Direct Tax Vista Your weekly Direct Tax recap Edn. 80 – 25th Oct 2023 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

               

1. Apex Court explains the relevant date of entering into a DTAA for a party to claim benefit of a “same treatment” clause

The Supreme Court in the case of ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2(2)(2) NEW DELHI Vs M/s NESTLE SA [2023-VIL-27-SC-DT] has delved into the intricacies of treaty interpretation within the context of Double Taxation Avoidance Agreements (DTAAs). The core issue is a tax dispute relating to the capital gains tax on the sale of shares in an Indian company by foreign investors. The question was whether these foreign investors were eligible for a reduced tax rate as specified in the DTAAs or whether they were subject to a higher rate of taxation as per the Indian Income Tax Act. During the course of the dispute, some of the countries party to the DTAAs with India, became members of the OECD. Thereafter, the countries adopted a particular "limitation of benefits" clause in their DTAAs with India to restrict the benefit of a reduced tax rate to those eligible under the new criterion. However, The Court ruled that the relevant date for consideration of this clause is the date of entering into the treaty. The court also clarified that a notification under Section 90(1) of The Income Tax Act is not just a procedural formality but a necessary and mandatory condition for any court, authority, or tribunal to give effect to a DTAA or any protocol altering its terms or conditions. The case reinforces the sanctity of DTAAs, underscores the significance of subsequent practice, and offers clarity regarding the timeline for claiming treaty benefits.

 

2. Purchase of material as per chosen colour and design, do not attract TDS u/s 194C as they are a contract for sale of goods.

TDS u/s 194C of The Income Tax Act shall be leviable when any person is responsible for paying any sum to any resident contractor for carrying out any “work” in pursuance of a contract between a specified person and the resident contractor. "Work" shall include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such customer as is the person placed in relation to the assessee under the provisions contained in Section 40A(2)(b). The judgement of Hon’ble Karnataka High Court reported in (2014) 369 ITR 72 (Karn) in the case of CIT v/s Spice Tele communications Pvt. Ltd makes it clear that where an the assessee does not supply any material to the manufacturers or suppliers for the supply of finished products as per their requirement or specification, such transactions could not be treated as ‘works contracts’ within the meaning of section 194C (1) of the IT Act.

 

Hence, it was held by The ITAT in the case of BHARATPUR DUGDHA UTPADAK SAHKARI SANGH LIMITED Vs INCOME TAX OFFICER [2023-VIL-1358-ITAT-JAI], that purchase of packing material as per requirement of the assesses and only where colours and design are decided by it, do not attract TDS u/s 194C as they are a contract for sale of goods.

 

3. Date extended for Processing of refunds for AY 17-18... yet again

Processing refunds u/s 143(1) of Income tax Act is largely an automated process until and unless it is stuck up for some technical and other glitches. However, after the expiry of nine months from the end of the financial year, intimations u/s 143(1) get time barred and therefore cannot be processed and hence refunds also get stuck. It has been brought to the notice of CBDT that due to certain technical issues or for other reasons not attributable to the assessees concerned, several returns for various assessment years up to the assessment year 2017-18 which were otherwise filed validly under section 139 or 142 or 119 of the Income-tax Act, 1961, could not be processed u/s 143(1) of the Act. The CBDT, through Order dated October 16, 2023, initially directed that all properly filed returns up to Assessment Year 2017-18, which included refund claims, could be processed until November 30, 2021. However, due to ongoing taxpayer grievances concerning refund issues, the CBDT has decided to extend the time frame. As a result, these ITRs can now be processed until January 31, 2024.

 

It is now high time that refunds are processed.

 

4. New Quarterly Form 15CD for IFSCs in place of Form 15CA – Part D

Another procedure has been eased for IFSCs. The CBDT vide Notification No. 89/2023 dated October 16, 2023, has amended Rule 37BB of the Income Tax Rules, 1962. This amendment stipulates that the International Financial Services Centre (IFSC) units are no longer obligated to furnish Part D of Form 15CA when making non-taxable remittances. Starting from January 1, 2024, the IFSC units are now obligated to submit a quarterly statement in Form 15CD, detailing all remittances made to non-residents or foreign companies. The form includes detailed fields for providing information about the unit, remittee, remitter, currency details, and more. Units of IFSCs must now furnish a quarterly statement for each quarter of the financial year. This statement covers all remittances, and it must be submitted within fifteen days from the end of the respective quarter. The reporting must be done electronically under digital signature. All relevant entities should take steps to adapt to the new reporting format and meet their compliance obligations. The formats to be noted as follows -

 

 

 

# If available

$ If applicable

 

5. New Audit Report Form 56F for SEZs/ FTZs/etc – filing date extended to 31st Dec 2023

The CBDT issued Notification No. 91/2023, dated October 19, 2023 to introduce a new Rule 16D into the Income-tax Rules, 1962 through the Income-tax (26th Amendment) Rules, 2023. This new rule specifies that the report of an accountant, which is required to be submitted by the taxpayer under section 10AA(8) of the Income Tax Act, 1961, in conjunction with section 10A(5) of the IT Act, must now be filed using the newly introduced Form No. 56F. Simultaneously, in another Order u/s 119, the CBDT issued Circular No. 18 of 2023 dated October 20, 2023, extending the due date for filing the report of accountant (Form 56F) under Section 10AA(8) and 10A(5) for AY 2023-24 until December 31, 2023.

 

Section 10AA of the Act provides for a deduction of income tax for industrial undertakings that have commenced production of goods or operation of ships during the previous year. The deduction is available for a period of 10 years from the date of commencement of production or operation.

 

Section 10A(5) of the Act requires that the taxpayer must submit a report of an accountant to the income tax authorities in order to claim the deduction under section 10AA. The report of the accountant must certify that the taxpayer has fulfilled all the conditions for claiming the deduction.

 

Form No. 56F is a new form that has been introduced by the CBDT for the purpose of filing the report of the accountant under section 10AA(8) of the Act. The form requires the taxpayer to provide certain information, such as the name and address of the accountant, the date of the report, and the details of the deduction claimed. In such form, the Accountant has to specify the amount of deduction under section 10AA to which the assessee is entitled and whether the full consideration in convertible foreign exchange for exports made by the Unit was brought into India within a period of six months from the end of the previous year.

 

Taxpayers who are claiming a deduction under section 10AA of the Act are advised to file the report of the accountant in Form No. 56F by 31st December 2023, i.e. after submission of the Tax Audit Report.

 

6. First Appeals cannot introduce a new Source

It is a settled position now that the first Appellate Authority is invested with very wide powers under Section 251(1)(a) of the Income Tax Act and once an assessment order is brought before the authority, his competence is not restricted to examining only those aspects of the assessment about which the assessee makes grievance and ranges over the whole assessment to correct the Assessing Officer not only with regard to a matter raised by the assessee in appeal but also with regard to any other matter which has been considered by the Assessing Officer and determined in the course of assessment. However, there is a solitary but significant limitation to the power of revision, viz. that it is not open to the Appellate Commissioner to introduce in the Assessment a new source of income and the assessment has to be confined to those items of income which where the subject-matter of original assessment.

 

Hence even where TDS is not paid within the same FY, the CIT(A) cannot enhance the income as it is a new source as was held in the case of DCIT, CENTRAL CIRCLE-28, NEW DELHI Vs M/s GOEL EXIM INDIA PVT LTD [2023-VIL-1376-ITAT-DEL]. At best the CIT(A) can remand the matter back.

 

7. Tax Planning vide colourable device u/s 45(3) ... not allowed?

Is tax planning an offence or not? From the Apex Court’s decision in the case of Union of India vs. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), it is transpired that once the transaction is genuine, merely because it was entered into with a motive to plan tax, it would not become a colourable device nor does it earn any disqualification. However, the Courts have their way of distinguishing transactions. The same also depends upon the representations made. Lets understand the case of ASHA NIMMAGADDA Vs ASST. COMMISSIONER OF INCOME TAX [2023-VIL-1372-ITAT-HYD], at hand.

 

In order to plan payment (or non-payment) of tax on the capital gains arising out of sale of shares, a piece of land owned by the assessee is transferred to an LLP, which the assessee is controlling as a partner. The agricultural Land is transferred at a loss to such LLP by the assessee. The conversion of a Pvt. Ltd. Company to an LLP was made because section 45(3) of the Income tax Act is applicable only to a firm or other association of persons or body of individuals and its specifically excludes a company or a cooperative society. Possibly such a transaction does not furnish any meaning or purpose having regard to the timing. Possibly only to bring the transaction within the purview of section 45(3) of the Act, the conversion took place. However, the question is whether the tax laws or department or Courts prohibit tax planning and even otherwise, can they direct as to when to do or not to do a transaction?

 

It was argued by the revenue in this case that the Hon’ble Apex Court in the case of Sunil Siddharthbhai vs. CIT [1985] 156 ITR 509 (SC) held that if the transfer of the personal asset by the assessee to a partnership in which she is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income-tax on a capital gain, it will be open to the income tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership is genuine, the transaction of transferring the personal asset to the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or is nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain.

 

The Court held in favour of the revenue.

However, it may be noted that post this decision in the case of Sunil Siddharthbhai, Section 45(3) has been introduced in the Income-tax Act, 1961 (Act) by the Finance Act, 1987 w.e.f 01.04.1988. The reason for insertion of sub-section (3) in section 45 has been explained, inter alia, by CBDT in circular no. 495 dated 22.09.1987. A perusal of para 24.1 and 24.2 of the said circular would show that section 45(3) has been introduced in the statute apparently to legislatively overrule the decision rendered by the Hon’ble SC by way of a common judgment in Sunil Siddharthbhai v. CIT and Kartikeya V. Sarabhai v. CIT.

 

Therefore, we may see this matter being contested in the higher forums on this ground going forward as the same case if invoked when actually the situation is reverse, may actually be against the revenue.

 

8. Payments made for the services rendered outside India are outside purview of TDS u/s 195

Where payments are made for the services rendered outside India and income is neither received nor deemed to have been received in India nor accrues or arises in India, it falls outside the purview of Sec.5 of the Income Tax Act. Sec. 9(1)(vii)(b) excludes income from accruing or arising in India where the fees are payable in respect of services utilised in a business or profession carried on outside India or for the purposes of making or earning any income from any source outside India and hence the deduction of TDS does not arise. Following the ratio, foreign remittance made to non-residents towards destination sampling charges/ore analysis charges was considered as not liable to TDS u/s 195 of The Income tax Act in the case of M/s TUMKUR MINERALS PVT. LTD Vs JCIT, MARGAO RANGE, GOA [2023-VIL-1366-ITAT-MUM].

 

9. Where main matter is cancelled on appeal, penalty levied under Section 271(c) of the Act cannot survive

Many a times, even after the main matter is decided in favour of the assessee, the penalty matter continues. In such cases reference can made to the decision of the ITAT Jabalpur in the case of MANESSH SHARMA Vs JCIT (TDS) [2023-VIL-1370-ITAT-JBL] where it was held that since order passed by AO under Section 201(1)/201(1A) of the Income Tax Act has already been cancelled by CIT(A) on appeal, penalty levied under Section 271(c) of the Act cannot survive. The main matter, as a matter of fact, was that an individual or HUF is required to deduct TDS if the turnover of the individual or HUF in the financial year immediately preceding the financial year in which the payment is made exceed the limit prescribed under section 44AB. Incase an assessment year is first year of audit, the assessee was found to be not liable to deduct TDS in the same assessment year.

 

10. Person resident outside India maintaining a rupee account can purchase or sell dated Government securities/treasury bills

RBI has notified the FEM (Debt Instruments) (Second Amendment) Regulations, 2023. As per the amended norms, persons resident outside India (PROIs) maintaining a rupee account as per reg. 7 of FEM (Deposit) Regulations can purchase or sell dated Government securities/treasury bills. Further, the amount of consideration for purchase of such securities/bills must be paid out of funds held in rupee a/c. Also, the sale/maturity proceeds must be credited to the said rupee a/c.

A new sub-paragraph, labeled “E,” was introduced after sub-paragraph D in paragraph 1 of Schedule 1. This sub-paragraph grants permission to persons resident outside India who maintain a rupee account, as per regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016. It allows them to purchase or sell dated Government Securities and treasury bills, subject to terms and conditions specified by the Reserve Bank.

 

In paragraph 2 of Schedule 1, a new clause “4A” was added. This clause clarifies that the consideration for the purchase of dated Government Securities/treasury bills under sub-paragraph (E) of paragraph 1 should be paid out of funds held in the rupee account maintained under regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016.

 

In paragraph 4 of Schedule 1, a new clause “2A” was introduced, stipulating that the sale or maturity proceeds (net of applicable taxes) of instruments held by persons resident outside India with a rupee account under regulation 7(1) of the Foreign Exchange Management (Deposit) Regulations, 2016, shall be credited to the same rupee account.

 

11. PMLA further tightens Client Due Diligence and Maintenance of Records norms

Constant and far-reaching changes to PMLA and Rules continue. The last amended was made on September 4, when the threshold for determining beneficial ownership in a partnership firm was brought down from 15% to 10% of capital or profits in the partnership. On 17th October 2023, The Ministry of Finance, vide notification no. G.S.R. 745(E), has notified the Prevention of Money-laundering (Maintenance of Records) Third Amendment Rules, 2023.

 

Every reporting entity, which is part of a group, shall implement group-wide programmes against money laundering and terror financing, including group-wide policies for sharing information required for the purposes of client due diligence and money laundering and terror finance risk management and such programmes shall include adequate safeguards on the confidentiality and use of information exchanged, including safeguards to prevent tipping-off. Groups are required to implement group-wide policies for the purpose of discharging obligations under the provisions of Chapter IV of the Prevention of Money Laundering Act, 2002 (15 of 2003). The principal officer of a reporting entity shall, on being satisfied that the transaction is suspicious, furnish the information promptly in writing by fax or by electronic mail to the Director. Every reporting entity, its Directors, officers, and all employees shall ensure that the fact of maintenance of records referred to in rule 3 and furnishing of information to the Director is kept confidential.

 

Further, Every reporting entity shall, at the time of commencement of an account-based relationship or while carrying out occasional transaction of an amount equal to or exceeding Rs.50,000/-, whether conducted as a single transaction or several transactions that appear to be connected, or any international money transfer operations Identify its clients, verify their identity using reliable and independent sources of identification, obtain information on the purpose and intended nature of the business relationship, where applicable; Take reasonable steps to understand the nature of the customer’s business, and its ownership and control; Determine whether a client is acting on behalf of a beneficial owner, and identify the beneficial owner and take all steps to verify the identity of the beneficial owner, using reliable and independent sources of identification.

 

(The author is a CA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Lead - Indirect Tax Core Group of CII-ER and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)