Taking cognisance of the difficulties faced by taxpayers owing to incorrect tax demands resulting from the computerisation and centralised processing of income-tax returns, the Delhi High Court in March 2013 directed the Central Board of Direct Taxes to resolve the matter.

The CBDT accordingly issued instructions aimed at speedy disposal of applications filed by taxpayers for rectifying incorrect demands (two months from receipt of application and rectifying TDS mismatches).

Though welcome, the directions need to be implemented effectively and in a time-bound manner. Especially because the onus is on the taxpayer to approach the Income-Tax Department to get his/ her records corrected, and income-tax officers still retain the authority for disposing of grievances.

Tacit warning against tax havens

Finance Act, 2011 introduced anti-avoidance measures for transactions with persons in jurisdictions not notified by the Central Government (those that do not effectively exchange information with India). The term ‘person’ is widely defined to include a permanent establishment of a person who otherwise is not a resident of the notified jurisdiction. The memorandum explaining Finance Bill 2011 had referred to this section as a ‘toolbox of counter-measures’.

Under Section 94A of the Indian tax code, any transaction in which one of the parties is located in the notified jurisdictional area (NJA) shall be deemed international, subject to Indian transfer pricing regulations (including the onerous documentation under existing transfer pricing provisions, according to Rule 10D). Additionally, the section provides for an authorisation for payments made to financial institutions and prescribed documentation for payment to any other person.

The Central Board of Direct Taxes recently notified Rule 21AC in the Income-tax Rules, 1962, prescribing Form 10FC for furnishing the authorisation to claim deduction of payment made to a financial institution. For any other expenditure/ payment, in addition to the prescribed documentation under existing transfer pricing provisions, the following information should be maintained:

A description of the ownership structure of the specified person, and details of other entities, whether located in the notified jurisdictional area or outside, having directly or indirectly more than 10 per cent shareholding or ownership interests in the specified person;

a profile of the multinational group of which the specified person is a part, along with other details of each of the enterprises in the group with which the taxpayer has entered into a transaction, and the ownership linkage among them;

a broad description of the business of the specified person and the industry it operates in;

any other information which may be relevant for the transaction.

In a way, Section 94A authorises the Government to blacklist certain jurisdictions in order to curb transactions with them. Even though the section is effectively non-operational, as the Government has not yet notified any such jurisdiction, the CBDT has now prescribed forms and documentation. In a way, this is tacit warning from the Government to taxpayers to keep away from transacting with such jurisdictions (perceived tax havens); else they should be ready to be burdened with onerous requirements.

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