Facing a shortfall in revenue collection and piling litigations, the Central Board of Excise and Customs has issued a circular prescribing timelines for recovery of confirmed demands during pendency of stay applications filed at various appellate forums. The circular states that where a stay application is not disposed of by the Appellate Commissioner/ CESTAT (Customs, Excise and Service Tax Appellate Tribunal) within 30 days of filing a quantum appeal, recovery proceedings shall be initiated.

In effect, no consideration will be given to the fact that the applicant is not at fault for the pendency of the undisposed stay application.

Where stay application is filed before the High Courts or the Supreme Court, recovery shall be initiated immediately after order passed by CESTAT or High Court if there is no subsisting stay.

The circular goes against settled jurisprudence related to recovery proceedings. At the cost of unsettling a settled tax position, the circular will result in issue of recovery letters in the case of outstanding demands.

Discouraging second-hand machinery

Recently, the Reserve Bank of India clarified the conditions attached to conversion of import of capital goods/ machinery/ equipment to equity as stated in the Consolidated FDI Policy. According to the amended position, import of second-hand machinery cannot be converted to equity under FDI Policy 2012. This is meant to pre-empt import of cheaper/ substandard second-hand machinery and incentivise latest machinery technology.

Taxman clears QFIs’ doubts

Even though qualified institutional investors (QFIs) are allowed to invest in Indian equity and debt markets, the investment market had not warmed up to the QFI route owing to unclear taxation issues.

According to the recent clarification from the Central Board of Direct Taxes in the form of FAQs, the Qualified Depository Participant (QDP) is considered a single point of contact for, and a ‘representative assessee’ of its QFI clients, thereby making the QDP liable for all tax-associated compliances and obligations; it sets forth a contradictory position on capital loss set-off; disregards brought-forward losses and requires QDPs to determine the vexed nature of the QFI’s income as business income or capital gain while computing tax liabilities at withholding stage.

Though the clarification is welcome on certain matters, the onerous tax responsibilities and compliance burden cast on QDPs may become a roadblock in the development of the QFI regime in India.

Scope of transfer pricing regulations

In a recent Hyderabad Tribunal decision relating to financial year 2006-2007, the applicability of section 92B(2) of the Income Tax Act 1961 on two Indian entities was debated.

International transactions between two or more associated enterprises, at least one of which must be non-resident, were covered under the transfer pricing regime since its advent in 2001.

There has been an ongoing debate on coverage of enterprises under the deeming fiction of section 92B(2) of the I-T Act. The controversy is whether the section or deemed international transaction is an exception to the condition of ‘associated enterprises’ relationship only or an exception to the residency condition also in order to make a transaction international for Indian transfer pricing regulations.

The Hyderabad Tribunal held that the transaction between the two Indian residents cannot be regarded as international and hence Indian transfer pricing provisions would not apply.

The Tribunal also observed that section 92B(2) was enacted to target cases where two associated enterprises intend to have an international transaction but want to avoid transfer pricing provisions by interposing a third party as an intermediary.

This is indeed a welcome judgement which clarifies the scope of deemed international transactions and categorically mentions that such transactions between domestic entities are outside the purview of Indian transfer pricing regulations.

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