FM's googly on indirect transfers

After representation from various bodies, the Finance Minister, Mr Pranab Mukherjee, has amended the Finance Bill 2012.

While the amendments to GAAR are welcome, there has been no direct amendment on taxation of indirect transfer.

The Minister has, however, outlined retrospective clarificatory amendments:

the retrospective clarificatory amendments will not override India's tax treaties — that is, it would only impact transactions involving indirect transfer routed through low-tax or no-tax countries with which India does not have a tax treaty;

the retrospective clarificatory amendments will not be used to reopen any cases where assessment orders have already been finalised.

Instead of amending the Budget, the Minister has instructed CBDT (Central Board of Direct Taxes) to issue a policy circular stating the position after the passage of the Budget. One will have to see the fine print to find out the likely impact on individual cases.

TDS relief for the payer

Income-tax authorities have shifted the burden of tax payment from the payee to the payer in the form of TDS and also provided for adverse consequences in the hands of the payer — non-deduction of expenditure. There was an ambiguity in law on whether non-deduction of expenditure applies only to amount payable or even to amount paid to resident Indians. Tribunals took contrary views. However, payers have found relief from the Special Bench of the Vishakhapatnam Tribunal by relying on the literal interpretation of provisions of Section 40(a)(ia) of the Income Tax Act.

The Tribunal noted that “When the provision was proposed to be inserted, it sought to disallow ‘any amount credited or paid'. However, on enactment, only ‘amount payable' was covered.” Accordingly, it held that the provisions of this section would not apply to amounts actually paid.

The taxpayer can benefit from the above ruling until it is overruled or the provision is amended.

Taxing Internet use

Budget 2012 proposes to amend the Income Tax Act to clarify that the expression “process” in the definition of ‘royalty” includes transmission by satellite or other similar technology.

This amendment could bring payment towards “Internet charges” within the ambit of royalty and, therefore, mandate tax withholding under section 194J. However, technical arguments suggest that the proposed amendment has “misfired” and would not capture such payments, as the definition of royalty stresses on “use”. Courts have previously ruled that to “use” a process/equipment one would need to obtain control over their functionality. Accordingly, though a customer uses an Internet service, the process is considered to be used by the service provider.

With the intent behind the amendment in mind, however, there is a practical risk of the tax authorities invoking it to tax such payments as royalty.

Waiver for expats, long-term visitors

Finance Bill 2012 proposed mandatory filing of tax return by all residents with assets (including financial interest in any entity) outside India or signing authority in any bank account outside India.

The Finance Minister intended to introduce a requirement for every resident to disclose foreign assets, to check unaccounted money parked outside India. The provisions, as they were worded, required RNORs (generally long-term visitors and expatriates) to disclose foreign assets though the income may not be taxable in India.

However, the amended Finance Bill makes it clear that such provisions would be applicable only if the person is resident and ordinary resident, and in effect excludes RNORs.

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