Direct Tax Proposals 2012 : INTERNATIONAL TAXATIONS

Understanding

Direct Tax

                                                  Proposals

   

            International Taxation                                                                     

Ø Retrospective Amendments: Income Deemed to accrue or arise in India

Sec.	Existing Act	Proposed Changes (w.r.e.f. 01-04-1962)
2(14)	“CAPITAL ASSETS” means “PROPERTY” of any kind held by an assessee, Whether or not connected with his business or profession, but does not include...........................	“PROPERTY”Includes and Shall be Deemed to have Always included any rights in or in relation to an Indian company, including v rights of management or v control or v Any other rights whatsoever
2(47)	TRANSFER, in relation to a “Capital Assets”includes,— the sale, exchange or relinquishment of the asset ; or the extinguishment of any rights therein........... ;	“TRANSFER”includes and shall be “Deemed to have Always included v disposing of or v parting with an asset or any interest therein, or v creating any interest in any asset In any manner whatsoever, v directly or indirectly, v absolutely or conditionally, v voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or v otherwise, Notwithstanding that such transfer of rights has been characterized as v being effected or v dependent upon or v flowing from the transfer of a share or v Shares of a company registered or incorporated outside India
9(1)(i)	Incomes shall be ‘Deemed to Accrue or arise in India :— All income accruing or arising, whether directly or indirectly, “Through” or from any business connection in India, or “Through” or from any property in India, or “Through” or from any Asset or source of income in India, or “Through” the transfer of a Capital asset situate in India.	“Through” shall mean and include and shall be Deemed to have Always meant and included v “by means of”, v “in consequence of” or v “by reason of
		An Asset or a Capital Asset being v any share or v interest in a company or v entity registered or incorporated outside India shall be Deemed to be and shall Always be Deemed to have been situated in India if the share or interest derives, directly or indirectly, Its value substantially from assets located in India
195(1)	ANY PERSON responsible for paying to a non-resident, v not being a company, or v to a foreign company, any interest or any other sum chargeable under the Act , shall, v at the time of credit of such income to the payee or v at the time of payment thereof ü in cash or by the issue of a cheque or draft or by any other mode whichever is earlier, Deduct income-tax thereon at the rates in force.	Obligation to comply with 195(1) applies and shall be Deemed to have always applied and extends and shall be deemed to have always extended to All persons, resident or non-resident, whether or not the non-resident has:- v a residence or place of business or business connection in India; or v any other presence in any manner whatsoever in India. » Boards Shall, by Notification » Instruct class of Persons or cases » to make an application before AO » to determine the Appropriate portion of Taxable Sum » and after such determination » Deduct tax u/s 195.

Validation Clause Inserted : (New Clause)

Provision for Validation of Income Tax Proceedings and corresponding demands       Where income accruing or arising,       through or from transfer of a capital asset situate in India,       in consequence of v  the transfer of a share or shares of a company registered or incorporated outside India or       in consequence of v  Agreement or otherwise outside India       Through this validation clause, any notice sent or purporting to have been sent,       taxes levied, demanded, assessed, imposed or collected or recovered       during any period prior to Finance Act 2012 coming into force       shall be deemed to have been validly made and       such notice or levy of tax shall not be called in question on the ground that the       tax was not chargeable or any ground including that capital gains arising out of transactions which have taken place outside India.       This Validation clause shall operate irrespective of any court decisions

Brief Comment:

»     This Amendment is proposed to overrule Hon’ble SC decision in case of Vodafone International Holdings B.V. vs. Union of India & ors in which Apex court had held that

     (a) in case of International Holding structures, the form of the transaction have to be seen and not the substance.

       Department should “LOOK AT” the transactions and not “LOOK THROUGH” the transactions.     

     (b) There is no transfer of capital assets in India due to transfer of shares outside India

     (c) Income Tax Act does not contain any provisions to tax such kind of offshore transactions                                                                    

    

     Court had held that Govt should bring required changes in law to tax such kind of transactions. Regarding the Vodafone Case, Income Tax Department had filed a review petition before SC, which was rejected by SC. Will Department proceed with another review petition, once the amendment will come in force, will going to be an interesting case. 

»     Retrospective Amendments :

    

     Hon’ble SC in case of “Ujagar Prints & Ors vs. UOI” & Bhaskar Trust & Ors” had held that a      Retrospective Amendments, which is directed to negate a SC decision is not sustainable.

    

      If SC gives judgement, exposing lacuna in the law and retrospective amendment addresses that lacuna and as a results, renders the judgement ineffective, then the retrospective amendments is valid in law.

    

     SC in case of “National Agricultural Co-operative Marketing federation vs. UOI”, had held that if a clarificatory explanation is seeking to get over previous decisions, will results into a altogether new levy or changes the law drastically, then the retrospective amendment will be treated bad in law and liable to be quashed.

     

      Amendments seeks to put altogether new levy, through retrospective amendment, is results into violation of Fundamental rights, as per Article 14 & Article 19 of the constitution of India.

     

     All Retrospective amendments says “Deemed to mean and shall be deemed to have always meant” like words, the meaning of which is drawn from long drawn litigations.

  

     A retrospective amendments in law after years of litigations, cannot be seems to provide a reasonable certainty. It will make impact on Foreign Direct Investments     

            

»     All Retrospective amendments says “Deemed to mean and shall be deemed to have always meant” like words, the meaning of which is drawn from long drawn litigations. 

»     Definition of Property includes Rights or management or control in an Indian Company. Overseas restructuring through tax heavens will now seems to be curbed through these amendments.

»     Definition of Transfer retrospectively amended to clarify that Transfer shall always mean disposing of the assets in any manner irrespective of the fact that the same are related to transfer of shares outside India. 

»     Section 195 now casts liability on non residents also to deduct tax at source, regardless of their physical presence, if transaction is liable to or deemed to be liable to tax in India. There may be various administrative issues, in which clarifications is required from government like collection or recovery of taxes from persons having no physical presence.

»     Validation clause seems to validate all notices issue by department, in which there are jurisdictional issues.

»     Retrospective amendments will bring a major impact on Pending litigations, covering the similar issues like Vodafone Case.

»   Memorandum Explaining the Finance Bill:     

     “Non-resident person is also required to deduct tax at source before making payments to another non-resident, if the payment represents income of the payee non-resident, chargeable to tax in India. There are no other conditions specified in the Act and if the income of the payee non-resident is chargeable to tax, then tax has to be deducted at source, whether the payment is made by a resident or a non-resident. Certain judicial pronouncements have created doubts about the scope and purpose of sections 9 and 195. Further, there are certain issues in respect of income deemed to accrue or arise where there are conflicting decisions of various judicial authorities. Therefore, there is a need to provide clarificatory retrospective amendment to restate the legislative intent in respect of scope and applicability of section 9 and 195 and also to make other clarificatory amendments for providing certainty in law.” 

Ø Royalty RE-defined [ Section 9(1)(vi)]

Existing Act

Proposed  New Clause  (W.r.e.f. 01-06-1976)

Any income payable by way of ROYALTY        in respect of v  any right, v  property or v  information       is deemed to Accruing or Arising in India. ROYALTY MEANS       Consideration received or receivable for       for transfer of all or any right in respect of (a)   Transfer of all or any rights including granting of License in respect of a Patent, Invention, Model, Design, Secret formula or “Process” or trade mark or similar property. (b)   Imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or “Process” or trade mark or similar property ; (c)    the use of any patent, invention, model, design, secret formula or “Process” or trade mark or similar property ; (d)   the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (e)    the use or right to use any industrial, commercial or scientific equipment. (f)    the transfer of all or any rights (including the granting of a licence) in respect of any  copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (g)   Rendering of any services in connection with the activities referred to in above sub-clauses

COMPUTER SOFTWARE       ROYALTY includes and         has Always included       transfer of all or any right for       Use or Right to use a “COMPUTER SOFTWARE” (including granting of a licence)       Irrespective of the medium       Through which such right is transferred. RIGHT, PROPERTY & INFORMATION:       ROYALTY includes and         has Always included consideration in respect of       any “Right, Property or Information”, whether or not v  Possession or control of such right, property or information is with the payer; v  Such right, property or information is used directly by the payer; v  the location of such right, property or information ‘is in India’. PROCESS RE – DEFINED :       The term “PROCESS” includes and       shall be Deemed to have always included v  transmission by satellite v  (including up-linking, amplification, conversion for down-linking of any signal), v  cable, v  optic fibre or v  by any other similar technology,       Whether or not such process is secret.

Comment:

v Various courts had held that Consideration for use of Computer software is not Royalty. To nullify     the effect of these judgements, this amendment is proposed. Few of such decisions are as under :

        DIT vs. Ericsson AB - 66 DTR 1 (Delhi HC) : Supply of software is inseparable part of GSM systems and incapable of independent use is not Royalty       

v Process RE-defined : Mumbai ITAT in “Standard Chartered Bank vs. DDIT 11 ITR 721 (Mum ITAT)” had held that “the activity of transmitting raw data to user, processing of the data by such user by using software belonging to assessee and transmission of such data to assessee does not involve “use of any process” so as to constitute royalty”. To overcome these judicial pronouncements, the word “Process” redefined w.r.e.f. 01-06-1976.

v Asia Satellite Telecommunications Co vs. DDIT (Delhi HC) 197 Taxman 263 : Income received by foreign   satellite companies is not taxable in India.  

v Sale consideration received by Non resident on account of Computer Software is now taxable as per amended provision. Non Resident have to comply with other provisions also like obtaining of PAN, filing of returns etc.......

v Payer now have to comply with TDS provisions on account of said payment and in  case of no PAN, section 206AA, will come into picture.

Extract of Memorandum:

“The term “royalty” has been defined in Explanation 2 which means consideration received or receivable for transfer of all or any right in respect of certain rights, property or information. Some judicial decisions have interpreted this definition in a manner which has raised doubts as to whether consideration for use of computer software is royalty or not; whether the right, property or information has to be used directly by the payer or is to be located in India or control or possession of it has to be with the payer. Similarly, doubts have been raised regarding the meaning of the term processed. Considering the conflicting decisions of various courts in respect of income in nature of royalty and to restate the legislative intent, it is further proposed to amend the Income Tax Act.”

Extended Time Limit for Issue Notice to agent of Non Resident

Existing Act	Proposed  New Clause  (W.r.e.f. 01-04-2011)
ü Notice u/s 149 ü Can be issued ü Upto 2 YEARS from the end of Assessment years ü to any person ü who is Treated as Agent of NON Resident	ü Extended to “6 Years”

Comment:

The extension of time limit to issue notice to agent of non resident will give Taxing authority an extended time so that any payment which had been not taxed earlier, will now come under tax net.