Wednesday, 30 November 2011

S. 10A : Exempt incomes – Free Trade Zone‐ Export Oriented Undertaking‐Exemptions under sections 10A,10B continue to “exempt” profits & so loss of other units (eligible & non‐eligible, including B/f loss) not liable for set‐off against sections 10A,10B profits.


Two issues where before the High Court for AY 2001‐02 & onwards, (i) Whether the loss incurred by
a non‐eligible unit & (ii) whether the brought forward unabsorbed loss & unabsorbed depreciation
of the eligible unit has to be set‐off against the profits of the eligible unit before allowing deduction
u/s 10A/ 10B.
Held that (a) S. 10A allows deduction “from the total income”. The phrase “total income” in s. 10A
means “the total income of the STP unit” and not “total income of the assessee“. Consequently, s.
10A deduction has to be given before computing the “profits & gains of business” under Chapter IV.
Though s. 10A was amended to make it a “deduction” provision, it continues to remain in Chapter III
and was not moved to Chapter VI‐A. The result is that even now s. 10A is in the nature of an
“exemption” provision and the profits of the eligible unit have to be deducted at source level and do
not enter into the computation of income.


(b) S. 10A(6) as amended by the FA 2003 w.e.f. 1.4.2001 provides that depreciation and business
loss of the eligible unit relating to the AY 2001‐02 & onwards is eligible for set‐off & carry forward
for set‐off against income post tax holiday. This amendment does not militate against the
proposition that the benefit of relief u/s 10A is in the nature of exemption with reference to
commercial profits. However, to give effect to the legislative intention of allowing the carry forward
of depreciation and loss suffered in respect of any year during the tax holiday for being set off
against income post tax holiday, it is necessary that a notional computation of business income and
the depreciation should be made for each year of the tax holiday period. Such loss is eligible to be
carried forward. But, as the income of the 10A unit has to be excluded at source itself before arriving
at the gross total income, the question of setting off the loss of the current year’s or the brought
forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise.
CIT v Yokogawa India Ltd. (Karn) (High Court)

Tuesday, 29 November 2011

Transfer Pricing - Corporate Guarantee

In the unreported case  No. ITANo. 149/HYD/2010, Section 92B of the Income Tax Act, 1961 dated 9-9-2011 it was held that Corporate Guarantee provided in respect of AE is not an international transaction in terms of section 92B of the Income tax act, 1961.

The ITAT held that no guidelines are stipulated in respect of such transaction. unlike a bank or a financial institution, provision of corporate guarantee is incidental to the business of the taxpayer. In the absence of any charging provision, such transaction cannot be considered under transfer pricing.

Tax Due Date for the Month of December 2011


Sr No
Due Date
Related to
Compliance to be made
1
05.12.2011
(Monday)
Service Tax
Payment of Service Tax for the Month of November 2011
2
07.12.2011
(Wednesday)
TDS/TCS
(Income Tax)
·        Deposit TDS for payments of Salary, Interest, Commission or Brokerage, Rent, Professional fee, payment to Contractors, etc. during the month of November 2011.

·        Deposit TDS from Salaries  deducted during the month of November 2011

•   Deposit TCS for collections made under section 206C including sale of scrap during the month of November 2011, if any

•    Deliver a copy of Form 15G/15H, if any to CCIT or CIT for declarations received in the month of November 2011, if any
3
15.12.2011
(Thursday)
Income Tax
Payment of second installment of advance tax (75%) for corporate
4
20.12.2011
(Tuesday)
VAT
Payment of VAT & filing of monthly return for the month of November 2011
5
26.12.2011
(Friday)
Service Tax
Filing of Service tax return for the half year ended September 30, 2011




Sunday, 27 November 2011

Excise Duty on Finished Goods: Accounting Aspect



For Excise Duty on finished goods in stock as at the end of the year, there is an option available to provide for the same or to show the same as a Contingent liability. Comment
(The AS-2 (Revised) on, "Valuation of Inventories" states that finished goods are to be valued by taking into account the costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition. The costs of conversion to be included would be all direct factory overheads related to the said finished goods. Excise duty is a duty which is payable on the manufacture of the finished goods inside a factory. Though the collection of the same is deferred till the goods leave the factory, the liability for the same arises when the manufacture takes place.
The Institute, before the enactment of the revised AS-2, in its Guidance Note on Accounting Treatment for Excise Duty gave an option to entities to provide the excise duty payable on finished goods and add the same to the valuation of finished goods or not to make any provision but only make a disclosure of the said liability. After the revised AS-2 was issued, the ICAI revised its earlier guidance note and removed the alternative of not providing for the excise duty. Thus it is now mandatory for an entity to provide for liability for excise duty on finished goods lying in stock at the end of the year and add the same to the to the value of closing stock. According to Guidance Note on "Accounting Treatment of Excise Duty", excise duty should be considered as a manufacturing expense and like other manufacturing expenses be considered as an element of cost for inventory valuation. Where excise duty is paid on excisable goods and such goods are subsequently utilised in the manufacturing process, the duty paid on such goods, if the same is not recoverable from taxing authorities, becomes a manufacturing cost and must be included in the valuation of work-in-progress or finished goods arising from the subsequent processing of such goods. Further, where the liability for excise duty has been incurred but its collection is deferred, provision for the unpaid liability should be made.
Excise duty cannot be treated as a period cost. Accordingly excise duty now cannot be shown as a contingent liability. Thus, it is now mandatory for an entity to provide for liability for excise duty on finished goods lying in stock at the end of the year and add the same to the value of closing stock. If the said provision is not made, the revised Guidance Note on Accounting Treatment for Excise duty says that the auditor should qualify his report and, if possible, also mention the quantum of the duty not so provided).

Saturday, 26 November 2011

Amalgamation


Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers and the procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation approved.  The business people or the MBA students look at the issue of mergers in a different angle to that of legal professionals. It is very often been criticized by legal professionals that the sections providing for amalgamation etc. are being misused and it may be true to some extent, but, its not wholly true. But, when we discuss the issue of mergers with business people and MBA graduates, then, they talk about business strategies like market penetration strategy etc. Its true that when a company is not doing well and its financial position is weak, then, the Act itself guides the Company to go for settlement with creditors or go for some arrangement instead of winding-up the Company. The Act can not force the company to go for compulsory merger or settlement and it all depends upon the commercial wisdom and viability of a Company. While the Act facilitates the arrangement or settlement with creditors etc. when the Company is not doing well, it is for the creditors and other stake-holders to decide as to whether they agree for settlement etc. or not. The act facilitates arrangement, settlement, amalgamation and merger etc. If it is a private company or a public limited company, the Company has to follow the procedure laid down under the Companies Act apart from the Central Government rules in this regard. If it is a listed public company, then, the company has to comply with the SEBI regulations too and its all in the nature of giving prior relevant information to the stake holders/public or giving further material information when the deal is over.
    Dealing with the issue of mergers and amalgamations elaborately is a bigger and complicated affair.
          In this article, I would like to deal with, in brief, as to whether it is right to say that the amalgamation provisions as provided in the Act are being misused and the procedure to be followed while getting the scheme of amalgamation approved under the provisions of Companies Act, 1956. 
Is it correct to say that the provisions dealing with the arrangement and amalgamations will be useful for the unscrupulous as an escape route? 
          There is a general assumption that the provisions of Act especially provisions providing for compromise, arrangement or amalgamation, are getting misused. Even though, there is nothing in law even by implication to suggest that the provisions will get misused, it is general thought that the persons charged with will take the plea that the application has been filed for sanctioning the scheme and the proceedings will automatically get abated. Law is very clear in this regard that the criminal proceedings against the persons connected with the affairs of the company will not get abated just because an application seeking sanction of scheme is filed or scheme is being implemented. Only the proceedings, to some extent, sought to be stayed when a scheme is filed and implemented. It is based on the logic that if the civil proceedings are going on simultaneously when the scheme is being approved, then, the scheme could not be worked out. Dealing with the same, the High Court of Bombay, in State of Tamilnadu Vs. Uma Investments Pvt. Ltd (1977) 47 Com Cases 242, was pleased to observe that “it is in respect of these classes of creditors that a proposal is put forward by the company for a compromise or arrangement. The compromises or arrangements are, therefore, concerned with civil liabilities where a creditor will accept a lesser payment or receive less on distribution or grant time or waive interest and work out other kindred things. It is not possible to take the view that section 391 is meant for freezing criminal proceedings which may be instituted either by a creditor or a member of a company or by the State either against the company or its officers. The section does not provide an umbrella to a company or its directors and officers for a thing which is an offence or an infringement or violation of any law, rule or regulation punishable by imprisonment or fine or both. Such criminal proceedings can be commenced or continued notwithstanding the fact that a scheme for compromise or arrangement has been initiated under section 391”.  
Procedure to be followed while approving the scheme of amalgamation: 
          The procedure to be followed while getting the scheme of amalgamation is approved will depend upon sections 391 to 394A. Though, section 391 deals with the issue of compromise or arrangement which is different from the issue of amalgamation as deal with under section 394, as section 394 too refers to the procedure under section 391 etc., all the section are to be seen together while understanding the procedure of getting the scheme of amalgamation approved.  Again, it is true that while the procedure to be followed in case of amalgamation of two companies is wider than the scheme of compromise or arrangement though there exist substantial overlapping. The procedure to be followed while getting the scheme of amalgamation and the important points, are as follows:
     (1)    Any company, creditors of the company, class of them, members or the class of members can file an application under section 391 seeking sanction of any scheme of compromise or arrangement. However, by its very nature it can be understood that the scheme of amalgamation is normally presented by the company.  While filing an application either under section 391 or section 394, the applicant is supposed to disclose all material particulars in accordance with the provisions of the Act.
     (2)    Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the meeting of the members, class of members, creditors or the class of creditors.  Rather, passing an order calling for meeting, if the requirements of holding meetings with class of shareholders or the members, are specifically dealt with in the order calling meeting, then, there won’t be any subsequent litigation. The scope of conduct of meeting with such class of members or the shareholders is wider in case of amalgamation than where a scheme of compromise or arrangement is sought for under section 391.
     (3)    The scheme must get approved by the majority of the stake holders viz., the members, class of members, creditors or such class of creditors. The scope of conduct of meeting with the members, class of members, creditors or such class of creditors will be restrictive some what in an application seeking compromise or arrangement.
     (4)    There should be due notice disclosing all material particulars and annexing the copy of the scheme as the case may be while calling the meeting.
     (5)    In a case where amalgamation of two companies is sought for, before approving the scheme of amalgamation, a report is to be received form the registrar of companies that the approval of scheme will not prejudice the interests of the shareholders.
     (6)    The Central Government is also required to file its report in an application seeking approval of compromise, arrangement or the amalgamation as the case may be under section 394A.
     (7)   After complying with all the requirements, if the scheme is approved, then, the certified copy of the order is to be filed with the concerned authorities.
 Note:
          Please note the pendency of new companies bill before Lok Sabha.

DOUBLE TAX AVOIDANCE AGRE


DOUBLE TAX AVOIDANCE AGREEMENT


Dividend
 Interest
No.
Country DTAA between India &
General Rate
Special Rate [Note 5]
Level of voting control (%)
General Rate
Special Rate for Bank
Special Rate for Govt.
Royalties
Fees For Technical Services
Remarks
01.Armenia10  10# E 1010Effective from AY 2006-07. # Interest derived and beneficially owned by certain entities is exempt.
02.Australia15  15  15#$Note 2/ Note8#Royalty @ 10% for Equipment Rental and for services ancillary or subsidiary thereto.
03.Austria1010E1010Effective from AY 2003-04
04.Bangladesh101010%10E10Note 1
05.Belarus151025%10E15$15$Effective from AY 2000-01
06.Belgium15  1510 10#10##Rate & scope modified on account of Indo-German Treaty
07.Brazil15  15 E25#$Note 1#Royalties other than "Royalty arising from use or right to use trade marks" taxable at 15%
08.Bulgaria15  15 E20#$20$#Royalties relating to Copyrights etc. taxable at 15%
09.Canada251510%15 E10-2010-20#Royalty @ 10% for Equipment Rental and for services ancillary or subsidiary thereto.
10.China1010E1010
11.Cyprus151010%10 E15#$10##Royalties include "Fees for included services"
12.Czech Republic10  10 E1010Effective from AY 2001-02
13.Czechoslovakia251525%15 E30  
14.Denmark201525%15+10+E20$20$
15.EgyptNote 4Note 4ENote 3#Note 1#Royalties not taxable in the country of residence
16.Finland15+10+E15#$Note 2Effective from AY 2000-01 #Royalty @ 10% for Equipment Rental and for services ancillary or subsidiary thereto.
17.France1010E1010
18.Germany1010E1010
19.GreeceNote 3#Note 3#ENote 3#Note 1#Dividend, interest & Royalties not taxable in the country of residence
20.Hungary10*10*#E10*10*Effective from AY 2007-08, *For rates applicable up to AY 2006-07, please refer to Treaty # Interest received and beneficially owned by certain entities is exempt.
21.Indonesia151025%10E15$Note 1
22.Ireland10-1510E1010Effective from AY 2003-04
23.Israel10101010
24.Italy201510%15+E20$20$
25.Japan (Revised)1010#E10$10$#Interest derived and beneficially owned by certain entities is exempt.
26.Jordan1010E20$20$Effective from AY 2001-02
27.Kazakhstan1010E1010
28.Kenya1515+E20+$17.5+$
29.Korea (South)2015 20%1510E15$15$
30.Kuwait10101010
31.Kyrgyz Republic1010#E15$15$Effective from AY 2003-04. #Interest derived and beneficially owned by certain entities is exempt
32.LibyaNote 3#Note 3#E Note 3#Note 1#Dividend, interest & Royalties not taxable in the country of residence
33.Malaysia1010#1010Effective from AY 2005-06. # Interest derived and beneficially owned by certain entities is exempt.
34.Malta151025%10E15#$10##Royalties include "Fees for included services"
35.Mauritius15510%20E15+$Note 1#Exempt if the transaction giving rise to the debt-claim has been approved in this regard by the Government, else taxable as per Domestic Law
36.Mongolia1515E15$ 25$
37.Morocco1010#E1010
38.Namibia1010E1010Effective from AY 2001-02
39.Nepal201010%1510E15$Note 1
40.Netherlands1010E10-2010-20
41.New Zealand1510E1010Protocol restricting treaty benefits to Indian or New Zealand residents
42.Norway2015#25%15E1010+#Applicable for new contribution only. Rate of fees for Technical services modified as per Indo-German DTAA. *There is possibility that the rate of royalty may also be taken @ 10% instead of treatment as per domestic law However, this is subject to different interpretation. As per protocol, the capital gain tax is changed to 10%.
43.Oman12.51010%10E15$15$
44.Philippines201510%15#10E15 @ $Note 1#10% in case of FIs, Ins. Co. and on public issues of bond, debentures, etc. @ subject to approval of agreement
45.Poland15#15E22.5$22.5$#Dividend should relate to new contribution after 1-4-1990
46.Portuguese Republic1010#1010Effective from AY 2002-03. #Only if the capital is owned by a company for an uninterrupted period of 2 years prior to payment of the dividend.
47.Qatar5-1010E1010Effective from AY 2002-03.
48.Romania201525%15E22.5$22.5$
49.Russian Federation1010E10 10Effective from AY 2000-01
50.Saudi Arabia510E10Note 1#Tax on fees for technical service to be decided after five years after review of tax treaty
51.Singapore151025%15#101010#10% in case of Ins. Co. or similar FIs.
52.Slovenia5-15101010Effective from AY 2006-07.
53.South Africa10   10E1010
54.Spain1515E10#20##Rate & Scope modified on account of Indo-German Treaty
55.Sri Lanka15+10E10 Note 1
56.Sudan1010#E10Note 1Effective from AY 2006-07. #Interest derived and beneficially owned by certain entities is exempt
57.Sweden1010#E10Note 1
58.Swiss Confederation10   10#E10Note 1
59.SyriaE7.5+E10+Note 1
60.Tanzania15+10+#10%12.5+E20+$Note 1#Only if the shares held during at least 6 months preceding payment of dividend
61.Thailand201510%2010+#E15+$Note 1#If recipient is financial institution \including insurance company
62.Trinidad & Tobago1010E1010Effective from AY 2001-02
63.Turkey151510#E15$15$#Also applicable to financial institution
64.Turkmenistan1010E1010
65.Uganda1010#E1010Effective from AY 2006-07. # Interest derived and beneficially owned by certain entities exempt.
66.Ukraine10-1510E1010Effective from AY 2003-04
67.United Arab Emirates15510%12.5510Note 1
68.United Arab RepublicNote 4Note 4ENote 3#Note 1#Royalties not taxable in the [Egypt] country of residence
69.United Kingdom151510ENote 8Note 8#Royalties @ 10% for Equipment Rental and for services ancillary or subsidiary thereto
70..United States of America201510%1510*ENote 8#Royalties @ 10% for Equipment  Rental and for services ancillary or subsidiary thereto. *Also applicable to bonafide FIs
71.Uzbekistan1515E15$15$
72.Vietnam1010E1010
73.Zambia15+5+#25%10+E10+Note 1#Only if the shares held during at least 6 months preceding payment of dividend
Note: The rates mentioned above are the rates of tax applicable in the source country. Taxability in the country of residence would be as per the domestic law of country of residence, unless otherwise specified.
+ Beneficial ownership not required
E Exempt from tax
$ For agreement made after 31st May, 1997, the rate of tax under the Income Tax Act on royalty or fees for technical services receivable by a foreign company is reduced to 20% (plus Surcharge & Cess, as applicable) by the Finance Act, 1997. As per section 90(2), this rate may be adopted if is lower than rates under DTAA. The rate is reduced to 10% (plussurcharge & cess, as applicable) for agreements entered into on or after 31st May, 2005 vide Finance Act, 2005.
Note 1: There is no separate provision for fees for Technical Services under the Treaty. Therefore, the same may be taxed under "Business Profits" or "Independent Personal Services" as per relevant DTAA, whichever is applicable.
Note 2: There is no separate provision for Fees for Technical Services under the Treaty. Therefore, the same way be taxed under "Business Profits" or "Independent Personnel Services" as per relevant DTAA, whichever is applicable.
Note 3: Taxable as per Domestic Law.
Note 4: Refer Treaty for detailed provisions.
Note 5: Special Rate of Tax on Dividend (other than Section 115-O Dividend) as mentioned in col. 4 is applicable if the recipient is a company beneficially holding at least specified percentage of voting control (mentioned in col, 5) in the company declaring Dividend.
Note 6: The above rates should be applied after carefully analysing and applying each Article of the Treaty and the Protocols, if any.
Note 7: Dividend u/s. 115-O is exempt u/s. 10(34) of the IT Act, 1961.
Note 8 : Royalties and fees for technical services would be taxable in the country of source at the following rates
(i) during first five years of aggeement     - 15 per cent if payer is Government or specified organisation.
                                                        - 20 per cent in other cases.
(ii) subsequent years, 15 per cent in all cases.