that the sites of capital
assets being shares/interest in a foreign entity, directly or indirectly
deriving value substantially from assets located in India, shall be deemed
to be in India
23.
Recommend CBDT should issue administrative guidelines with respect
to taxation under the indirect transfer rule, consistent with Shome
Committee report
Owing to lack of clarity currently in section 9 on many aspect
relating to the indirect taxation rule, foreign companies
acquiring overseas companies (with subsidiaries in India) or
undertaking overseas mergers/acquisitions, etc. are unclear
on providing for Indian taxes
Taxabilty of immovable property
24.
24.1.
No provision for case of property for inadequate consideration
Existing provisions does not cover a situation where immovable
property has been received for inadequate consideration.
24.2.
Recommend to amend to avoid triple jeopardy.
Issues related to individual and joint properties
Withholding tax of 1% on for an immovable property (other than
agricultural land) valued at over INR 5 million.
Recommend Introduce other measures to counter tax evasion.
Non availability of deduction for skill development expenses (u/s
35CCD)
25.
The provisions would result in double taxation. Reduces the
confidence of foreign investors in India and would act as a
significant hindrance to free movement of capital and
earnings.
Recommend weighted deduction of 1.5 times of expenses incurred on
trainings, including in-house training for development of technology
skills
Potential of double taxation.
Compliance challenges for individuals and for properties
held jointly. In case of loans procured from housing finance
institutions (HFI), the transferee would have no money to
remit TDS since the HFI would disburse the instalments
directly to the transferor.
The industry operates in highly competitive environment
requiring constant upgrade of skills and new technologies
hence incurs substantially on skill development.
PROCEDURAL ISSUES
26.
Denial of deduction u/s 10A/10B and 10AA
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26.1.
Restriction on transfer of employees to claim deduction u/s 10 AA
Tax holiday denied when employees who have worked in other
undertakings are deployed to the newly formed units on grounds of
violation of 80:20 rule.
Recommend the condition of new employees not be imposed while
examining the eligibility of the tax payer for the deduction under section
l0AA.
Denial of Benefits on Delayed Realization of Export Sale Proceeds
Deductions denied if there is delayed realization of export sale proceeds
26.2.
Recommend deductions be allowed when RBI grants implicit approval
26.3.
26.4.
26.5.
Denial to newly formed undertakings under same license u/s 10AA /
10A/ 10B
Deduction for a newly formed undertaking are being denied on the
grounds that the newly formed undertaking is the second / subsequent
undertaking under the same STPI / EHTP license.
Recommend that recommendations of the Rangachary committee
report be implemented.
Clarification on circular 1/2013 based on Rangachary Committee
Recommendations
Clarification be issued to mention that as the contract may be entered
into either between clients and the STPI/SEZ units or with the legal
entity. Tax benefit should not be denied to the STPI/SEZ units as long as
it is a new business and cost and revenue are recorded in respective
SEZ/STPI units in which the work is executed.
Inconsistency in the definition Of “Export Turnover”/ “Total Turnover
Presumed that Foreign exchange expenses are embedded in revenues
and have to be excluded, e.g. expenses incurred in foreign exchange are
accounted by debiting the Profit and Loss Account; Expenses excluded
from export turnover are not reduced from the total turnover.
Splitting up or reconstruction of business happens when
20% or more of the total value of machinery or plant used in
the business is transferred (80: 20 rule). This is not
applicable to manpower movement from one undertaking
to another
Applications for delayed realization of sale proceeds in
convertible foreign exchange made to RBI are granted an
implicit approval by allowing the sale proceeds to be
credited in the bank accounts maintained with authorized
dealers.
There is no presumption in law that only one undertaking
can be set up in one STP/EHIP/SEZ or only one undertaking
can claim benefits under Sections 10A and 10AA or only one
undertaking can operate under one license.
CBDT has issued Circular no. 1/2013. Tax authorities at the
assessment stage have not accepted this circular in the true
spirit. Company being a legal entity can have multiple units.
The assessing authorities are not appreciating the fact that
STPI/SEZ units do not have any legal existence.
“Total Turnover” is an aggregate of “export turnover” as
defined in the numerator of the mathematical formula and
other residual turnover of the undertaking. The Hon’ble
Karnataka High Court has upheld this issue and the
Department should be advised to accept this decision.
Recommend to clarify exclusion of any item be made only when “export
turnover” specifically includes them“
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27.
Set-off of losses, unabsorbed depreciation u/s 10A /10B/10AA
Ambiguities related to if set-off of losses claiming benefits under Section
10A is allowed against the income earned by another undertaking (10A
unit or Non-10A unit) and if brought forward losses they have to be setoff before tax deduction from income earned by a 10A unit in the
current year.
Recommended clarification to ensure relief under Section 10A which
takes precedence over setting off losses against the 10A unit’s income.
Set-off of unabsorbed depreciation, accumulated loss in merger
"Computer software” has not been defined in section 72A
28.
29.
30.
31.
Recommend clarification to be inserted retrospectively that the
definition of “manufacturing of computer software” under section 10A
shall be read into section 72A.
Carry backward of business losses to be allowed
Recommend in line with best international practice, allow carry
backward of business losses. Remove limit of eight years should to
allow the carry forward of business losses infinitely. Alternatively, a
scheme may be formulated to provide an option to the company to
create Rehabilitation Reserve in any given year to be utilized in the year
it suffers losses.
Framing Rules to recognise economic employer/secondment
Company deputing personnel initially pays the salary/ other costs on
behalf of company to which personnel are deputed. This is reimbursed
later. Currently, these reimbursements are being taxed as fees for
services.
Recommend Clarification to provide that as long as the employee
reports and works directly for the Indian company and operationally
works under the 'control and supervision' of the Indian company,
payments made to the foreign company towards reimbursement of the
salary cost would be treated as 'pure reimbursement' and would not be
taxable under the Act.
Contributions to Approved Superannuation Fund
Employer’s contributions to Approved Superannuation Fund are not
taxable in the hands of an employee upto Rs. 1 lakh. Contributions in
Taxpayers position, is that the tax holiday under section 10A
is undertaking based and profits earned by a 10A unit need
to be computed first and granted tax deduction before setoff of losses incurred by other units in the current year or
losses incurred in the preceding years and brought forward
to current year are considered.
Bombay and Karnataka High Court have ruled in favour of
taxpayers
Section 72A of IT Act prescribes carry forward, set off of
accumulated loss and unabsorbed depreciation allowance
for amalgamation of a company. Further, industrial
undertaking is defined to include any undertaking engaged
in “manufacture of computer software” u/s 10A.
Taxation laws of a number of countries including Canada,
France, Germany, Japan, Netherlands, USA and UK provide
for carry backward of business losses for varying periods,
whereas in India, there are only carry forward provisions
(with limitation of eight years) and no carry back provisions.
This may result in ineffective utlisation of losses.
Such reimbursements made by Indian entity to an overseas
entity towards salary and other costs in relation to the
deputed employees is not towards any services provided by
the parent company, but are only for reimbursement of
salary costs.
Approved Superannuation Fund should be restored fully to
follow the EET policy framework. A retirement benefit
should not be subject to double taxation.
14 | P a g e
excess of Rs. 1 lakh are regarded as a perquisite and subject to tax in the
hands of the employee. Taxing the contributions in excess of Rs 1 lakh
and taxing it again at the time of payment of pensions is resulting in
double taxation.
Simplification of procedures
32.
32.1.
Perpetuating tax demands for meeting collection targets
Several orders resulting in unrealistic tax demands being passed to meet
revenue targets fixed for revenue officials.
Uncertainty for the assessees, impairing their financial
health and enhance cost of compliance
Recommend to reconsider performance parameters for revenue
officials to include indicators like quality of the assessment orders.
Suggestion to map internal processes and monitor performance
dashboard
No process to map internal processes and monitor
performance dashboard.
32.3.
Recommend to consider initiating electronic workflow methodologies
that aids internal reviews and process improvements.
Need for industry consultation to bring in new tax laws /amendments
in existing provisions
Introduction of tax laws or amendments without consultation leads to
interpretation and implementation issues.
Re-gearing the systems to meet the new information /
reporting requirements is challenging for taxpayers and
cannot be achieved without incurring substantial costs of
compliance.
32.4.
Recommend to include all stake holders in advance esp. the industry
bodies at the formative stage of the legislation, notification.
Lack of automated facilities
32.2.
No automatic generation of Form 27A
Form 27A prepared manually for submission to the TIN centres
Administrative inconvenience
32.4.1.
Recommend RPU programme be modified to generate Form 27A during
validation of e-TDS return data
No automated facility for deductor to check the correct PAN
32.4.2.
32.5.
Recommend a web site under NSDL to check PAN etc. of the
vendors/service providers
Simplification in online procedures
Deductor responsible for quoting correct PAN of the vendor
/service provider in the TDS return and depends on
information provided by the payee.
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32.5.1.
32.5.2.
32.5.3.
Improving navigating facilities in the Return Preparation Utility (RPU)
Process of preparing the correction e-TDS statement gets delayed in the
process of tracing vendor records to be corrected
Recommend RPU to be user friendly with searchable and copying
options
Auto computation of interest in TDS returns
RPU for preparing e-TDS return does not include mechanism to autocompute interest.
Recommend that RPU be upgraded to include mechanism for autocomputation of interest for delay in deduction/ delay in payment of TDS.
Form 16A not generated for deductees having no PAN
Recommend mechanism for deductors to generate Form 16A for
deductees without PAN and prescribe certain unique protocol like
XXXXX1234X etc.
Providing disclosures with online returns
Online format of ITR does not contain provision to include any
disclosures or notes in respect of the computation of income.
32.5.4.
Recommend that a separate sheet be inserted in the online form of the
income tax return for disclosure or note on the computation of income
filed by the assessee.
Issues in obtaining Tax residency certificate
Procedure laid down for securing TRC is adding to needless paperwork
without requiring application of mind in most cases.
32.5.5.
32.6.
Incorrect computation of interest could lead to issuance of
erroneous demand notices at times from the Revenue
requiring revision of e-TDS returns
Form 16A needs to be issued manually to avail tax credit,
especially for non-resident deductees
Additional disclosure of information is required to avoid
unnecessary scope for litigation for non-disclosing certain
facts on the computation of income and levy of penalty
under section 271(1)( c) of the Act.
Administrative difficulties
Recommend that TRC be issued based on the residential status declared
in the Return of Income for the latest previous year and assessees be
enabled to download the digitally signed Tax Residency Certificate in
Form 10FB from Income Tax website, with an information trigger to the
AO.
Issues in claiming TDS credit
Compliance error on the part of the Deductor
32.6.1.
Filing correction statement of e-TDS return takes substantial
efforts in terms tracing vendor details and effecting changes
Factors beyond the control of the deductee could lead to
litigation and associated inconvenience.
Recommend that tax returns to allow uploading a statement showing
TDS Credits, which are not entered in Form 26AS.
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32.6.2.
TDS credits following statutory re-organization
Mismatch between the assessee-company reporting the income and the
PAN of the company mentioned for TDS credits / challans for remitting
tax in case of reorganization due to difference in date of merger and
approval of the same by court.
Can result in a tax demand along with interest u/s 234A,
234B and 234C.
Recommend that assessee be allowed to transfer so much pre-paid
taxes as are relatable to the transferred business.
Credit for TDS for the purposes of Section 199
Inability of the deductee to file declaration under Rule 37BA results in
denial of tax credits that are relatable to the income assessable.
32.6.3.
Recommend that the person crediting TDS amount through information
/ data entered his tax return of income be enabled to forego that part of
the TDS to another deductee who is assessable for the income.
Difficulties while making correction in TDS Challan details
Difficulties being faced to get the TAN/PAN details rectified in the TDS
challan by the assessing officer.
Leads to interest, penalty and prosecution implications,
besides litigation costs.
32.6.4.
32.7.
32.7.1.
Recommend AO to have the appropriate authority to make necessary
corrections in the to reflect correct TDS deposit details and request for
correction in TAN/ PAN be resolved within 7 working days.
Changes in Authority of Advance Rulings
Single Bench of Authority of Advance Rulings (AAR)
The AAR is burdened with the back log of cases due to single bench at
New Delhi.
Recommend AAR to have multiple benches
Dissenting views of AAR on similar set of facts
32.7.2.
Causes delay in the pronouncement of rulings.
Creates confusion and uncertainty in the minds of the
taxpayer.
Recommend AAR to have a larger bench, the decision of which can be
binding on the other benches as well.
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32.8.
Miscellaneous Applications before ITAT
ITAT orders not implemented within a reasonable time and the time
available for filing a Miscellaneous Petition and for the ITAT to pass a
rectification order automatically shrinks.
Recommend ITAT Order be given effect by passing a consequential
order within six months.
32.9.
Issues with appeal procedure
32.9.1.
Priority in disposing appeals before Commissioner (Appeals)
Sequence of “hearings” and disposal of appeals influenced by the
Demand/ Refund position of the cases.
Recommend chronological hearing with effective timelines for passing
the order.
Delays in giving effect to Appellate Orders
32.9.2.
32.9.3.
32.9.4.
32.9.5.
32.10.
Recommend amendments to the IT Act to give effect to appellate order
within 60-90 days from the date of the receipt of the order
No time limit for refund of tax as a consequence of appellate order
favourable to the assesse
Recommend In line with sec 156 AO should also be bound to grant the
refund of tax within 10 days of receipt of the appellate order.
Penalty proceedings u/s 271(1) (c) despite favourable orders
Recommend issuance of advising the field officers that penalty
proceedings be initiated only in rare circumstances.
Prolonged litigation for common issues
Recommend procedural changes like issuance of a guidance note/
circular with close monitoring.
Issues in the functioning of Large Tax Payer Units (LTUs)
Administrative and operational difficulties in LTUs.
Recommend the issues are addressed and necessary guidance in the
conduct of proceedings to reinforce the objectives of tax facilitation as
set out in the LTU Charter be issued. Alternatively, it is recommended to
abolish the LTUs.
Not enough time to take recourse to Section 254 for the
rectification of any mistake apparent from record.
Increase in pending list of matters
Orders giving effect to the appellate decisions are generally
not passed without rigorous follow up by the assesse,
adding to the time and effort of the assesse.
This will also result in saving of interest costs for the
Revenue (under section 244A), which is material cost as has
been pointed out in the past by the standing committee of
the Parliament.
Administrative inconvenience
The objective of LTU initiative was to reduce tax compliance
cost, cut down drastically on the delays in especially in case
of refund/rebate claims etc., in practice the industry finds no
perceptible qualitative difference in the service delivery
from the LTU unit.
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32.11.1.
TDS related issues
Application for certificate for deduction at lower rate
Administrative concerns in electronic filing of Form 13 to obtain
certificate for lower/ non-deduction of TDS.
32.11.2.
Recommend procedural changes.
TDS from manpower supply
TDS implication on consideration for mere supply of labour under a
labour contract, where the supplier takes no obligations as to the risks
of services provided by the personnel deployed.
32.11.
32.11.3.
Recommend clarification that only section 194C is applicable to
payment of consideration for supply of manpower.
Frequent Issuance of TDS certificates under Form 16A
Form No. 16A required to be issued on a quarterly basis.
Recommend issue of TDS certificate be removed or made annual.
Lack of guidelines to reply to intimation u/s 156 of the Act
32.11.4.
32.11.5.
32.12.
Recommended procedural clarification like rectification application u/s
154 be allowed to be filed online and justification report detailing the
reasons for the demand be made available immediately after the
intimation.
PAN of the deductor not appearing in 26AS statement
The 26AS statement contains the details of Name and TAN of the
deductor. However the PAN of the deductor is not appearing in the
statement currently.
Recommended that 26AS statement should also incorporate the PAN of
the deductor.
Requirement of additional disclosure in personal Income Tax Return
Forms Disclosures for individuals holding asset/ signing authority in Bank
abroad in personal ITR.
Administrative inconvenience.
The supply is not in the nature of fees for technical services,
requiring deduction of tax at source.
With cash-flow challenges due to low margins, the viability
of such businesses would suffer, if TDS is deducted @ 10%
u/s 194J.
Leading to substantial administrative inconvenience while
adding to the compliance cost.
There are no guidelines/mechanism on the procedure to
reply to the intimations u/s 156.
It is difficult to match the TDS as per 26AS with the books of
the accounts of the companies where the customer details
are generally PAN based.
For listed companies in India, such a requirement may not
be necessary as these companies abide by various
compliance and audit requirements, corporate governance
norms etc.
Recommend exclusions for employees of listed companies with signing
authority to operate co bank account/s located abroad
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Issues with transfer of cases and change in tax jurisdictions
32.13.
32.14.
32.15.
Recommend that the request for a transfer of a case be disposed off
within 3 months. The assessee be allowed to update the information in
the PAN by entering the new AO in new jurisdiction along with his
notification of change of address.
Adjustment of refunds without prior intimation
Recommend that demand of one year should not be adjusted against
the refund due for another year without the prior intimation / consent
of the assessee.
Modes prescribed u/s 269SS, 269T for loans and deposits outdated
Section 269SS of the Act requires that acceptance of any loan or deposit
exceeding INR 20,000 by an account payee cheque or an account payee
bank draft. Non-compliance results in penalty
Recommend New modes like RTGS, NEFT, EFT, ECS, etc. be included as
valid modes of fund transfers under Section 269SS and 269T of the Act.
- Other than cash may be accepted as valid.
Delay in issue of refunds to foreign companies with no bank
account/presence in India
Foreign companies without permanent establishment in India and have
refunds are required to furnish Indian bank account
32.16.
32.17.
Recommend e-format of the income-tax return allow the foreign
companies to provide details of foreign bank accounts in the return
form. Since the cheques issued are in Indian Currency which are not
accepted by all the foreign banks, a facility of remitting refunds through
wire transfer be introduced.
Delay in processing of NIL/lower withholding applications
Delay in timely processing of applications filed under sections 195(2)
and 197 of the Act by the tax authority results in inordinate delay in
carrying out the commercial transactions
Administrative inconvenience as the assessee is confronted
by notices and even consequences of best judgment
assessment under the old jurisdiction.
The demands adjusted are not notified to the assessee. Even
in cases where the demands have been notified, the
applications for rectification of mistakes under section 154
are not acted on.
Other banking modes have not been included. These
provisions were introduced in the year 1984 were to curb
tax evasion. These provisions are now outdated.
Since the foreign companies have no bank accounts in India,
it is causing undue hardship to the companies at the time
the refunds are processed.
There is no time limit prescribed for disposal of application
u/s 195(2) and 197 of the Act.
Recommend suitable time limits for disposal of such applications, three months from the end of the month in which the application is
made
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Pre-budget Memo for IT/ITeS Industry, 201415
DIRECT TAX ISSUES
Policy Issues
7. INVESTMENT ALLOWANCE EXCLUDES IT PRODUCTS U/S 32AC
Section 32AC1 provides for an investment allowance for high value investments in plant and
machinery, qualified as “new asset”. However, “new asset” does not include any office appliances
including computers or computer software. Further, any plant and machinery installed in any office
premises is sought to be excluded from the scope of “new asset”.
Issue
It is well known that computers and computer software enhance efficiencies and have a critical role
in process monitoring, application engineering and quality checks. They are indispensable in the
current modern manufacturing environment. Certain computers and computer software, such as
servers, ERP systems etc., may be installed in any premises, are intended to enhance overall
operational efficiency. Hence, it is ironical that modern technological tools such as computer and
computer are excluded though they bring about enhanced efficiency in manufacture and production
of goods.
Recommendation
Computers and computer software should be regarded as “new asset” for the purposes of Section
32AC.
8. WEIGHTED DEDUCTION U/S 35(2AB) FOR IT SECTOR
Section 35(2AB) of the Act provides for weighted deduction (200%) of R&D expenditure (capital and
revenue) incurred by a company in the course of its business of manufacture or production of articles
or things, subject to certain conditions (registration of R&D centre, approval etc.). Department of
Scientific and Industrial Research (‘DSIR’) is the body recognized for registration and approval of R&D
facility.
Issue
Currently, there seems to be an ambiguity in the office of Department of Scientific and Industrial
Research (‘DSIR’) with respect to whether a company engaged in the business of development and
sale of software or providing IT services or ITES is eligible for weighted deduction on the R&D
expenditure incurred by it, as this benefit is for R&D expenditure incurred for manufacture or
production of articles, things, goods.
While the expression “scientific research” would clearly include development of in-house software
tools and products used in the delivery of software development services, the section states that the
company should be engaged in the business of bio-technology or in any business of manufacture or
production of article or thing. As a result, there is no clarity whether weighted deducted under section
35(2AB) of the Act will be allowed and the approval of the prescribed authority can be sought for
research and development facility for software tools / products used in software development for
clients by IT companies.
1
inserted in Finance Bill 2013
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The Board had notified “manufacture or production of computer software being an article or thing”
vide notification No. SO 452 dated February 8, 2000. This notification has since become redundant as
the scope of section 35(2AB) has been made generic with the amendment made in section 35(2AB) by
the Finance (No.2) Act, 2009 w.e.f. April 1, 2010.
With reference to provisions u/s 10A of the Act, tax deduction on income earned from export of
articles/ things or computer software manufactured or produced is permissible. Apart from the
computer programme recorded on a device, some other services/ products were considered as
computer software for claiming deduction u/s 10A of the Act, which were notified[1]. As per the
provisions of section 10A/ 10B read with the notification, development and sale of software, IT
services and ITES are considered as computer software for the purpose of claiming deduction u/s 10A
or 10B of the Act.
Given the above, it can be considered that an entity engaged in development and sale of software or
providing IT services/ ITES should be eligible for claiming weighted deduction u/s 35(2AB) of the Act.
Recommendation
Given the above, DSIR should be able to approve the R&D facilities of the companies engaged in
development and sale of software. Many countries worldwide provide R&D benefits to IT/ ITES
sector. Examples of such countries are Australia, Ireland etc.
Section 35(2)(AB) may be amended to include ‘Information technology” along with biotechnology so
that there is clarity that the weighted deduction would be available to an assessee engaged in
production of computer software and business of information technology so that all R&D activities
are enabled for weighted deduction.
9. NO SPECIFIC TAX DEDUCTION FOR CSR EXPENSE
Issue
Section 135 of new Companies Act, 2013 (Cos Act 2013) and Companies (Corporate Social
Responsibility Policy) Rules, 2014 (CSR rules) came into effect from 1 April 2014 requiring companies
which meet specified financial criteria (viz. net worth of Rs. 500 Cr or more, turnover of Rs. 1000 Cr
or more or net profit of Rs. 5 Cr or more during any financial year) to form CSR Committee,
formulate CSR policy and spend at least 2% of average net profits of three immediately preceding
years on CSR activities. Companies have to choose CSR activities from list of activities specified in
Schedule VII of Cos Act 2013, which, inter alia, includes contribution to Prime Minister’s National
Relief Fund.
In absence of specific tax provisions granting tax deduction for amount spent on CSR, there is
significant uncertainty and concern on tax treatment of such expenditure.
The Parliamentary Standing Committee on Finance had recommended that specific provisions be
inserted in Direct Taxes Code for CSR expenditure in backward regions and districts to encourage
more CSR activities in places where it is required. However, CBDT’s note accompanying draft of
Direct Taxes Code Bill 2013 published on 1 April 2014 states that “The CSR expenditure cannot be
allowed as a business deduction as it is an application of income. Allowing deduction for CSR
[1]
Notification: No. SO 890(E), dated 26-9-2000
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expenditure would imply that the government would be contributing one third of this expenditure
as revenue forgone.”
There are several judicial precedents which have upheld tax deductibility of CSR expenditure
incurred on voluntary basis by corporates in pre-Cos Act 2013 era. Also, CSR is viewed as charge
against profits under Cos Act 2013 which requires reflection of CSR expenditure in statement of
Profit & Loss under Part II of Schedule III (Refer para 5(1)(k) of General Instructions for preparation
of statement of profit and loss).
Recommendation
Denial of tax deduction on CSR expenditure incurred under statutory mandate will only result in
avoidable litigation between Tax Authorities and corporates. In the interests of avoiding litigation
and providing clarity on the issue, it is recommended that specific provisions be inserted in the
income tax law to grant deduction for CSR expenditure incurred pursuant to section 135 of Cos Act
2013. It is recommended that tax relief with respect to the CSR expenditure be introduced,
specifically covering critical areas like education, health, animal husbandry, water management,
women's empowerment, poverty alleviation and rural development.
Current ambiguity may encourage corporates to play safe by merely making contributions to Prime
Minister’s Relief Fund which ensures 100% tax deduction under s.80G of Income tax Act. Such trends
will defeat the very object of introducing CSR and will significantly impair the development of
meaningful CSR activity in the country.
10. MINIMUM ALTERNATIVE TAX (MAT)
High MAT rate
Issue
The rate of MAT is being raised steeply over the years as is clear from the table below:
Assessment Year
MAT
Rate
Effective MAT rate
(surcharge, education
cess)
Normal
tax rate
Effective normal rate
(surcharge, education
cess)
AY 2009 – 10
10.00%
11.22%
30.00%
33.66%
AY 2010 – 11
15.00%
17.00%
30.00%
33.99%
AY 2011 – 12
18.00%
19.93%
30.00%
33.22%
AY 2012 – 13
18.50%
20%
30%
32.45%
AY 2013- 14*
18.50%
20%
30%
32.45%
* Where the book profits of the company exceed Rs 10 crore the applicable surcharge will be 10% and thus effective
MAT would rise to 20.96 percent during the financial year 2013-14 as compared to 20.01 percent in FY 2012-13.
As is clear, rate of increase in the MAT rate is significantly higher than the rate of increase of the
normal rate of taxation. In fact, the MAT rate at nearly ⅔rd of the normal tax rate has skewed the
scheme of taxation of companies. Further, companies eligible to tax benefits under section 10A of
the Act have been made subject to MAT, creating unfavourable cash flow positions and constraining
planned investments.
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Though MAT credit can be carried forward and set-off within a period of 10 years, companies’ tax
benefits are already carrying substantial MAT credits accumulated in respect of past years, with
concerns on ability to avail the credit either under the Act.
There is also no clarity on the availability of the MAT credit to an amalgamated /resultant company,
in the event of an amalgamation of an entity which has a MAT credit.
Recommendation
The effective tax rate for the companies has been on the rise over the period. So, in order to ease
out the burden and provide some relief to the companies in respect of the taxes, MAT rate should be
reduced to 10%.
With a view to reduce litigation and protecting the intent of law that amalgamations are sought to
be tax neutral, appropriate changes be carried out in legislation indicating that the MAT credit would
be available in the case of an amalgamation as well.
MAT on Dividend Income from foreign companies only
Issue
At present the dividend received from the domestic companies are exempt from paying Tax as per
normal provisions of tax as well as Minimum Alternate Tax under section 115JB. As per the
provisions of section 115BBD dividend received from foreign companies is subject to concessional
tax rate of 16.2%. However such dividend is taxable as per the provisions of section 115JB.
Recommendation
Since the intention of the Finance Minister is to provide the concessional tax rate as per the normal
provisions of the act, the same should also be extended in respect of Minimum Alternate Tax by
providing the exemption from paying MAT on the dividend received from the foreign companies or
at least levying concessional MAT tax rate in line with the normal tax rate.
11. CASCADING EFFECT OF DDT ON DIVIDEND RECEIVED FROM FOREIGN
COMPANIES
Issue
As per amendment in section 115-O of the Act vide Finance Act 2013, dividend taxed as per Section
115BBD of the Act received by the Indian company from its foreign subsidiary (i.e. where equity
shareholding of the Indian company is more than 50 percent), then any dividend distribution by such
Indian Holding Company to its shareholders in the same financial year to the extent of such foreign
dividends will not be not liable to DDT.
As per Section 115BBD, dividend received from a specified foreign company i.e. a foreign company in
which the holding of the Indian company is more than 26 percent or more in the nominal value of
equity share capital, is subject to tax at a lower rate of 15 percent. However, as per provisions of
Section 115-O, where dividend is received from a foreign subsidiary (i.e. more than 50 percent
equity shareholding) which is subject to tax @ 15% under Section 115BBD, then such dividend will
be reduced from the DDT base on any further dividend distributed by the Indian company. In other
words, where the Indian company holds 26 percent to 50 percent in nominal value of the equity
share capital of the foreign company, then such dividend would not be excluded for computing DDT
base of the Indian parent.
Recommendations
25 | P a g e
The provisions of Section 115O should be changed such to the effect that the DDT base should be
reduced by dividend received from specified foreign company i.e. where the Indian company has
26% or more equity shareholding instead of dividend received from foreign subsidiary i.e. where the
Indian company holds more than 50% equity shareholding in the foreign company as provided in the
current provision. This would help in aligning with the 26% or more equity shareholding provided in
Section 115BBD and in removing the cascading effect of DDT in cases where the Indian company
holds 26 percent to 50 percent equity shares in the foreign company.
12. CONSOLIDATED TAX RETURN FILING
It may not always be possible or commercially expedient for companies headquartered in India to
establish overseas branches to carry-on business in foreign countries. It is customary for such
companies to establish subsidiaries in countries outside India with a view to meeting the local
regulatory and business requirements.
It is inevitable that substantive decisions in respect of such businesses will still be made in India.
Further, acquisition of foreign companies by Indian companies would automatically result in
subsequent substantive decisions being influenced by the headquarters in India. In such
circumstances, the legal form in which businesses are carried on in foreign countries would lead to
unintended adverse tax consequences in India.
A consolidation of tax return filing in India offers the following benefits:
a) Ease of compliance: The parent company incorporated in India will be able to enhance its
global footprint on the basis of a single business enterprise. The form in which businesses
are carried on will become irrelevant for tax purposes.
b) Anti-avoidance measure: The practice of establishing Regional Holding Companies in low tax
jurisdictions outside India with a view to defer the tax consequence on repatriation of
income into India will get eliminated. Controlled Foreign Corporation regulations, when
introduced, will be required only if an overseas entity is not included in the consolidated tax
filing.
c) Transfer pricing: As a single enterprise headquartered in India, there will not be any need
for determining arm’s length price for international transactions / specified domestic
transactions with subsidiaries included in the consolidated tax filing. It will eliminate the
cost of compliance with transfer pricing regulations, which is based on elaborate
documentation requirements. It will also save substantial administrative resources of the
Government engaged in transfer pricing assessments and resolution of disputes arising
therefrom.
d) Residency test: There will be no need to determine the residential status of an overseas
subsidiary included in the consolidated tax filing. Otherwise, there will have to be a
determination on whether the place of control and management of each of the overseas
subsidiaries is wholly in India (Section 6).
e) Revenue neutrality: Consolidated tax filing, as a policy initiative, is essentially revenue
neutral. The profits accruing in overseas subsidiaries will become liable to tax in India
concurrently in the year in which they are earned. If foreign taxes are paid on such profits,
granting of foreign tax credits in respect of such foreign taxes paid, will reduce the tax
payable in India.
Recommendations
The Income-tax Act should provide an option for filing a “consolidated tax return” for each financial
year. This could be achieved by providing that any company incorporated in India may opt to file a
consolidated tax return including all its direct and indirect subsidiaries in India and overseas with an
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effective shareholding in excess of 75% as at 31st March of each financial year. The single enterprise
filing the consolidated tax return will be regarded as the “assessee” under the Act.
A more beneficial provision would be to allow consolidation by the parent company incorporated in
India of only those direct or indirect subsidiaries (with an effective holding of 75% or more), which the
Indian parent company elects to disregard as a separate legal entity.
It may be provided that the option to file either; (i) full consolidated tax return or (ii) filing of
consolidated tax return by including only elected subsidiaries. It may be provided that once an option
is exercised to file a consolidated tax return under the Act, it shall remain irreversibly for a period of
atleast five years or blocks of five years. This will be an anti-avoidance measure.
13. ISSUES RELATED TO FOREIGN TAX CREDITS
Issue
India headquartered business enterprises endeavour to get a higher share in the global trade by
carrying on business in foreign countries, which inevitably result in international double taxation.
Since tax residents in India are liable to tax under the Act on their worldwide income, it is critical
that foreign tax credit is granted in a manner that if any tax is required to be paid in India on foreign
sourced incomes, it is after relieving the tax paid in foreign countries. However, significant difficulty
is experienced, particularly, when foreign sourced income is derived from provision of services. The
key issues are discussed below:
Issue
Foreign Tax Credits not on aggregate basis: Currently, foreign tax credit is granted with reference to
the provisions of the Double taxation Avoidance Agreements (DTAAs), which are bi-lateral. Thus,
foreign tax credits are claimed and granted following a country-by-country approach, which operate
inefficiently when foreign sourced income are derived from a number of countries.
Taxes paid to local jurisdictions - DTAAs are generally entered into with the central / federal
governments of foreign countries. In some countries local governments at the provincial/state, cities,
counties, which are not parties to the DTAAs, also levy taxes on income. The DTAA relief is denied by
tax authorities in India on the grounds that such local taxes are not covered within the scope of the
applicable tax treaty.
Carry-forward of excess Foreign Tax Credit ¬- The FTC is restricted to the tax liability of the assessee
in India, which maybe lower for reasons, which are not associated with the taxation of foreign
sourced income:
Working formula prescribed in Section 91 or the relevant tax treaty is not yielding optimal results by
way of granting FTC.
In case of loss for any assessment year.
Computation of income in the foreign countries is different from the computation of income under
the Act.
Time period within which tax credit be claimed/ allowed not defined
Conflict of residence, source, residence and source - International juridical double taxation occurs
when India or another country impose tax on the same taxpayer on the same income (or capital) and
maybe for the same period. Conflicts of either Residence or Source or Residence and Source are
causing international juridical double taxation.
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Others – In addition to the aforementioned issues, there are issues with regard to methods of
eliminating elimination of double taxation, denial of FTC credit and documentation requirements.
Recommendations
Policy changes be considered by introducing provisions for pooling of FTC. Domestic law should
incorporate provisions for aggregating all foreign sourced incomes and all foreign taxes paid and
granting FTC with reference to the proportion the aggregate foreign sourced income bears to the
aggregate of income liable to tax in India. As an anti-avoidance measure, the income and taxes may
be categorized into two baskets, viz.: (a) active income; and (b) passive income.
FTC be allowed for taxes on income levied by overseas provincial/local tax jurisdictions.
Assesses be allowed to carry forward the “unutilised” foreign tax credit for 5 years.
Place of incorporation be adopted as the sole basis of determining its residential status in India.
Alternatively, such treaties where there is no clear tie breaker test for determining residency, such
treaties should be suitably amended to incorporate such tests which clearly help in determining the
residency of the tax payer.
Sourcing rules be adopted in line with international principles.
Guidelines be issued so as to resolve administrative difficulties in computing the FTC.
14. RE-NEGOTIATION OF DOUBLE TAXATION AVOIDANCE AGREEMENTS
The DTAAs that India has entered over the years are on the basis that India is an importer of
technological services. India’s DTAAs with USA and UK were entered into almost 25 years back.
There is a deemed accrual of income in India, characterized under the DTAAs as fees for technical
services, which requires withholding of tax.
Issue
India has become the world’s largest exporter of ICT services. This dominant position is giving India
the benefit of being the most preferred destination for outsourcing technological services. The
Information Technology Enabled Services (ITeS) are almost wholly provided to overseas clients from
off-shore locations in India (Units in SEZs, STPI, EOUs and DTA units). Even in software development
and IT services, pre-dominant efforts are rendered to overseas clients from offshore locations in
India. The services provided from off-shore locations may be construed as creating a digital
presence in the foreign countries. Further, the consideration payable by the overseas clients for
these services may be construed as “fees for technical services”.
The DTAAs, being bi-lateral in nature, would have the same force when overseas clients pay for the
IT / ITES services received by them from exporters in India. Taxation of offshore services provided
from India, either as a direct levy or as a withholding in foreign countries, would have a base erosion
effect. Further, cost competitiveness of India’s export of technical services will decline significantly.
Recommendations
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The DTAAs, especially the developed countries, be re-negotiated so that only services which are
physically performed in a contracting state are liable to tax in that State. This will sub-serve the
objective of sustaining the status of the largest exporter of ICT services.
15. SOCIAL SECURITY AGREEMENTS
Issue
India has entered into a few SSAs. However, the exemptions envisaged in the SSAs are often denied
to international workers on account of the following:
(i)
(ii)
(iii)
employment is organized to meet local compliances;
Certificate of Coverage (“CoC”) issued by the competent authority (“EPFO”) is required
upfront with no time relaxation;
EPFO has not automated the issuance of CoC
Further, India has a very small network of SSAs. Even the SSAs which have been concluded have not
been brought into force by India though the treaty partner countries have notified the same. There is
no SSA with developed countries like USA and UK, where substantial social security costs are incurred
by IT companies in respect of deputation international workers from India.
Recommendations:
1.
2.
3.
4.
For SSAs which have been concluded, ensure implementation in “good faith” through
Protocol. The SSAs should not frustrated for the reason that local compliance requirements
are being met. Substance over Form should be the yardstick for granting exemption. The
time period for furnishing CoC should be reasonable – 6 months from the time SSA benefits
are availed in respect of each international worker.
Notify the dates of entry into force of 5 agreements already concluded.
Widen the network of SSAs: Cover developed countries like UK, USA.
EPFO should provide a framework where workers (proceed for exercising in a country with
India has entered into SSA) are themselves allowed to draw their COC (through electronic
downloads or otherwise), which will be valid, unless it is specifically cancelled by EPFO.
16. CONCERNS RELATED TO INCENTIVES STRUCTURE IN DTC BILL, 2013
The DTC substitutes profit-linked incentives with investment based incentives wherein capital
expenditure incurred for specified businesses will be allowed as a deductible expenditure. However,
certain profit-linked tax incentives under the Act are grandfathered in the DTC.
For Special Economic Zones
(i)
SEZ Developers and even units established in SEZ engaged in the business of manufacture or
production of article or things or providing of services would be eligible for tax incentives.
(ii) Grandfathering of profit-linked incentives under the Act to continue for SEZ developers notified
on or before 31 March 2015 and for SEZ units commencing operations on or before 31 March
2015.
(iii) Eligible expenditure for investment based tax incentive not to include:
a. Expenditure on purchase, lease or rental of land or land rights
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b. Negative profit for any financial year preceding the relevant financial year.
Issue
All profit-linked incentives are intended to be withdrawn. A key change in tax incentives provision is
introduction of investment based tax incentives for SEZ developers and SEZ units operational on or
after March 31, 2015 respectively. Investment based incentives as proposed in the DTCB will not be
very effective for IT/ITeS industry since the industry is not required to make any significant
investment in operating units.
Recommendation
(i) On phasing out of the profit linked incentives in SEZs, it is proposed that incentives linked to
employment creation and skill development incentives should be introduced under the DTC
(i.e. similar to the provisions of section 35CCD inserted under the Act vide Finance Act 2012 and
incentives should be provided based on employment creation, skill development,
entrepreneurship and innovation and market development.
(ii) The time frame for phasing out the SEZ incentives should be revised to allow 2 years for the
units to be operational in the SEZs. Therefore if the SEZ tax based incentives are phased out for
developers in 2015, then for SEZ units, it should be phased out in 2017, allowing them enough
time to set up and operate.
17. LIABILITIES DUE TO AMENDMENTS IN ROYALTY DEFINITION
It is well known that India is a large beneficiary of technological innovations in the field of
information technology and telecommunication. India is a large exporter of IT services, which rests
on the use of technological tools like software imported through internet, access to web-based
information and use of telecommunication links to develop and export data.
The scope of “royalty” defined in Section 9(1)(vi) of the Act was broadened by the Finance Act, 2012
by inserting Explanations 4, 5 and 6 and that too with retrospective effect from 1-6-1976.
Issues
With the sourcing rules expanded, almost payments to non-residents for availing technology are
liable to deduction of tax at source under Section 195 of the Act. The rate of taxation has also been
enhanced significantly from 10% to 25% 9Section 115A), which is further dependent on meeting
prescribed procedural requirements [Sections 206AA and 90(4)]. These procedural requirements
imposed on non-resident payees are resulting in denial of relief provided in the DTAAs. The burden
of taxation is invariably passed on to the importer in India either through net of tax arrangements or
in the pricing. These amendments have been inserted when import of technology-based goods /
services are already liable to customs duty / service tax. The current scheme of taxation for availing
the benefit of global technological innovations is not cost effective.
The tax liability for the past has fallen on the importers (payers) for failure to deduct tax at source.
There is also a disallowance u/s 40(a)(i)/(ia) on payments made to non-residents / other residents. In
many cases, the businesses may become unviable.
All software related transactions are sought to be covered within the scope of “royalty” by virtue of
insertion of Explanation 4, viz.:
(a)
(b)
(c)
Payment for software products and upgrades which are imported electronically through
the internet, which are liable to the levy of service tax;
Payment for software products and upgrades which are imported through customs
channels, which are liable to customs duty;
Annual maintenance fees and charges for ancillary services, where there is no supply of
“license” at all;
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(d)
Payment for equipment with embedded software. There are hardly any equipment
available today that have no software component.
Services provided as utility services by service providers are sought to be covered within the scope of
“royalty” by virtue of insertion of Explanations 5 and 6, viz.:
(a)
(b)
(c)
(d)
Payment for provision of basic telephone service;
Payment for provision of mobile telephone service;
Payment for transmission of data by telecommunication service providers;
Payment for a travel ticket by any mode of transport.
Recommendations
Explanations 4, 5 and 6 under clause (vi) of Section 9(1) be omitted altogether as these are clearly
against the definition of “Royalty” provided under Explanation 2 clause (iv) and as also understood
internationally.
Alternatively, the following clarifications may be issued:
Software when acquired under a license is for personal or business use of a copyrighted article where
there is no consideration paid for the transfer of the right to use the copyright. Only a payment made
for replication of software (other than the mere purpose of copying the software on a hardware) shall
be construed as “royalty”. The definition of “royalty” should be aligned to international
understanding.
Software embedded / etched in hardware is an integral part of sale of equipment and thus it is not to
be construed as “Royalty”. The consideration should not be bifurcated between hardware and
software, to tax software separately. Conditions of identifying embedded software maybe notified as:
a. Software is not available and/or usable stand-alone without the pre-designed equipment in
which it operates.
b. Cannot be purchased individually and is only available as a whole when embedded into the
hardware
c. The equipment with embedded software is billed as ‘goods’ with VAT/CST levied at the time
of sale or custom duty at the time of import.
Payment for basic services such as telephone / mobile charges and broadband / data communication
link / internet connectivity charges are outside the ambit of Royalty.
Payment for accessing information shall not be construed as “royalty” for the reason that the access
is through internet or other electronic means.
In “net of tax” arrangements, since the tax is to be borne by the person by whom the income is
payable, it may be clarified that there is no requirement for non-resident payee to furnish his PAN.
The rate of tax on “royalty” and “fees for technical services” may be restored to 10% under Section
115A.
A non-resident receiving consideration, who claims no tax liability in India on account of the
provisions of the DTAA, is required to obtain a Tax Residency Certificate (“TRC”) from the
Government of the country / specified territory in which he is resident [Section 90(4)]. Failure to
obtain TRC results in denial of relief under the DTAA, in which case royalty is liable to be taxed @
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25% [Section 115A]. Even though withholding of tax in India is towards the final tax liability in India
of the non-resident, the non-resident payee is required to furnish his PAN issued as per the
provisions of the Act to the deductor [Section 206AA]. If PAN is not so furnished, the rate of tax
deduction @ 20% is attracted and the non-resident is denied the relief under DTAA at the time of tax
deduction.
18. HIGH TAX RATE ON ROYALTY OR FEES FOR TECHNICAL SERVICES
The Finance Act, 2013 enhanced the rate of tax on “royalty” from 10% to 25% for non-residents.2.
DTAA rates will prevail of they are lower than 25%.
Issue
Most Indian companies pay the consideration by way of royalty and fees for technical services under
“net of taxes” arrangement i.e. taxes are borne by Indian entities. Also, payments to non-residents
for import of technology related services and products constitute a significant business cost for
exporters of IT services and technologically advanced products. The withholding tax rates were
reduced to 10% in 2005 to enable import and adaption of technology at a lower rate. The enhanced
rate of withholding tax will have the following impact:
1. In “net of tax” arrangement, the procurement cost of imported technology will increase
significantly since the burden of tax will be on the person making the payment of royalty and
fees for technical services.
2. Even with DTAA countries, if the recipient does not have a PAN number, then the higher rate of
25% would apply (due to section 206AA w.e.f. FY 2010-11). This is generally the case for import
of technology. After gross-up, rate would be 37%.
Such a high withholding tax rate would act as a deterrent for Indian companies wanting to access
latest technologies in order to grow their business and is against the development thrust expressed
by the Hon’ble Union Finance Minister.
Recommendation


The withholding tax rate under section 115A should be reduced to 10%, as earlier.
Suitable clarification be inserted in section 206AA that DTAA rates would apply, even if the
recipient does not have a PAN as long as tax is being withheld at the rate prescribed under the
tax treaty or section 115A.
19. DISALLOWANCE U/S 40(A)(I) HARSH COMPARED TO SECTION 40(A)(IA)
Issue
Section 40(a)(ia) of the Act allows the taxpayer extended time upto the due date of filing the Return
of Income for depositing the tax deducted at source whereas under Section 40(a)(i) of the Act,
dealing with specified payments to non-residents no such benefit is available.
Recommendation
The discrimination between payments to residents and non-residents regarding extended time line
for deposit of TDS be removed and even under Section 40(a)(i) of the Act the assessee should be
given the benefit of extended time for depositing the TDS on payments made to non-residents up to
the due date of filing the Return of Income.
2
Amendments in Section 115A
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20. SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE TO BE TREATED AS
INCOME
Issue
A new clause in section 56(2) introduced in 2012 introduced tax under the head “income from other
sources” for excess consideration received by a company (not being a company in which the public
are substantially interested) from a resident for issue of shares over the face value of such shares or
their fair market value. The company receiving the consideration will have to substantiate the fair
market value having regard to its facts and circumstances or adhere to the method for the
determination of fair market value as may be prescribed. The provision shall not apply where the
consideration for issue of shares is received by a venture capital undertaking from a venture capital
company or a venture capital fund.
This is against the very concept of income as it has the effect of taxing a capital receipt. The
investment itself is proposed to be taxed although it is to be taxed in the hands of the company
receiving the consideration.
This means an angel investor investing in a company is likely to be taxed. This overlooks critical
aspects of the angel funding model - not just the money but also mentoring for the enterprises. This
proposal will imply scope for negotiation of FMV and the associated premium, with the assessing
officer, and could lead to further corruption.
The definition of fair market value cannot possibly be determined by any valuer and certainly not by
a tax authority but only resides in the minds of the entrepreneur and the investor. Angel Investors
are critical for entrepreneurship in any country. They invest at a startup stage when there is almost
nothing on the ground, mostly an idea and the risk is extremely high and no finance is available from
recognized sources such as Banks, Venture Capital Funds, etc. They assist their investee companies
with strategic inputs, operational direction and access to their networks and help them to grow and
succeed. The typical investment in a venture rarely exceeds Rs. 10 crores, in contrast to VC Funds
who come in at a later stage, usually 6-8 months after the angels and invest typically Rs. 25 crores
and above in a venture.
Angels invest at an early stage where the concept of a fair market valuation is virtually impossible.
Angel investors are driven by the track record of the team, their personal view of the potential of the
company and the market and the space in which it operates, etc. and the valuation is less systematic
and driven more by gut feel and negotiation between the investor and the entrepreneur.
Therefore any method of valuation as may be prescribed is unlikely to address the requirements of
all businesses and this also adds to the concern.
By subjecting start-ups to obtain valuation reports for issue of shares to its investors, it is enhancing
cost of funds for a start-up, and adding uncertainty. Allowing a tax assessor’s view to be appealed
does not solve the issue as the basic problem remains and no angel investor would be inclined to
invest if there was a risk of such a tax as startups, which are starved for money have little ability to
pay the tax or appeal and litigate. Also, companies at this stage have little or no cash except that
invested by Angels and so, in effect, it becomes an investment tax on the tax paid income of the
Angel, making it more attractive for him to invest that money in other instruments such as mutual
funds, real estate, etc.
Recommendations
 Any investment made by a domestic investor (individual or corporate entity), be exempted
from this provision provided that the investment is below Rs. 5 crores and the company
does not collectively receive more than Rs. 10 crores within 6 months of such an investment.
 Investments by angel investors are often given in instalments (although the total amount is
agreed upfront through a duly signed agreement), based on the company’s performance and
33 | P a g e

meeting of milestones. Hence, the date of investment should be the date of the first
instalment.
Investor information: for the investment to be exempted, investors should provide KYC as
per norms to the investee company
21. TAXATION OF UNLISTED SHARES
Sale of shares in an unlisted company, held for more than 1 year, results in long-term capital gain.
Issue
The long-term capital gains from sale of unlisted shares in the hands of non-residents attracts a tax of
10% whereas it attracts a tax of 20% in the hands of residents. Thus, residents are more onerously
taxed than non-residents, though the nature of income is identical. This is causing domestic investors
being less competitively placed than international investors. There is a substantial private equity
interest emerging from high networth domestic investors, which will nurture and encourage
entrepreneurship.
Recommendations
The tax rate for all assessees in respect of long term capital gains from unlisted companies be
reduced to 10% to maintain parity.
22. ADDITIONAL INCOME TAX ON DISTRIBUTED INCOME FOR BUYBACK ON
UNLISTED SHARE
The Finance Act, 20133, levies a tax on “Distributed income of domestic company for buy back of
shares”. This tax on the distributed income by a company is treated as final payment of tax and no
further credit can be claimed by the company or by the shareholder.
Issue
a) The insertion of Chapter XII-DA, outside the purview of capital gains provisions, renders DTAAs
inapplicable. The shareholders to whom consideration for the buy-back of shares is paid are also
denied the benefit of tax credits. Therefore, the provisions results in double taxation.
b) A domestic company is required to pay an additional income tax at the rate of 20% on the amount
paid to its shareholders towards buyback of shares negating the principle that the shares covered
by Section 77A rank pari-passu.
c) A member holding the shares allotted to him by the company may transfer such shares and pay
capital gains tax. If the transferee shareholder tenders such shares for buy-back, there will be
another incidence of tax on the company under Chapter XII DA. Thus, there is a potential case for
double taxation within India.
d) Where ESOPs are issued by the Indian company at a discount followed by buy back, there would
be double taxation as the employees are liable to tax on the perquisite.
e) With the Finance Minister/Government focusing on attracting foreign investments, any scheme
of taxation that has the potential for double / multiple taxation is not justified.
3
introduced Chapter XII DA - Sections 115QA to 115QC
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f)
While this would largely impact MNCs/ foreign shareholders, it could act as a hindrance for free
movement of capital and earnings. More importantly, it raises a concern that domestic tax laws
in India are drifting away from internationally accepted principles.
Recommendations
a) Buy-back of shares is governed by the provisions of the Companies Act, 2013 and therefore there
are statutory limits upto which buy-back of shares could be pursued. Ordinarily, buy-back of
shares should be regarded as a “transfer” resulting in capital gains as provided in Section 46A of
the Act.
b) Chapter XII-DA [Sections 115QA to 115QC] is inserted as an anti-tax avoidance measure. Instead
of a blanket tax @ 20%, share buy-back by unlisted companies should be covered under GAAR to
be effective from April 1, 2016. Illustrations maybe given explaining the circumstances in which
share buy-back by unlisted companies would be construed as tax avoidance.
c) Even if Chapter XII-DA provisions are to be retained, the tax should be levied only on so much of
income as would represent an increase in the free reserves of the unlisted company during the
period of holding by the person tendering such shares for buy-back. This is to ensure that:
(i)
there is no double / multiple taxation within India.
(ii)
no tax is levied on the value which gets embedded in the cost of acquisition of the shares
and only the amount paid by the company for the buy-back of such shares in excess of the
cost of acquisition will be subject to the tax under Section 115QA.
(iii)
section 115QA does not apply where the unlisted company does not have distributable
surplus.
If the tax has to be imposed; a mechanism for credit of such tax should be notified as imposing a tax
overruling DTAAs as a final tax with no credit available is grossly unjustified and may cause undue
hardship to investors.
23. CLARIFICATIONS REQUIRED ON THE INDIRECT TRANSFER RULE IN SECTION 9
The Finance Act, 2012 amended section 9(1) (i), 2(14) and 2(47) retrospectively (w.e.f. April 1, 1962)
of the Income tax Act, 1961 (the “Act”). Explanation has been added to section 9(1)(i) to clarify that
the sites of capital assets being shares/interest in a foreign entity, directly or indirectly deriving value
substantially from assets located in India, shall be deemed to be in India.
For example, what is “substantial” (in the context of shares of overseas companies deriving
“substantial” value from assets located in India), exemptions for small holdings overseas, etc.? The
DTC 2013 released by the Government for public comments does address most of these aspects
after taking into account the recommendations of the Standing Committee of the Parliament.
Owing to lack of clarity currently in section 9 on many aspect relating to the indirect taxation rule,
foreign companies acquiring overseas companies (with subsidiaries in India) or undertaking overseas
mergers/acquisitions, etc. are unclear on providing for Indian taxes.
Recommendation
It is recommended that the CBDT issues necessary administrative guidelines with respect to taxation
under the indirect transfer rule. The recommendations provided below are consistent with Shome
Committee report:

The term ‘value’ should be defined.
Also, ‘substantially’ should be defined. Shome Committee report has defined it as a
threshold of 50 percent of the total value.
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




Exemption should be provided for transactions of transfer of shares of a foreign company
which are not intended or do not result in any change in control of such company. For
example, transfer of shares of a foreign company (deriving value substantially from assets
located in India) pursuant to a group restructuring exercise (including internal mergers and
reorganizations of entities, and contribution of shares) should be excluded.
In the case of foreign companies (deriving value substantially from assets located in India), a
“de minimus” threshold should be provided. Any transfers below this “de minimus”
threshold should not attract tax under the explanation.
In case of foreign companies (deriving value substantially from assets located in India) which
are listed in overseas stock exchanges, any transfer of the shares of such company on the
stock exchange should not attract tax in India.
A computation mechanism should also be prescribed where by tax should be levied only on
the proportion of assets in India.
Where capital gains arising to a non-resident on account of transfer of shares or interest in a
foreign company or entity are taxable under section 9(1)(i) of the Act and there is a DTAA
with country of residence of the non-resident, then such capital gains should not be taxable
in India unless provided so in DTAA.
Since the DTC 2013 has also indirectly brought in these clarifications after giving effect to the
Standing Committee’s recommendations, administrative clarifications by the CBDT ought to be
issued to clear ambiguity.
24. TAXABILITY OF IMMOVABLE PROPERTY
No provision for cases of property for inadequate consideration
The existing provisions of sub clause (b) of clause (vii) of sub-section (2) of section 56 of the Incometax Act, inter alia, does not cover a situation where the immovable property has been received by an
individual or HUF for inadequate consideration. The provisions are amended to provide that where
any immovable property is received for a consideration which is less than the stamp duty value of
the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property
as exceeds such consideration, shall be chargeable to tax in the hands of the individual or HUF as
income from other sources
Issue
There is a potential double taxation of the same income in the hands of transferor and transferee, as
the transferor will be liable to tax under section 50C. Further, on sale of such property by the current
purchaser, the “cost of acquisition” will be considered as the actual cost (not as per stamp valuation)
Recommendation
The provision should be amended to avoid the triple jeopardy
Issues related to Individual and joint Properties
Provisions introduced by way of Section 194-1A for the transferee to deduct tax at 1% on the
consideration paid or payable to the transferor of any immovable property (other than agricultural
land) where consideration is in excess of INR 5 million.
Issue
a) The transferee would be required to deduct tax every-time an instalment of the consideration is
paid to the transferor. The transferee will have to obtaining a Tax Deduction Account Number;
remit the tax and file a TDS returns. All these will result in serious compliance challenges for
individuals and for properties held jointly.
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b) Most instalments of the purchase consideration for any immovable property are paid by
securing loans from housing finance institutions. Such housing finance institutions would
disburse the instalments directly to the transferor, which means that no money is made
available to the transferee to remit the TDS amount. The financial institutions may not be in a
position to administer the TDS provisions on behalf of each borrower.
Recommendation
a) The Government may consider other effective measures to counter tax evasion by bringing to
tax net only such categories of assesses meeting conditions such as purchase of more than 2
properties in the year or where payments are made out of own sources and not from
borrowings etc.
b) Further, Government should clarify how the provision will be implemented in case of joint
ownership of property.
25. NON AVAILABILITY OF DEDUCTION FOR SKILL DEVELOPMENT EXPENSES (U/S
35CCD)
Section 35CCD inserted by the Finance Act, 2012 allows a deduction to the extent of one and one-half
times of expenditure incurred on any skill development project notified by the board. CBDT has issued
guidelines4 in this regard, prescribing the eligible company, procedure to get deduction, compliance
etc.
'Eligible company', is defined as a company engaged in the business of manufacturing any article or
thing (other than alcoholic spirits and tobacco products) or engaged in providing services specified in
the Table under Rule 6AAH.
Issue
There is no clarity if manufacturing of computer software is covered within the meaning of "article or
thing”, in order to be eligible for the weighted deduction. There have been disputes regarding whether
IT products are considered as “article or things”.
Specified services listed in Rule 6AAH does not contain IT or software related services. Obsolescence
in field of information technology is rapid and companies engaged in software development,
maintenance and ITeS incur substantial expenditure on its employees for skill development. Academic
institutions are not entirely equipped to impart skills in students in order to readily qualify for
productive employment in industry. Significant training initiatives are required to enable students
work on customers’ projects. Thus it is important that the deduction of skill development expenses is
available to the IT sector as well.
The procedures prescribed in Rules 6AAF to Rule 6AAH to qualify for weighted expenditure are
cumbersome. Apart from National Skill Development Agency, which is required to recommend the
skill development project, CBDT is required to issue notification in the prescribed form (Form No. 3CR)
to be published in the official gazette, subject to conditions as it deems fit.
Recommendations
Include “manufacture or production of computer software’ as an ‘article or thing’ for the purpose of
this section. This would ensure the availability of the deduction to the IT sector as well.
Include services in the field of information technology as “Specified Service”.
4
vide Rules 6AAF, 6AAG and 6AAH
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NSDA itself may be authorized to approve the skill development project as a single window agency.
The weighted deduction should be allowed for the projects approved by NSDA.
PROCEDURAL ISSUES
Pursuant to the constitution of the Committee on Taxation of Development Centres and IT Sector by
the Office of the Hon’ble Prime Minister (the Rangachary Committee), NASSCOM had made detailed
presentations to the said Committee regarding the litigation issues which have resulted in denial of
deductions under section 10A / 10B / 10AA. The Rangachary committee in its first report has tried
to address many of these concerns. While the notification of some is awaited some still needs
consideration.
26. DENIAL OF DEDUCTION UNDER SECTIONS 10A/10B/10AA
Income tax deductions are allowed to STPI, EOU and SEZ undertakings in the IT / ITES sector under
Sections 10A, 10B and 10AA of the Act respectively for exports of computer software and IT/ITES
services. The deductions under sections 10A and 10B were available to undertakings in STP and
EOUs only till 31 March 2011.
Below are some of the critical issues leading to denial of deduction by the revenue authorities which
needs consideration:
Restriction on the transfer of employees to claim deduction under Section 10AA
Issue
Section 10AA of the Income-tax Act, provides for deduction of profits derived by an undertaking,
being a Unit, located in Special Economic Zone, from export of articles or things or provision of
services.
Deduction u/s 10AA is available subject to following conditions
(i)
(ii)
(iii)
It manufactures or produces any article or thing or provides any service;
It is not formed by the splitting up, or the reconstruction, of a business already in existence
except in circumstances specified under section 33B of the Income-tax Act;
It is not formed by the transfer of a new business of machinery or plant previously used for
any purpose.
The Act further provides that deduction under section 10AA of the Act is only available to a SEZ unit
not formed by splitting up or reconstruction of business already in existence and which meets the
80: 20 rule on transfer of old plant and machinery to the new unit, i.e., old machinery should not be
more than 20% of the total value of machinery or plant used in the business. Identical conditions for
forming an undertaking are found section 10A and 10B.
Assessing authorities are questioning eligibility of deductions u/s 10AA alleging that with employees
who have worked in other undertakings are transferred to the new undertakings and thus the 80-20
rule as stipulated in the Act is being violated.
Imposition of such a condition is unreasonable:

The employees / workers employed in the business of the undertaking cannot be regarded as
machinery or plant to attract the condition u/s 10AA (4)(ii).

Previously used machinery or plant become redundant and are replaced, however creation of
employment cannot be met by retiring existing employees and recruiting new employees.
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
Any machinery or plant previously used in India is not regarded as new machinery or plant for
section 10AA (4)(ii). If the same is applied to employees, and it will lead to absurd results.
Meeting the main objectives of the SEZ scheme

Generation of employment opportunities: The creation of employment opportunities would be
met only when work is created. The Units set up in the Special Economic Zone secure export
orders for goods and services, which translate into creation of employment in the Units. Thus,
Section 10AA continuously promotes generation of work in the business of exports of the Units,
which is performed by workers.

The work generated by newly formed Units in their businesses, create employment
opportunities including for persons who are already employees or persons who have never
worked before for remuneration. In either case, the objective of creating employment
opportunities is met.

While services of employees would be regarded as dependent personnel services considering
the nature of engagement by the employer, the services could also be performed by
independent personnel as contractual service. Certain services may also be availed by an
eligible unit as technical services by paying a fee to a service provider. Imposing such conditions
will encourage short term contractual employees.
Recommendation
There is no condition with regard to workers in section 10AA (4) and no new condition should be
imposed. Section 80HH had a condition with regard to minimum number of workers not found in
section 10AA. However, section 80HH condition on minimum number of workers, has no
restriction on deployment of employees who had worked in other undertakings of the assesse.
Hence, imposing any condition on number of new employees is outside the purview of the current
law.
Further, imposition of such conditions can in the long terms encourage short term contractual
employment leading to undesirable hiring practices.
The Rangachary Committee recommendations in this regard are as follows:

As per the provisions of Section l0AA there is no requirement with regard to the employment of
new employees in the eligible undertaking in order to claim deduction.

Legislative changes are required to incorporate any provisions related to manpower.
Denial of Benefits on Delayed Realization of Export Sale Proceeds
Issue
Sub-section 3 of section 10A provides that the sale proceeds from exports should be received in or
brought into India within a period of six months from the end of the previous year or within such
further period as the competent authority may allow in this behalf. While applications for delayed
realization of the sale proceeds in convertible foreign exchange are made by the assessee, the
competent authority (RBI), without granting a positive approval in the case of large exporters,
implicitly allows the sale proceeds to be credited in the bank accounts maintained with authorized
dealers.
The assessing authorities deny the deduction under section 10A in respect of any delayed realization
of the sales proceeds in convertible foreign exchange for the reason that RBI has not specifically
allowed such delayed realization. The assessing authorities also refuse to reckon such sale proceeds
as part of the export turnover of the subsequent year in which it is realized.
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Recommendation
It may be clarified:
i.
That the export sale proceeds collected beyond the prescribed period shall also qualify as
part of “export turnover” where the approval sought is pending before the competent
authority or where the approval is implied on the basis that the sale proceeds having already
been realized and credited in the accounts with authorized dealers.
ii.
That tax, if any, withheld from export sale proceeds in any overseas jurisdiction amounts to
sale proceeds received in or brought into India.
Alternatively, the deduction under Section 10A and 10B be allowed in the year in which convertible
foreign exchange is received in or brought into India (on cash basis).
Denial to newly formed undertakings formed under same license u/s 10AA / 10A/ 10B
Issue
In order to meet the growth in business, an exporter sets up new undertakings in any software
technology park or electronic hardware technology park or special economic zone.
Deduction for a newly formed undertaking are being denied on the grounds that the newly formed
undertaking is the second / subsequent undertaking under the same STPI / EHTP license. The tax
authorities have inferred that these new undertakings are merely expansion of the existing
undertaking and therefore curtail the tax deduction to the new undertakings to the balance period
available for the existing undertaking.
The views of the Rangachary committee in this regard are as follows:
There is no presumption in law that only one undertaking can be set up in one STP/EHIP/SEZ or only
one undertaking can claim benefits under Sections 10A and 10AA or only one undertaking can
operate under one license.
The committee further recommends the following recourse:
•
Where the authorities have decided this issue in favour of the taxpayer, no further appeal
should be filed by Revenue.
•
Wherever Revenue have filed further appeal on this issue, the ground of appeal should be
withdrawn immediately
Recommendation
Recommendations of the Rangachary committee be implemented as incorporated in the circular
1/2013 under clause 7 para 2. Appeals wherever pending maybe withdrawn in accordance to the
circular.
Clarification on circular 1 / 2013 based on Rangachary Committee Recommendation
IT industries were facing denial of income tax deduction under Sec 10A & 10AA of the Income Tax
Act, 1961 by the Assessing authorities on income from the following revenues:



Onsite development of computer software does not qualify as exports hence not eligible
deduction u/s 10A/10AA.
Disallowance of 10A/10AA benefits considering some part of the business as “Deputation of
Technical Manpower (DTM) who are engaged in software development”.
Disallowance of 10AA benefits to SEZ units by treating those units as are formed by
reconstruction of business due to the fact that Master Services Agreement (MSA) are
entered by IT Companies prior to the commencement of SEZ units.
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Pursuant to representation made by IT Industry, CBDT has issued Circular no. 1/2013 dated
17.01.2013 clarifying all the above issues.
However, tax authorities at the assessment stage have not accepted this circular in the true spirit for
which it was intended. Their contention is that to claim the tax benefit, “development of software
should be pursuant to a contract between the client and the eligible unit” as per the circular No.
1/2013 dated 17.01.2013.
Company being a legal entity can have multiple units. These units may be DTA unit or STPI unit or
SEZ unit. In terms of the Rule 19(7) of the SEZ Rules, 2006, the SEZ units need not be separate legal
entities. Business contracts are entered into between the customer and the legal entity. The
contract specifically mentions that the legal entity would be responsible deliverables, risk and
rewards. All arbitration about the contract lies with the legal entity. Therefore, even if the legal
entity has multiple STPI/SEZ units, the contract will be entered between legal entity and customer.
The assessing authorities are not appreciating the fact that STPI/SEZ units do not have any legal
existence. The STPI/SEZ units are not separate legal entities and not capable of entering into
contract with the customer. The company being the legal entity is the contracting party in any
agreement with the customers and is responsible and accountable to the customer.
The circular can be implemented only in cases where a company has only one SEZ/STPI unit for its
entire operations. On the other hand companies having multiple units are not in a position to have
their SEZ/STPI units to contract with customers. Customers do not sign contracts with individual
units. Therefore Section 10A and 10AA benefits should not be denied to companies having multiple
units merely for the fact that contracts are entered into with the company and not with units. This is
a gross discrimination in providing tax benefits between companies which have a single SEZ/STPI
unit versus companies having multiple units.
Recommendation
Clarification should be issued to mention that as the contract may be entered into either between
clients and the STPI/SEZ units or with the legal entity. The tax benefit should not be denied to the
STPI/SEZ units as long as it is a new business and the cost and revenue are recorded in the respective
SEZ/STPI units in which the work is executed.
Inconsistency in the definition of “export turnover”/ “total turnover”
Issue
Settled Karnataka High Court Judgment on Definition of “Export Turnover”/”Total Turnover” –
Exclusions from “export turnover” should also be excluded from “total turnover”.
The expression “export turnover” is defined in clause (iv) of the Explanation 2 under section 10A of
the Act and the same is extracted hereunder:
“export turnover” means the consideration in respect of export by the undertaking of
articles or things or computer software received or brought into, India by the
assessee in convertible foreign exchange in accordance with sub-section (3), but does
not include freight, telecommunication charges or insurance attributable to the
delivery of the articles or things or computer software outside India or expenses, if
any, incurred in foreign exchange in providing the technical services outside India”.
Assessing authorities are determining “export turnover” by making the following adjustments:
a) Expenses incurred in foreign exchange and accounted by debiting the Profit and Loss
Account have to be reduced from the amount of consideration received by the assessee in
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convertible foreign exchange for the export of computer software by the undertaking
(accounted in the Profit and Loss Account as revenues). There is a presumption that the
expenses are embedded in the revenues and therefore have to be excluded; and
b) For computing the deduction as per the working formula in section 10A(4), the expenses
which are excluded from export turnover are not required to be reduced from the total
turnover.
Recommendations to the Rangachary Committee were made in this regard and following is the view
of the committee:
The Committee is of the view that the formula for computation of the profits eligible for
deduction under Sections 10A, 10B and 10AA cannot be altered without explicit provision in
law in such a manner so as to artificially reduce such eligible profits. Therefore, the
Committee recommends that whenever certain items of expenses or receipts are removed
from the export turnover, the some item of expenses or receipts should also be removed from
the total turnover to ensure parity between the numerator and the denominator.
Recommendation
i.
“Total turnover” should ensure harmony between the numerator and denominator in the
mathematical formula used to arrive at the export profits eligible for the deduction.
Reliance should be placed on the HC judgements passed in this regard.
Recommendations of the Rangachary committee be notified and implemented.
ii.
iii.
27. SET-OFF OF LOSSES, UNABSORBED DEPRECIATION u/s 10A/10B/10AA
Issue
The provision of Section 10A/10B/10AA offers a ‘deduction’ or an ‘exemption’. Prevailing
ambiguities are
Particulars
Losses of an eligible
undertaking
Question / Ambiguity
Contention of Assessee
a) Whether the loss of an eligible unit
Yes. There is no restriction in
in any year are required to be set- Section 10A, which restricts setoff against the business profits
off as per the provisions of
derived by the assessee from
Section 70 and 71.
other sources?
b) Whether such loss of an eligible
No. Section 10A has no provision
unit, which are already set-off similar to sub-section 5 of section
against the business profits derived 80-IA, wherein the eligible
by the assessee, should be
undertaking is regarded as the
notionally carried forward and
reduced from the profits derived by only source of income of the
the undertaking in a subsequent assessee during the previous
year falling within the tax holiday year.
period?
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Losses from other a) Whether the business losses
No. Section 10A is a provision which
incurred
from
other
sources
should
sources
allows the deduction at source
first be set-off against the profits and therefore the provisions of
derived by an eligible unit and the
section 70 and 71 are to be
deduction is to computed with
reference to the reduced profit applied after allowing the
deduction.
after set-off?
b) Whether brought-forward business
No. Section 10A is a provision which
losses from other sources should allows the deduction at source
be set-off against the profits and therefore the provisions of
derived by an eligible unit and the
section 72 are to be applied after
deduction is to computed with
reference to the reduced profit allowing the deduction
after set-off?
CBDT had issued a Circular No.7 dated 16 July, 2013 which clarified that losses of ineligible units, if
any, should be set off against the profits of the eligible units before allowing deduction under
10A/10B/10AA. Taxpayers position, contrary to revenue authorities, have been that the tax holiday
envisaged under section 10A/10B/10AA is undertaking based and accordingly, the profits earned by
a eligible unit need to be computed first and granted tax deduction before set-off of losses incurred
by other units in the current year or losses incurred in the preceding years and brought forward to
current year are considered. Delhi, Bombay and Karnataka High Court have ruled in favour of
taxpayers
Recommendation
Government should issue necessary circulars/ clarifications to ensure relief under Section 10A takes
precedence over setting off losses against the 10A/10B/10AA unit’s income. This is as per the spirit
of the legislation and various court judgment.
28. SET OFF OF UNABSORBED DEPRECIATION, ACCUMULATED LOSS IN MERGER
Section 72A of IT Act prescribes carry forward and set off of accumulated loss and unabsorbed
depreciation allowance in case of an amalgamation of a company owning an industrial undertaking
with another company. The term industrial undertaking is defined to mean any undertaking which is
engaged in the “manufacture of computer software”.
Issue
The term “computer software” has not been defined in section 72A. Section 10A has defined
“computer software” to include:
(i) Any programme recorded on any disc, tape, perforated media or other information storage
device; or
(ii) Many ITeS services notified by the Board.
Recommendation
A clarification shall be inserted effective from inception that the definition of “manufacturing of
computer software” under section 10A shall be read into section 72A to avoid any litigation.
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29. CARRY BACKWARD OF BUSINESS LOSSES TO BE ALLOWED
Issue
Taxation laws of a number of countries including Canada, France, Germany, Japan, Netherlands, USA
and UK provide for carry backward of business losses for varying periods, whereas in India, there are
only carry forward provisions (with limitation of eight years) and no carry back provisions. This may
result in ineffective utlisation of losses.
Recommendation
Internationally, business losses are allowed to carry backward. Therefore, in line with best
international practice, it would be appropriate to introduce the same in India to allow carry
backward of business losses. Further, limit of eight years should be removed to allow the carry
forward of business losses infinitely. Alternatively, a scheme may be formulated to provide an
option to the company to create Rehabilitation Reserve in any given year to be utilized in the year it
suffers losses. It is suggested that such reserve should be allowed as a deduction in computing the
total income of the company.
30. FRAMING RULES TO RECOGNIZE ECONOMIC EMPLOYER/SECONDMENT
It is customary for any multi-national enterprise to conclude the contract of employment with its
employees in the country in which MNE is headquartered or in countries in which the employees are
domiciled. However, the employee may be required to exercise employment in another entity
incorporated in another country. The deputation of employees is called “secondment” where the
risks and rewards of employment are borne by the entity to which the employees are seconded, which
becomes the economic employer. The remuneration to employees may be paid wholly or partly by
such economic employer, which undertakes to discharge all pay-roll related obligations including tax
deduction at source. Alternatively, the remuneration of the seconded employees may continue to be
paid by the formal / legal employer with whom the contracts of employment were originally
concluded. The payment of remuneration by the formal / legal employer is to extend the retirement
benefits which are based on continuity of employment and expediency. The employee will continue
retain a lien with the formal / legal employer for continuing employment after the secondment
arrangement is terminated.
Issue
There have been many disputes in the recent past, which have unsettled the understanding of the
concept of economic employer and arrangement of secondment. A contract of service (master –
servant in an employment) is often misconstrued as a contract for service (between contracting
parties to provide personnel or services through its employees). The Supreme Court rulings under the
labour laws provide a clear understanding that “employer” and “employee” arise out of masterservant relationship and it is not dependent on who pays the remuneration. There is also a clear
understanding that even a managerial personnel like the managing director is an employee. Since the
tax consequences for a contract for service and a contract of service are materially different, MNEs
are confronted by the uncertainty.
Recommendations
The terms “employer” and “employee” have not been defined in the Act. These terms may be defined
based on judicial rulings in labour and tax laws. An employer may be defined as under (Section --- of
the Direct Tax Code Bill):
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“Employee” may be defined as the person, being an individual, who is required to provide services
under the supervision and control of the employer and where the risks and rewards of the services
rendered by the person are borne by the employer.
31. CONTRIBUTIONS TO SUPERANNUATION FUND
Employer’s contributions to Approved Superannuation Fund are not taxable in the hands of an
employee upto Rs. 1 lakh. Contributions in excess of Rs. 1 lakh are regarded as a perquisite and subject
to tax in the hands of the employee. Employer is required to deduct tax at source on the contribution
in excess of Rs 1 lakh and remit the TDS to the Government within the due dates.
Issue
The tax policy with regard to contributions to Approved Superannuation Fund was EET i.e. (i) Exempt
the contributions; (ii) Exempt the accrual; and (iii) Tax the pay-outs.
Taxing the contributions in excess of Rs 1 lakh and taxing it again at the time of payment of pensions
is resulting in double taxation. Commutation / withdrawal of 1/3rd of the accumulations / corpus at
the time of retirement in a tax exempt manner, is not addressing the aspect of double taxation of the
same income. An employee may opt not to commute, in which case, there is certainly a double
taxation of the same income.
Recommendations
Approved Superannuation Fund should be restored fully to follow the EET policy framework. A
retirement benefit should not be subject to double taxation.
32. SIMPLIFICATION OF PROCEDURES
Most of these suggestions have also been shared with the TARC, and we await a quick
implementation
Perpetuating tax demands for meeting collection targets
Issue
In the recent years, several orders resulting in unrealistic tax demands have been passed. It is
understood that such demands are often raised to meet revenue targets fixed for revenue officials.
These orders, generally fail to get sustained at the higher appellate forums. However, these orders
enhance the uncertainty for the assessees, impair their financial health and enhance their cost of
compliance. A vicious circle sets in as the incumbent income-tax authorities, who are required to
implement the appellate orders, tend to pass new orders for pending assessments with higher
demands to collect afresh or adjust the refunds granted against demands raised and collected in the
earlier years. In many cases, the collections against disputed demands are never actually refunded
as adjustments are carried out against fresh demands, pursuant to section 245 of the Income-tax
Act.
Recommendation
Section 245 of the Income Tax Act should be implemented only after the income-tax authority
mentioned in Section 245 seek prior approval of his higher authority, which shall be granted only
after recording the reasons. Refunds arising to an assessee shall not be automatically adjusted
against pending demands.
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Government should reconsider the performance parameters for revenue officials and include
indicators like the quality of the assessment orders, sustainability in appellate forums etc.
Suggestion to map internal processes and monitor performance dashboard
Recommendation
The Department should consider initiating electronic workflow methodologies that aids internal
reviews and beings about process improvements. A dashboard maybe designed for effective
performance monitoring at its offices and the Department at large e.g. number of pending cases of
rectification, legacy refund cases etc.
The Indian IT industry has globally excelled in business process mapping and engineering projects
and can work closely with the Department for development of such a system. This is essential to
ensure uniform and time-bound implementation while minimizing discretion for officers. It will
further limit litigations as the rationale behind particular decisions including judgments maybe
informed.
Need for industry consultation to bring in new tax laws /amendments in existing
provisions
Issue
Introduction of tax laws or amendments to the existing tax laws, issuance of new circulars,
notifications, Forms etc. lead to interpretation and implementation issues. Substantial compliance
costs are incurred only to get a correct understanding of the legislative intent and it involves
consultations with legal counsels, representations through Trade bodies, pursuing litigation etc.
Quite often new procedures / Forms applicable to a financial year are issued either at the fag-end of
financial year or even after the end of the financial year. Re-gearing the systems to meet the new
information / reporting requirements is often challenging for taxpayers and cannot be achieved
without incurring substantial costs of compliance.
Recommendation
All stake holders should be involved in advance esp. the industry bodies at the formative stage of the
legislation, notification is required. At the time of introducing the changes, following best practices
should be made mandatory:
a.
The draft of proposed changes etc. should be made available in the public domain for a
reasonable duration for seeking comments, suggestions.
b.
Procedural changes like changes in the Forms should be notified well in advance. Any changes
in the information called for should be deferred to the next financial year.
c.
An estimate of the compliance cost in terms of time and money should be published.
Lack of automated facilities
32.4.1 No automatic generation of Form 27A
Issue
Form 27A is required to be prepared manually for submission to the TIN Centers. The Return
Preparation Utility (RPU) developed by NSDL for preparing statement of e-TDS Return does not
generate Form No. 27A while validating the e-TDS return data.
Recommendation
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The RPU programme be modified to include generation of Form 27A at the time of validating e-TDS
return data.
32.4.2 No automated facility for deductor to check the correct PAN
Issue
Currently, there is no website to validate the PAN of any person. The person responsible for
deducting tax at source has to rely on the information / document provided by the payee. Any error
by the deductee in providing the information or by the deductor in recording the information in the
TDS returns would result in denial of TDS credits.
Recommendation
Since PAN is the critical link for all TDS related matters, a free website under NSDL should be
accessible for verification of PAN either on random as well as bulk basis.
Simplification in online procedures
32.5.1 Improving Navigating facilities in the RPU
Issue
Filing of correction statement of e-TDS return takes substantial efforts and time in terms of tracing
vendor / payee details and effecting changes.
Recommendation
The Return Preparation Utility (RPU) should be more user friendly for searching and navigating
deductee related information. It should be equipped with all the features of a spreadsheet,
especially when the deductee information runs into several thousand records. Changes can be easily
made if the utility allows sorting the data based on vendor and the copy and paste (“cut and paste”)
command is allowed to multiple records.
32.5.2 Auto computation of interest in TDS returns
Issue
Unlike the RPU for preparing income-tax return, the RPU for preparing e-TDS return does not include
mechanism to auto-compute interest under section 201(1A)(i)/ 201(1A)(ii) and fee under
section 234E of the Act.
Incorrect computation of interest under section 201(1A)(i)/ 201(1A)(ii) and fee under section 234E of
the Act by the assessee could lead to issuance of erroneous demand notices at times from the
Revenue requiring revision of e-TDS returns.
Recommendation
The RPU should be upgraded to include mechanism for auto-computation of interest for delay in
deduction/ delay in payment of TDS by taking into account the date of deduction/ payment of TDS
entered into by the deductor in the e-TDS return.
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32.5.3 Form 16A not generated for deductees having no PAN
Issue
All deductors are now mandatorily required to generate and issue Form 16A from TIN-NSDL website
as per circular 03/2011 dated 13-May-2011 and 01/2012 dated 09-Apr-2012. Form No. 16A is being
generated based on the PAN numbers of the deductees. For a deductee without PAN, no certificates
in Form 16A are generated. The information in Form 16A is provided manually, especially to nonresident deductees.
Recommendation
Mechanism to enable deductors to generate Form No. 16A electronically for deductees without PAN
may be prescribed based on certain unique protocol like XXXXX1234X etc. This will also enable to
Department to evaluate whether any penalty is leviable on the deductee as per Section 272B of the
Act.
32.5.4 Providing disclosures with online returns
Issue
In the case of electronic filing of returns, there is no scope for making disclosures of material facts
until a notice u/s 143(2) is issued by the Assessing Officer to make further enquiries. Assessee with a
view to maintain transparency would prefer to make disclosures out of abundant caution or by way
of clarification, which is currently not feasible in the electronic filing of returns. This exposes the
assessees to risks of re-assessment under section 147 and also levy of penalty u/s 271(1)(c) of the
Act.
Recommendation
Provision to append notes or explanatory memorandum should be made to enable a higher level of
disclosure of material facts or positions. This will avoid unnecessary scope for litigation for nondisclosure of material facts and levy of penalty under section 271(1)(c) of the Act.
32.5.5 Issues in obtaining Tax residency certificate
Issue
The Finance Act, 2012 had provided that in order to be eligible to claim relief under the tax treaty, a
taxpayer is required to produce a Tax Residency Certificate (TRC) issued by the Government of the
respective country or the specified territory in which such taxpayer is resident, containing certain
prescribed particulars. There is no prescribed particulars in the TR now and the taxpayer can obtain
the TRC as issued by the foreign authorities. The Finance Act, 2013 also introduced a provision to
clarify that the taxpayer shall furnish such other information or document as may be prescribed.
The CBDT subsequently issued a notification amending the Income-tax Rules, 1962 (the Rules)
prescribing the additional information required to be furnished by non-residents along with the TRC.
The details are required to be furnished in Form 10F
•The details specified in the CBDT notification could increase the compliance requirements and
issues for deductors. For example, the CBDT notification requires a valid TRC to specify the period
for which the certificate is valid. Therefore, while the deductor would like to obtain the TRC at the
time of the transaction/ depositing the tax (to ensure that the payee is eligible for the tax treaty
benefits), the payee would typically apply for a TRC only after the relevant year.
• Depending on the jurisdiction, obtaining a TRC certificate may also be a time consuming/difficult
process. TRC requirement increases the administrative difficulty for non-residents, especially from
the perspective of non-residents having very few/ limited transactions connected to India.
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•As per the new Rule an Indian resident who wishes to obtain TRC from Indian income tax
authorities, is required to make an application in Form No. 10FA to the tax officer, containing
prescribed details. However, no time limit for issue of TRC is specified from the date of application
by the assessee. Furthermore, the issue of TRC in Form No. 10FB has been left to the discretion of
satisfaction of the tax officer, without providing a substantive definition for satisfaction in this regard
Recommendation
•At assessment stage, it is anyway incumbent upon the AO to ascertain complete details before
allowing tax treaty benefits. The TRC format specified in the CBDT notification could increase the
compliance requirements and issues for deductors. For example, the CBDT notification requires a
valid TRC to specify the period for which the certificate is valid. Therefore, while the deductor would
like to obtain the TRC at the time of the transaction/deducting the tax (to ensure that the payee is
eligible for the tax treaty benefits), it would pose a hardship to the payee to obtain a TRC before the
end of the relevant financial year.
•The requirement to obtain TRC may be made mandatory only for cases where the total payment to
a non-resident exceeds Rs. 1 crore in a financial year. This would mitigate hardship in respect of
small payments.
•Requirement to furnish TRC should be cast upon the payee at the time of the assessment of the
payee and the deductor/ payer should not be made liable to collect TRC from the payee at the time
of withholding tax.
•The time limit to issue TRC in Form 10FB should be specified and in case the tax officer refuses to
issue a TRC, the application of the assessee should be disposed by the tax officer by passing a
speaking order and clearly specifying the reasons for rejecting the application of assessee.
•It has not been specified as to who shall sign Form 10F. Hence, it should be clarified who is
authorized to sign the form. For example, it may be specified that persons prescribed under Section
140 of the Act for the purpose of signing the return of income would be eligible to sign the said
form.
Issues in claiming TDS credit
32.6.1 Compliance error on the part of Deductor
Issue
Form 26AS provides the credit for a financial year based on TDS returns filed by various deductors.
There is a substantial dependency on the factors that are beyond the control of the deductee, such
as
a) The deductor may not file TDS returns;
b) The deductor may enter an erroneous PAN number, which could result in denial of credit the
deductee. In some cases, the TDS credit may be shown against a person who is not the
deductee;
c) The deductor may mention a financial year that is different from the financial year in which the
deductee reports the income.
Granting a lower TDS credit to the deductee is also resulting in the deductee filing an appeal to
secure the TDS claim, which results in additional litigations costs for the appellant, which is
avoidable. The appellate authorities / tax administration is also stressed for granting proper TDS
credit, particularly for large assessees.
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Recommendation
The tax return of income filed electronically by an assessee under section 139 should allow the
following:
a) Upload a statement showing TDS Credits, which are not entered in Form 26AS. These would
cover cases where physical TDS certificates have been issued or even cases there is evidence
that TDS has been deducted. This will enable the assessee to avail proper credit and also
provide information to the Department on cases where there is a failure to remit TDS and file
TDS returns by the deductor.
b) Upload a Statement foregoing the whole or part of TDS credits for one financial year and assign
it to another financial year in which the income is assessable as per the method of accounting
followed by the assessee. If the TDS is assigned to an earlier financial year, the Assessing Officer
should within 3 months grant the TDS credit along with interest u/s 244A.
32.6.2 TDS credits following statutory re-organization
Issue
TDS credits and tax payments are recognized based on the PAN number. In case of a
re-organization (merger or de-merger), while the appointed date of merger or de-merger is
mentioned in the scheme of arrangement, the scheme itself comes into effect only when the Court
sanctions it.
On the approval of re-organization by the Court, there will be a mismatch between the assesseecompany reporting the income and the PAN of the company mentioned for TDS credits / challans for
remitting tax. This can result in AO assessing the transferee company by raising a tax demand along
with interest u/s 234A, 234B and 234C whereas the AO assessing the transferor company will be
obliged to grant a refund, which the assessee is not entitled to under the law. The situation is not
avoided even if the same AO is assessing both the transferor and the transferee companies.
Recommendation
In order to avoid such mismatch, which is currently remaining unresolved even after concluding
scrutiny assessments of transferor and transferee companies, assessees should be allowed to
transfer so much pre-paid taxes as are relatable to the transferred business. This is tax neutral as
the sum total of all pre-paid taxes of the transferor and transferee companies will not alter at all.
32.6.3 Credit for TDS for the purposes of Section 199
Issue
Rule 37BA5 envisages a situation where the whole or part of the income on which TDS is deducted is
assessable in the hands of a person other than the deductee. In such cases, the deductee is required
to file a declaration with the deductor so that the TDS is effected under the PAN of the other
deductee who is assessable for the income. An inability of the deductee to file the required
declaration results in denial of tax credits that are relatable to the income assessable in the hands of
another person.
Recommendation
The person who has been credited the TDS amount through information / data entered his tax
return of income should be enabled to forego that part of the TDS to another deductee who is
assessable for the income. The particulars which are required for the purposes of Rule 37BA may be
5
Inserted w.e.f. 1-4-2009
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incorporated by an assessee while filing his tax return and thereby ensure complete transparency as
to the person who is required to report the income and claim the TDS credit.
32.6.4 Difficulties while making correction in TDS Challan details
Issue
Challan Correction Mechanism provides that the deductor can request the AO, authorized under the
departmental OLTAS application to make correction in challan data in bonafide cases, to enable
credit of the taxes paid.
Practical difficulties have been faced to get the TAN/PAN details rectified in the TDS challan by the
assessing officer. Further, since the OLTAS system does not reflect correct TDS details, tax demand
notices/ TDS default notices are issued by the tax department to the concerned deductee or the
deductor, as the case may be, resulting in interest, penalty and prosecution implications, besides
litigation costs.
Recommendation
The assessing officer should have the appropriate authority to make necessary corrections in the
OLTAS systems to reflect correct TDS deposit details. Further, request for correction in TAN/ PAN
details in e-payment challans should be resolved within 7 working days from the date of filing
request application with the AO.
Changes in Authority of Advance Rulings
32.7.1 Single Bench of Authority of Advance Rulings (AAR)
Issue
The AAR is burdened with the back log of cases as there is only one bench constituted at New Delhi.
This causes delay in the pronouncement of rulings of the AAR thereby causing hardship to the
taxpayers owing to the inability to conclude cross-border transactions.
Recommendation
The AAR should have multiple benches, at least one in each of the metros, which would significantly
spread the workload for timely rendition of rulings to the taxpayers in respect of the prospective
transactions.
32.7.2 Dissenting views of AAR on similar set of facts
Issue
There have been instances wherein the AAR has rendered dissenting views on similar set of facts in
similar transactions. This creates confusion and uncertainty in the minds of the taxpayer. Despite of
the fact that a ruling of the AAR is binding only on the taxpayer seeking it, the same is cited by
Revenue as well as assessees as a persuasive value.
Recommendation
The AAR can adopt the model of other judicial forums of having a larger bench, the decision of which
can be binding on the other benches as well.
Miscellaneous Applications before ITAT
Issue
Section 254 of the Act provides that the ITAT, at any time within four years from the date of order
passed by it, can rectify any mistake apparent from record, if the same is brought to its notice by the
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tax payer or the Assessing Officer. However, very often the ITAT orders are not implemented within
a reasonable time and the time available for filing a Miscellaneous Petition and for the ITAT to pass a
rectification order automatically shrinks from 4 years. Further, ITAT itself is not required to pass the
rectification order in a time bound manner.
Recommendation
The ITAT Order should be given effect by passing a consequential order within six months. It will
leave enough time to take recourse to Section 254 for the rectification of any mistake apparent from
record.
Issues with appeal procedure
32.9.1 Priority in disposing appeals before Commissioner (Appeals)
Issue
It has been the industry’s understanding that the sequence of “hearings” and disposal of appeals
before the Commissioner of Income Tax (Appeals) is influenced by the Demand/ Refund position of
the cases. Without even specific prayers from the concerned appellants, preference is normally
given to appeals in which relief from high demands are sought and the appeals which would result in
higher refunds to appellants are normally kept aside, increasing the “pending” list of matters to be
heard.
Recommendation
The appeals should be heard and disposed off by applying the following criteria:
(a) On the basis of chronology i.e. the dates on which appeals are filed and not on the basis of
demand or refund position.
(b) High demand cases may be heard out of turn, when a specific prayer is made by the appellant
and the Commissioner (Appeals) admits the prayer.
(c) Exception to chronology may be made to appeals involving substantially identical issues, which
may be heard out of turn so that a batch of appeals gets disposed off simultaneously.
(d) There must also be an administratively set timeline within which appellate orders passed by the
CIT(A).
(e) It is found that the CIT(A) infrastructure is wholly inadequate to dispose off appeals in a time
bound manner. After the necessary infrastructure is put in place, CIT(A)’s may be urged to
record the reasons for delayed disposal beyond 1 year.
32.9.2 Delays in giving effect to Appellate Orders
Orders giving effect to the appellate decisions are generally not passed without rigorous follow-up
by the assessees. This adds to the time and effort of the assessee and the assessee does not get the
benefit of the reliefs granted in appellate orders.
Recommendation
An administrative instruction should be issued by CBDT to the effect that “consequential orders to
appellate orders should passed within 60 to 90 days from the date of the receipt of the orders”. If
there are remand issues to be dealt with, the AO should grant an opportunity to the assessee, and
unless the delay is attributable to assessee, the consequential order should be passed within the
outer limit of 60 to 90 days.
32.9.3 No time limit for refund of tax as a consequence of appellate order favourable to the assesse
Recommendation
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In line with sec 156 which makes it mandatory for the assesse to make a payment of the taxes due
within 30 days of the receipt of the notice of demand, the AO should also be bound to grant the
refund of tax within 10 days of receipt of the appellate order by him. This will also result in saving of
interest costs for the Revenue (under section 244A), which is material cost as has been pointed out
in the past by the standing committee of the Parliament.
32.9.4 Penalty proceedings u/s 271(1) (c) despite favourable orders
Issue
There is an increasing tendency of mechanically initiating penalty proceedings u/s 271(1)(c) in
respect of all additions made in the assessment order. Such proceedings are often initiated despite
orders of the higher judicial forums supporting the assessees’ contentions.
Recommendation

Guidelines should be issued advising the field officers that penalty proceedings should be
initiated only in rare circumstances involving deliberate suppression of material facts that have a
bearing on the assessment proceedings etc.

Interpretation issues or tax positions supported by decision of any appeal forum from ITAT and
above, should be kept outside the ambit of the penalty proceedings.
32.9.5 Prolonged litigation for common issues
Issue
A lot of time, money and efforts of the assessees and Department are expended in litigating various
issues, which are generally common in nature within industry segments or classes of assessees.
Recommendation
1. In case of any industry specific issue or any other common contentious issue, a guidance note/
circular should be provided by the CBDT just like the circular on FBT, the handbook on negative
list service tax regime, Circular to give to the effect to Rangachary Committee report etc. which
would clarify the Department’s view on such issues. Such views of the Department should be
administered uniformly. Even in cases where the issue is pending before an appellate authority,
the stand of the Revenue as per the said Circular should be accepted by the Appellate forum.
This will bring clarity and certainty in respect of various issues and reduce litigation.
2. The Department should withdraw its appeals once an issue is clarified through a Circular. The
Chief Commissioners should monitor such cases.
Issues in the functioning of Large Tax Payer Units (LTUs)
Issue
The Large Tax Payer Unit (LTU) was established with a view to make available a single window tax
facilitation centre to large tax payers. The objective of this initiative was to reduce tax compliance
cost, cut down drastically on the delays in especially in case of refund/rebate claims etc., in practice
the industry finds no perceptible qualitative difference in the service delivery from the LTU unit.
While some of the initiatives like having a dedicated ‘Client Executive’ for each large tax payer to act
as a single-point-of-contact (across all taxes) and address all administration related matters is
appreciated, some of the aspects discussed below related to conduct of proceedings of the large tax
payer, are not in line with the LTU Charter.
Some of the difficulties faced by LTUs are summarized below:

Audits carried out in an aggressive manner, with unreasonable requests such as:
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o
Large volume of information /details within a short time frame
o
Investigative nature of verification of details /information submitted
o
Information/details called for without due regard to the volume of transactions involved
and without appreciation of the systems /processes involved /followed
o
Non acceptance of scanned/electronic documents and insistence on submission of hard
copies
o
Insistence on written confirmations from third parties and non-reliance on third party
invoices
o
Insistence on bank account statements and requests for one-to-one correlation for all
expenses in ledgers
o
Insistence on TDS certificates issued to third parties to confirm payments being made,

Appellate orders giving effect to a refund order for the assesse not given priority while demand
notices are raised on assessees at the earliest

Requests for adjournments on matters seen as an approach of delaying proceedings
Recommendation
It is recommended that the above issues are addressed and necessary guidance is issued in the
conduct of proceedings to reinforce the objectives of tax facilitation as set out in the LTU Charter.
Alternatively, it is recommended to abolish the LTUs if there cannot be any qualitative difference in
the service delivery by the LTUs.
TDS related issues
32.11.1 Application for certificate for deduction at lower rate
Issue
Section 197 contains the provisions of issuance of certificate for lower / non-deduction of tax at
source. The application to the Assessing Officer is now required to be made electronically in Form
13. Following concerns are noted in this process:
1. The application requires the details of each payee along with their PAN, TAN and address. This is
not practical and is opposed to business requirements. The certificate cannot be used for a
payee not mentioned in the application.
2. The certificate is not issued in many cases. Even in cases where the certificate is issued, it is
delayed and comes into force only from the latter half of the financial year. Such delays affect
the viability of businesses as working capital gets blocked in higher TDS.
3. The application is invariably rejected if it is made by an assessee having taxable income and
paying advance tax.
Recommendation
a) An application for certificate u/s 197 should be disposed off within 30 days from the date of
application. This is in line with CBDT instructions to adhere to timeline of 30 days for disposal of
application u/s 197 of the Act. Considering that the certificate u/s 197 is important from cash
flow perspective of the assessee and is valid only for a particular year, it is important that the
strict adherence shall be made to CBDT instruction by the tax authorities at the ground level so
as to ensure speedy disposal of the applications.
b) If the certificate is issued during a financial year, it should cover transactions which have not
already suffered TDS during the FY.
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c) Wherever business losses / unabsorbed depreciation is large in comparison to the total income
of assessee seeking the certificate u/s 197, a certificate may be issued with a validity for the (3)
three financial years. This remove the working capital difficulties experienced by loss incurring
entities.
d) The Certificate u/s 197 should be issued to any assessee covered by the provisions of section
115JB and whose total income as per the normal computation is either a loss or nil.
e) Board should consider dispensing off details of the individual payees in the application.
Certificate should be a blanket certificate applicable to all payees of the assessee.
f)
Deductor should be in a position to check the exempt status online in the NSDL website to
prevent excess deduction.
g) The Certificate under section 197 should be allowed in cases of large assessee if the assessee
undertakes to pay advance tax to cover the tax liability for the year. This will reduce needless
paperwork without impacting the revenue collections. Board may also prescribe other
conditions like producing a Bank guarantee, pre-deposit of certain % at the beginning of the FY
in an interest bearing escrow account etc.,
32.11.2 TDS from manpower supply
Issue
Payment made for supply of labour under a labour contract, where the supplier takes no obligations
as to the risks of services provided by the personnel deployed, is not in the nature of fees for
technical services, requiring deduction of tax at source u/s 194J. However, the same is subject to tax
at source @ 10% u/s 194J in some locations.
Assessees who are in the business of supply of manpower earn only a small margin since substantial
part of the consideration is paid to the personnel as salary. With cash-flow challenges, the viability
of such businesses would suffer, if TDS is deducted @ 10% u/s 194J.
Recommendation
It may be clarified that section 194C is applicable to payment of consideration for supply of
manpower.
32.11.3 Frequent Issuance of TDS certificates under Form 16A
Issue
As per Income Tax (6th Amendment) Rules, 2010 (Notification No. 41 /2010 dated 31-May-2010),
Form No. 16A is required to be issued on a quarterly basis. This leads to substantial administrative
inconvenience, while adding to the compliance cost.
Since, the TDS certificates have to be downloaded from the NSDL database (into which the TDS
returns are filed), the need for again issuing TDS certificates is redundant and meets only an empty
formality. Further, the Certificate would be required only at the time the payee files his tax return
for the assessment year.
Recommendation

Since all records are being made available at the NSDL TIN website by the deductor, the
requirement of issuance of TDS certificates itself may be discontinued with.
55 | P a g e

Alternatively, digitally signed Form 16A can be auto-emailed from NSDL site on a quarterly basis
to the registered email ID of the deductee maintained in the site.

Alternatively the deductor should be allowed to issue T.D.S. certificates in Form 16A on an
annual basis.
32.11.4 Lack of guidelines to reply to intimation u/s 156 of the Act
Issue
The TDS Central Processing Cell (CPC),having its set-up at Vaishali, Ghaziabad, UP, have launched its
website named “TRACES” The TDS CPC is required to process returns as per section 200A of the
Income Tax Act, 1961. Intimations u/s 200A are received by the deductor via e-mail which are
required to be treated as demand notices u/s 156 of the Act.
There are no guidelines/mechanism on the procedure to reply to the intimations u/s 156. Further,
the demand continues to appear in TRACES even after a letter of rectification
u/s 154 is filed physically and through e-mail with CPC, Ghaziabad.
Recommendation

The rectification application u/s 154 should be allowed to be filed online with the requisite
supporting attachments. A similar facility is available for seeking rectification of intimations
issued u/s 143(1) (a) and this can be extended to TDS Central Processing Cell as well.

The justification report detailing the reasons for the demand is not made available immediately
after the intimation. The same be made available immediately and personnel at CPC/ TDS officer
of the assessees should be in a position to help the assessees rectify the issues.
32.11.5 PAN of the deductor not appearing in 26AS statement
Issue
The 26AS statement contains the details of Name and TAN of the deductor. This addresses the
aspect that a deductor could have more than one TAN. However, difficulty is experienced in
reconciling / matching the TDS entries in 26AS with the books of the accounts of the deductor where
customer details are generally PAN based.
Recommendation
The 26AS statement should also incorporate the PAN of the deductor so that the same can be
reviewed and matched with the books of accounts of the deductor.
Requirement of additional disclosure in personal Income Tax Return Forms
Issue
The CBDT vide notification No. 14/2012, Dated: March 28, 2012 has prescribed the Income Tax
Return forms - ITR 2/3-for the F.Y.2011-12 wherein a resident individual is required to make
additional disclosures if he/she holds any assets located outside India or has a signing authority in a
bank account located outside India.
Normally, a company operates its bank account through its employees who are given the signing
authority. The above notification requires even an individual-employee who has a signing authority
to operate company’s bank account located outside India, to disclose certain prescribed information
pertaining to the overseas account in his/her personal Income Tax Return to be filed for the
A.Y.2012-13. The requirement may be an unintended consequence of the said notification but is
causing hardships to individuals who have signing authority as employees.
56 | P a g e
Recommendation
In order to avoid hardship to such employees, it is recommended that an exclusion may please be
carved out in respect of employees of the listed companies who have signing authority on behalf of
companies to operate companies’ bank account/s located outside India.
Issues with transfer of cases and change in tax jurisdictions
Issue
Assessees who re-locate to another city make a request for transfer of cases to the new
jurisdictional officer. If the assessees do not hear from the Department within a reasonable period,
there is a presumption that the request for transfer has been acceded to and the assessees proceed
to file the tax returns under the new jurisdiction. In many cases, scrutiny assessments are also
completed by the assessing officers in the new jurisdiction.
With electronic filing of tax return, the jurisdiction gets allocated to the AO who issued the PAN. The
assessees are confronted by notices and even consequences of best judgment assessment under the
old jurisdiction.
Recommendation
The request for a transfer of a case should be disposed off within 3 months failing which it should be
construed that the request has been granted. The assessee should also be allowed to update the
information in the PAN by entering the new AO in new jurisdiction along with his notification of
change of address.
Adjustment of refunds without prior intimation
Issue
The Central Processing Cell is granting refunds claimed in the tax returns by assessees. In certain
cases, the refund amount granted is lower than the refund amount claimed as some past demands
on the assessee, as notified from the records by the Assessing Officers, are adjusted. The demands
as adjusted are not even notified or known to the assessee. Even in cases where the demands have
been notified, the applications for rectification of mistakes under section 154 are not acted on.
Recommendation
a) Demand of one year should not be adjusted against the refund due for another year without the
prior intimation / consent of the assessee.
b) Where applications for rectification of mistakes apparent from record have been filed and they
are not disposed off within six months, there must be a legal presumption that the applications
have been allowed.
Modes prescribed under section 269SS, 269T for loans and deposits outdated
Issue
Section 269SS of the Act requires that acceptance of any loan or deposit exceeding INR 20,000 by an
account payee cheque or an account payee bank draft. Section 269T of the Act requires the
repayment of any loan or deposit exceeding INR 20,000 by an account payee cheque or an account
payee bank draft. Non-compliance with these section could result in penalty levy under
section 271D/E to the extent of the loan/deposit amount involved. Other banking modes have not
been included. The above provisions introduced in the year 1984 were to curb tax evasion. These
provisions are now outdated.
57 | P a g e
Recommendation
New modes like RTGS, NEFT, EFT, ECS, etc. be included as valid modes of fund transfers under
Section 269SS and 269T of the Act. In the alternative, any mode other than cash may be accepted as
valid.
Delay in issue of refunds to foreign companies with no bank account/presence in India
Issue
Foreign companies that have no permanent establishment in India and have refunds arising in India
are compulsorily required to furnish Indian bank account details in the income-tax return. Since the
foreign companies have no bank accounts in India, it is causing undue hardship to the companies at
the time the refunds are processed.
Recommendation
It is suggested that the e-format of the income-tax return form be re-devised to allow the foreign
companies to provide details of foreign bank accounts in the return form. In this connection, it is
also suggested that, since the cheques issued by the Income-tax department are denominated in
Indian Currency which are not accepted by all the foreign banks, a facility of remitting refunds
through wire transfer be introduced.
Delay in processing of NIL/lower withholding applications
Issue
Delay in timely processing of applications filed under sections 195(2) and 197 of the Act by the tax
authority results in inordinate delay in carrying out the commercial transactions. There is no time
limit prescribed for disposal of application u/s 195(2) and 197 of the Act.
Recommendation
It is necessary to provide suitable time limits for disposal of such applications, with in- built
accountability and strict adherence. The order should be passed within three months from the end
of the month in which the application is made.
58 | P a g e
ANNEXURE I:
SOFTWARE TRANSACTIONS AND ROYALTY – GLOBAL EXAMPLES
1.
United States
The Internal Revenue Service (“IRS”) issued regulations6 on the tax treatment of transactions
involving computer programs. These regulations classify transfer of a computer program as
follows:

as a transfer of a copyright, which may be a sale or a license;

as a transfer of a copyrighted article, which may be a sale or a lease;

as the performance of services; or

as the provision of computer software "know-how", which would be treated as a form of
sale or license; and

as transactions consisting of more than one category of the above
A transfer of a computer program is classified as a transfer of a copyright right if, as a result of
the transaction, a person acquires any one or more of the rights described as under:
(i)
The right to make copies of the computer program for purposes of distribution to the
public by sale or other transfer of ownership, or by rental, lease or lending;
(ii)
The right to prepare derivative computer programs based upon the copyrighted
computer program;
(iii)
The right to make a public performance of the computer program; Or
(iv)
The right to publicly display the computer program.
In case none of the rights as described above are acquired, the transaction is classified as
transfer of copyrighted article. While characterizing the transactions as stated above, these
regulations recognize the “de-minimus” rule also referred as “incidental principle” requiring the
core nature of the income in a transaction be given primacy and such income not be segregated
and classified differently.
The transfer of software embedded in equipment cannot be said to impart the acquirer any of
the four rights as mentioned above and also following the principle of “de-minimus”, such
transaction could be regarded as transfer of copyrighted article and income thereof liable to tax
as business income and not royalty income.
2.
PHILLIPINES
The Bureau of Internal Revenue of Philippines issued a Circular No. RMC 44-2005, which
provides guidance on the taxation of software payments. This also deals with transfer of
‘copyrighted articles’ (i.e.an article incorporating the software can be perceived, reproduced
etc.).
In case of transfer of copyrighted articles, the Circular clarifies that if the transferee acquires a
copy of a software but does not acquire any of the rights set out below (or only acquires a de
minimus grant of such rights), the payments will constitute business income and not royalties.
The rights relevant for the purposes of this analysis are:
6
Classification of Certain Transactions involving Computer Programs – 26 CFR Parts 1 and 602 [TD 8785] issued
by the IRS, Department of the Treasury (Section 1.861-18)
59 | P a g e
(i)
The right to make copies of the software for purposes of distribution to the public by
sale or other transfer of ownership, or by rental, lease or lending.
(ii)
The right to prepare derivative computer programs based upon the copyrighted
software.
(iii)
The right to make a public performance of the software.
(iv)
The right to publicly display the computer program.
(v)
Any other rights of the copyright owner, the exercise of which by another without his
authority shall constitute infringement of such copyright.
Unless the above rights are transferred, a mere transfer of machinery or equipment in which
software is embedded should not constitute ‘royalty’.
3.
KOREA
With effect from 27 September 1989, the Ministry of Finance has issued a ruling (Kukjo 22611022) clarifying that the payment for know-how imported into Korea through software is
subject to corporate income tax or individual income tax in Korea. In September 1993 the tax
administration further clarified this issue in a guideline concerning the administration of
taxation on imported software, as well as in detailed guidelines concerning the administration
of taxation on payments for imported software.
There are no specific provisions concerning the taxation of payments for imported software,
although the taxation of such payments is covered by provisions concerning the taxation of
royalty income. However, in cases where software is imported as bundled with hardware, and
the payment for the software alone is not separable from the price, the payments are excluded
from withholding tax
4.
GERMANY
The term “royalties” is defined7 as payments of any kind received as a consideration for the use
of or right to use, any copyright of literary, artistic or scientific work, including cinematograph
films and software, any patent, trade mark, design or model, plan, secret, formula or process,
or for information concerning industrial, commercial or scientific experience; payments for the
use of, or the right to use, industrial, commercial or scientific equipment shall be regarded as
royalties.
There is no legal definition of the term “software”, however, the same is generally categorized
as standard software (i.e. software necessary to carry out the tasks required by the user –
internet browsers, e-mail programmes, videogames, etc.) and individual software (i.e. software
specifically programmed according to the needs of a client who order the same or which can be
individually adapted to the needs of a specific client).
The distribution of standard software for the permanent use of the buyer (online or by physical
trade) generally is not regarded as transfer of the use or right to use software, but as alienation.
In absence of a permanent establishment, the income is not subject to German tax liability8.
The distribution of individual software for the permanent use of the buyer (online or by
physical trade) is regarded as the alienation of a right. In general, a differentiation is made
between the concept of royalties and the alienation of rights or assets9.
7
Under section 50(g)(3) No 4b of the Income Tax Law (Einkommensteuergestz)
OFD Munchen (Regional Finance Office of Munich) regulation of May 28, 1998
9
Country Survey – Germany – Information as of December 19, 2005 by International Bureau of Fiscal
Documentation (“IBFD”)
8
60 | P a g e
Therefore, despite of the fact that the royalty definition includes the “use of or the right to use
software”; the alienation of software rights which grants a permanent use to the buyer is not
regarded as royalty income. Considering this, sale of embedded software at most grants the
buyer a permanent use of the software (albeit along with the hardware with which it was sold,
and considering that there is no standalone use of such embedded software), the same could
be regarded as an alienation and not use of or right to use software, so as to constitute
royalties.
5.
AUSTRALIA
The term “royalty” is defined under sub-section 6(1) of the Income-tax Assessment Act 1936 is
defined to include the amount paid for use of or the right to use any copyright, patent, design
or model, plan, secret formula or process, trademark or other like property or right.
In Taxation Ruling TR 93/12, the Australian Taxation Office (“ATO”) treats a payment for a
license to reproduce or modify the computer program in a manner that would, without such
licence, constitute an infringement of copyright, as royalty. This Ruling excludes the following
payments from the ambit of royalty:
(a)
payments for the transfer of all rights relating to copyright in the program;
(b)
payments for the granting of a license which allows only simple use of the software,
i.e. allows the end-user to run the software on a single computer or a computer
network but does not otherwise permit any use of the copyright in the program;
(c)
Proceeds from a sale of goods. Receipts for software are proceeds of a sale of goods
where: (i) hardware and software are sold in an integrated form without being priced
separately, i.e. without being unbundled; or (ii) property in tangible goods, such as a
disk, diskette or magnetic tape on which software is embodied, is transferred to the
consumer; and
(d)
Payments for the provision of services in the modification or creation of software.
Therefore, it again appears that the transfer of software embedded in equipment/device is sale
of a copy of computer program which is not regarded royalty income10.
6.
JAPAN
Digital distribution of shrink-wrapped software characterized as a sale of goods, to the extent
that there is a fixed price for perpetual license of shrink-wrapped software's source-code,
notwithstanding that the legal form is a license. Payments for the sale of goods are not subject
to withholding tax.
However, the Japanese tax enforcement, in order to determine the income characterization,
take into account the factual situation and legal implications of the payments must be carefully
analysed. Unless the end user is granted a certain right to download and modify certain
software's source-code for its use, the payments would be classified as business income, in
which case no withholding tax is imposed.
7.
SINGAPORE
The Inland Revenue Authority of Singapore follows a right based approach for characterizing
software payments and payments for use of or the right to use information and digitalized
goods. The payments that do not involve the transfer of the “copyright rights” embedded in
10
Toby Constructions Products Pty Ltd v. Computer Bar Sales Pty Ltd (1983) 2 NSWLR 48
61 | P a g e
the goods are considered as payments for “copyrighted articles” instead of “copyrights”. While
the payments for copyrighted articles are characterized as business income and not royalties.
A transaction is defined to involve a copyright right if the payer is allowed to commercially
exploit the copyright. The term “commercially exploit” means to be able to:
a. reproduce, modify or adapt and distribute the software, information or digitized goods; or
b. Prepare derivative works based on the copyrighted software program, information or
digitized goods for distribution. A copyrighted article is said to be transferred if the rights
are limited to those necessary to enable the payer to operate the software or to use the
information or digitized goods, for personal consumption or for use within his business
operations.
Considering this, in case of embedded software since the acquirer does not obtain a right to
commercially exploit the rights, but merely uses the software for the purposes of operating the
hardware (which incidentally would also be the primary transaction), the said transfer is
regarded as transfer of copyrighted article and hence, characterized as business income.
8.
NEW ZEALAND
If a copy of a computer program embodied in any carrying medium is integrated or
incorporated into any other product (for example, computer hardware or a motor vehicle), and
sold together without any accompanying copyright rights, the transaction is also treated as a
sale of a copyrighted article with the proceeds being business income (such software is often
referred to as integrated or bundled software). (Interpretation guideline issued by Adjudication
& Rulings on 14/10/03)
9.
URUGUAY
In Uruguay, following the 2007 tax reform, an issue has arises as to the taxability in Uruguay of
software incorporated into telecommunications equipment that was assigned in perpetuity to
the user.
In this respect, the Uruguayan tax authorities (DGI) have held that, where the
telecommunication equipment is purchased simultaneously and in a single transaction together
with the software necessary to run it and given the underlying reality of the business, basic
software is part of the cost of the equipment. As such, the transaction relates to the sale of
property and does not give rise to Uruguayan-source income. The same treatment should be
applied to other basic commercialized software, as described in the preceding paragraph, i.e.
purchased together with the equipment and necessary for its performance, assigned in
perpetuity, that forms part of other types of goods, such as software included in automobiles,
computers or certain household appliances
10. CHILE
Under Chilean law, no withholding tax is imposed in payments for software if certain
requirements are met. ‘Basic Programs’ are not taxed. These are defined as those which are
indispensable for the functioning of the equipment or the machine without which it cannot
operate as such (SII Ruling 270 of 5 February 2009).
11. OECD Model Tax Convention
The commentary on Article 12 of OECD Model Tax Convention (“Commentary”) concerning the
taxation of royalties’ suggests that the payment for a sale of a copyright should be considered
as “royalty income”, while the payment for a sale of a copyrighted article as “business income”.
The Commentary states that where consideration is paid for the transfer of full ownership of
the rights in the copyright, the payment cannot represent royalty, since where the ownership of
62 | P a g e
rights has been alienated, the consideration cannot be for the use of the rights [Para 15 and
16].
Therefore, in case of embedded software, where no rights in the copyright program are
acquired, so as to commercially exploit the same, such sale could be considered as equivalent
to sale of copyrighted article and hence, the consideration thereof cannot be treated as royalty
income.
As an illustration, reference has be drawn to “mixed contracts” which include sale of computer
hardware with built-in software since built-in software as well as embedded software, are sold
along with the hardware/equipment as a single product. The Commentary while dealing with
mixed contracts states that where necessary, the total amount of consideration payable under
a contract should be broken down on the basis of the information contained in the contract or
by means of a reasonable apportionment with the appropriate tax treatment being applied to
each apportioned part.
If however, one part of what is being provided constitutes by far the principal purpose of the
contract and the other parts stipulated therein are only ancillary and largely unimportant
character, then the treatment applicable to the principal part should generally be applied to the
whole amount of the consideration [Para 11 and 17].
The UN Commentary also lays down similar guidance in this context.
Considering this, a possible view could be that since the principal purpose of the supply contract is
sale of equipment/device and the sale of software embedded therein is incidental or ancillary to
such sale, the treatment applicable to the principal part (i.e. sale of equipment/device) should be
applied to the whole consideration. Therefore, the entire consideration would be treated as
“business income” and not “royalty”.
63 | P a g e

PRE-BUDGET MEMORANDUM 2014-15 Direct Tax Issues

Transcription

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