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Deduction of Tax at Source under Section 194N Restrained

The Kolkata High Court has passed an interim order restraining the deduction of tax at source under section 194N of the Income Tax Act till 30 September 2021 and directed that the matter be scheduled for final hearing after a period of eight weeks. The constitutional validity and legality of section 194N of the Act were challenged, by way of a writ petition, before Kolkata High Court in the case of Amalgamated Plantations Pvt. Ltd. & Anr.[1]

Section 194N – In Brief

The Finance Act, 2019 had inserted Section 194N under the Income-tax Act, 1961 (“the Act”), with effect from 1 September 2019, which mandates the deduction of tax at source at the rate of 2% on cash withdrawals from, inter alia, a banking company, on an amount exceeding INR 1 crore during the relevant tax year. The intention of introducing such provision under the Act was to discourage cash transactions and move towards cashless economy.

The Finance Act, 2020 substituted the above provisions to expand its scope. The revised threshold limit and rate of tax under section 194N of the Act have been summarised as follows:

Aggregate cash withdrawals in a tax year Rate of TDS
ITR of last 3 years filed ITR of last 3 years not filed
Up to INR 20 lakhs NIL NIL
Exceeds INR 20 Lakhs up to INR 1 crore NIL 2%
Exceeds INR 1 crore 2% 5%

The constitutional validity and legality of section 194N of the Act were challenged, by way of a writ petition, before Kolkata High Court in the case of Amalgamated Plantations Pvt. Ltd. & Anr.[1] (“the Petitioner”)


Is Section 194N beyond the legislative competence of the Parliament?


The Petitioner contended that the provisions of section 194N of the Act are beyond the legislative competence of the Parliament.

In this regard, the Petitioner placed reliance on Entry 82 of List I of Schedule VII of the Constitution of India, which empowers the Parliament to enact laws for imposition, collection and levy of tax on ‘income’. It was contended that the Parliament cannot legislate a provision for deduction of tax at source on an amount which is not an ‘income’.

The Petitioner further placed reliance on the decision of the Hon’ble Kerala High Court in the case of Kanan Devan Hills Plantations Company Pvt. Ltd[1] wherein, on a similar issue, the Kerala HC has admitted the writ petition and granted stay on deduction of tax at source under section 194N of the Act.

 

Interim Order on Section 194N

The Kolkata HC observed that the afore-mentioned order of Kerala HC has not been further challenged and the said interim order is still existing. It also observed that the Kerala HC, on the same issue, has passed series of orders admitting writ petitions and staying deduction of tax under section 194N of the Act.

Considering the above, the Kolkata HC has passed an interim order restraining the deduction of tax at source under section 194N of the Act till 30 September 2021 and directing that the matter be scheduled for final hearing after a period of eight weeks. In the interim, the Court has also directed that the Revenue authorities (“the Respondent”) and the Petitioner can file affidavit-in-opposition & reply thereof, respectively.

 

FM Comments:

The interim order of the Kolkata HC restraining the deduction of tax at source under section 194N of the Act is indeed a landmark order. The same should go a long way in deciding the constitutional validity and legality of this controversial provision in the law.

However, in the interim, it would be worthwhile to examine whether the benefit of the above order can be availed by other taxpayers at large.

At this juncture, it is also pertinent to highlight the fact that, although the intention of the legislature was to move towards a digital and cashless economy, one cannot lose sight of the fact that cash withdrawals from banks, by no stretch of imagination, can be considered, as ‘income’ earned by the recipient. As such, the collection of tax on such amounts ought to be treated as violative of the basic principles enshrined under our income-tax law.

If the issue is finally decided against the Revenue authorities, it would be an embarrassing setback vis-à-vis the Government’s significant efforts in moving towards a cashless economy.

Collection of tax on an amount that is not an ‘income’ of the recipient was an extreme step taken by the Government and going forward, more pragmatic approach may be expected to achieve the goal of a cashless and digital economy.

References:

[1] WPA 10826 of 2021

[2] WP (C) No. 1658 of 2020 dated 13/08/2020

Image Credits: Photo by Mathieu Stern on Unsplash

The Finance Act 2020 had expanded the scope of Section 194N, which earlier mandated the deduction of tax at source for cash withdrawals above a certain limit, by revising the threshold. The section has been challenged as ultra-vires. 

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Tax Alert: Latest COVID-19 Related Relaxations and Exemptions Issued by the Government

In view of the prevailing COVID-19 pandemic situation in the country, resulting in hardship and difficulty vis-à-vis complying with various due dates under the Indian Income tax Act, 1961 (‘the Act’) and causing severe impact on the cash flows, the Central Board of Direct Taxes (‘CBDT’) has time and again issued relevant Notifications, Circulars and Press Releases extending the due date w.r.t  various direct tax compliances.

 

Updated as on 13th July 2021

 

In the table below, we have summarized the key Notifications and Circulars issued by the CBDT, which has extended the due dates of various direct tax compliances under the Act:

Sr No

Compliance Particulars

Original Due Date

Extended Due Date[1]

1

Objections to Dispute Resolution Panel (DRP) and Assessing officer under section 144C

01 June 2021

31 August 2021 (note 1)

2

Statement of Deduction of Tax for the last quarter of the Financial Year 2020-21

31 May 2021

15 July 2021

3

Certificate of Tax Deducted at Source in Form 16

15 June 2021

31 July 2021

4

Statement of income paid or credited in Form 64D by Investment Fund to its unit holders for Financial Year 2020-2021

15 June 2021

15 July 2021

5

Statement of income paid or credited in Form 64C by Investment Fund to its unit holders for Financial Year 2020-2021

30 June 2021

31 July 2021

6

The application under Section 10(23C), 12AB, 35(1)(i i)/(iia)/(iii) and 80G of the Act in Form No. 10Af Form No.10AB. for registration/ provisional registration/ intimation/ approval/ provisional approval of Trusts/ Institutions/ Research Associations

30 June 2021

31 August 2021

7

Compliances for claiming exemption under provisions contained in sections 54 to 54GB

01 April 2021 to 29 September 2021

01 April 2021 to 30 September 2021

8

Quarterly Statement in Form 15CC to be furnished by Authorized Dealer in respect of foreign remittances made for quarter ended 30th June 2021

15 July 2021

31 July 2021

9

Equalization Levy Statement in Form 1 for Financial Year 2020-21

30 June 2021

31 July 2021

10

Time Limit for processing Equalization Levy return

30 September 2021

11

Annual Statement in Form 3CEK to be furnished under section 9A(5) by Eligible Investment Fund

29 June 2021

31 July 2021

12

Uploading declaration received from recipients in Form No 15G / 15H for quarter ended 30th June 2021

15 July 2021

31 August 2021

13

Exercising of option under section 245M(1) in Form No. 34BB for withdrawing application before Settlement Commission

27 June 2021

31 July 2021

14

Last date of linking of Aadhar with PAN under section 139AA

31 March 2021

30 September 2021

15

Last date of payment under Vivad se Vishwas (without additional amount)

31 August 2021

16

Last date of payment under Vivad se Vishwas (with additional amount)

31 October 2021

17

Time Limit for passing assessment / reassessment order

31 March 2021

30 September 2021

18

Time Limit for passing penalty order

30 September 2021

19

Due date for furnishing Return of Income – Non Audit Case

31 July 2021

30 September 2021

20

Due date for furnishing Tax Audit Report

30 September 2021

31 October 2021

21

Due date for furnishing Transfer Pricing Audit

31 October 2021

30 November 2021

22

Due date for furnishing Return of Income – Audit case

31 October 2021

30 November 2021

23

Due date for furnishing Return of Income where Transfer Pricing is applicable

30 November 2021

31 December 2021

24

Belated / Revised return for Assessment Year 2021-22

31 December 2021

31 January 2022

Note:

1) If the last date allowed u/s. 144C is later than 31 August 2021 then such a later date shall prevail.

 

References:

[1] Notification No 74/2021 & 75/2021 and Circular No 9/2021 dated 20 May 2021 and 12/2021 dated 25 June 2021

Image Credits: Photo by Nataliya Vaitkevich from Pexels

We have summarized the key notifications and circulars issued by the CBDT, extending the due dates of various direct tax compliances under the Act.

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Tax Alert: New Rules for Determining Taxability on Reconstitution of Firms

The Central Board of Direct Taxes (CBDT), vide notification[1] dated 2nd July 2021, has inserted a new sub-rule 5 under Rule 8AA of the Income-tax Rules, 1962 (Rules) which deals with the characterisation of capital gains under section 45(4) of the Act. The CBDT has also notified Rule 8AB, which deals with the attribution of income taxable under section 45(4) of the Act to the capital assets remaining with the specified entity. Additionally, the CBDT, vide circular[2] dated 2nd July 2021, has also issued guidelines for practical application of provisions under section 9B and section 45(4) of the Act.
Background
Finance Act, 2021 had inserted a new section 9B under the Income-tax Act, 1961 (Act) which provides that where a specified person[3] receives any capital asset or stock in trade or both from a specified entity [4] on dissolution or reconstitution of such specified entity, then such specified entity shall be deemed to have transferred such capital asset or stock in trade, or both, in the year in which such capital asset or stock in trade or both are received by the specified person and shall be chargeable to tax as income of the specified entity in that year, under the head “Profits and gains of business or profession” or under the head “Capital gains”, as the case may be. It is also provided that fair market value (FMV) of such capital asset or stock in trade, shall be deemed to be the full value of consideration as a result of such deemed transfer. Further, Finance Act, 2021 had also substituted the provisions of section 45(4) of the Act, which now provides that where a specified person receives any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from such receipt by the specified person shall be chargeable to tax as income of the specified entity under the head “Capital gains” in that year. The amount chargeable to tax under section 45(4) of the Act shall be calculated as per the below-mentioned formula. A = B + C – D where, A = Income chargeable to tax under section 45(4) of the Act B = Value of any money received by the specified person C = Amount of FMV of the capital asset received by the specified person D = Amount of balance in the capital account [represented in any manner (excluding increase due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset)] of the specified person in the books of account of the specified entity at the time of reconstitution. It is also clarified that the provisions of section 45(4) shall operate in addition to the provisions of section 9B and accordingly the taxation under these provisions need to be worked out independently. The Finance Act, 2021 has also inserted a new clause (iii) under section 48 of the Act (deduction from the full value of consideration) which provides that the amount of income chargeable to tax under section 45(4) which is attributable to the capital asset being transferred by the specified entity shall be calculated in the prescribed manner. It may be noted that the above-mentioned provisions are applicable w.r.e.f 1 April 2021 i.e. from the tax year 2020-21 onwards.
Notification/Circular
The Central Board of Direct Taxes (CBDT), vide notification[1] dated 2nd July 2021, has inserted a new sub-rule 5 under Rule 8AA of the Income-tax Rules, 1962 (Rules) which deals with the characterisation of capital gains under section 45(4) of the Act. The CBDT has also notified Rule 8AB, which deals with the attribution of income taxable under section 45(4) of the Act to the capital assets remaining with the specified entity. Additionally, the CBDT, vide circular[2] dated 2nd July 2021, has also issued guidelines for practical application of provisions under section 9B and section 45(4) of the Act. This tax alert summarizes the notification and guidelines issued by the CBDT as under: In order to avoid double taxation of the same amount, the provisions of section 45(4) r.w.s 48(iii) of the Act requires that the amount taxed under section 45(4) of the Act should be attributed to the remaining capital asset(s) of the specified entity, such that when these capital asset(s) get transferred in the future, the amount attributed to such capital asset(s) gets reduced from the full value of consideration.
Capital Gains Charged under Section 45(4)

It is further clarified that the revaluation of an asset or valuation of self-generated asset or goodwill does not entitle the specified entity for deprecation on such increased value. 

The specified entity is required to furnish, electronically, the details of the amount attributed to the capital asset remaining with the specified entity in Form No 5C on or before the due date as prescribed under section 139(1) of the Act.

 
Applicability of Attribution Rule (Rule 8AB) to Capital Assets Forming Part of Block of Assets

 

It was observed that the current provisions provide attribution of capital gains under section 45(4) of the Act only for the purpose of section 48 of the Act. It may be noted that provisions of section 48 apply to capital assets that do not form part of block of assets.

Accordingly, in order to provide clarity and remove the difficulty, the CBDT has stated that the attribution rule i.e. Rule 8AB of the Rules shall also apply in relation to capital assets forming part of the block of assets.

It is further clarified that the amount attributed under Rule 8AB of the Rules shall be reduced from the full value of the consideration received or accruing as a result of the subsequent transfer and accordingly net consideration shall be reduced from the written-down value (WDV) of the block of assets under section 43(6)(c) of the Act or for the purpose of calculating capital gains under section 50 of the Act.

 
Characterization of capital gains under section 45(4) of the Act

 

The CBDT has notified Rule 8AA(5) under the Rules which provides for characterization of the nature of capital gains (i.e. long term or short term) under section 45(4) of the Act. It provides that where the amount of capital gains chargeable under section 45(4) is attributed to short term capital asset, capital asset forming part of a block of assets or capital asset, being self-generated asset or goodwill, then the capital gains under section 45(4) shall be deemed to be from the transfer of short-term capital asset; otherwise, it shall be deemed to be transferred from long term capital asset.

 
Examples under the Guidelines

 

In order to better understand the provisions, few examples have been given in the guidelines:

 
Example 1

 

Facts

There are three equal partners A, B and C in a Firm ‘FR’ having a capital balance of INR 10 lacs each. The details of capital assets held by the firm are as under.

Partner ‘A’ wishes to exit and accordingly the firm decides to give him INR 11 lacs of money and Land ‘U’ to settle his capital balance.

 

Tax Implications

A. Under section 9B of the Act

It shall be deemed that the Firm ‘FR’ has transferred the Land ‘U’ to Partner ‘A’ and accordingly an amount of INR 35 lakhs (50 – 15) shall be chargeable to tax in the hands of ‘FR’ under the head capital gains as long-term capital gains and a tax liability of INR 7 lakhs (assuming no surcharge or cess) shall be payable.

For Partner ‘A’, the cost of acquisition Land ‘U’ would thus be INR 50 lakhs.

B. Accounting in the books of Firm ‘FR’

The net book profit after tax of INR 33 lakhs (computed as amount of capital gains without indexation INR 40 lakhs less tax of INR 7 lakhs) shall be credited to each Partner’s capital account i.e. INR 11 lakhs each.

Pursuant to the above, the capital balance of Partner ‘A’ would increase to INR 21 lakhs (10+11).

C. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per the afore-mentioned formula.

Capital Gains under Section 45(4)

The capital gains of INR 40 lakhs shall be chargeable to tax in the hands of Firm ‘FR’ in addition to INR 35 lakhs chargeable under section 9B of the Act.

D. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Characterization of capital gains under section 45(4) of the Act

Subsequently, when the Land ‘S’ or Land ‘T’ would be transferred by the Firm ‘FR’, the amount of attribution would get reduced from the full value of consideration as per the provisions of section 48(iii) of the Act.

E. Characterization of capital gains

Since the amount of INR 40 lakhs charged to tax under section 45(4) of the Act has been attributed to Land ‘S’ and Land ‘T’, being long term capital assets, such amount shall be chargeable as long term capital gains as per Rule 8AA(5) of the Rules.

 

Example 2

 

Facts

The facts of Example 2 are the same as in Example 1 with a modification that the Firm ‘FR’ sells the Land ‘U’ at FMV of INR 50 lakhs to an outsider and on the exit of Partner ‘A’, the Firm decides to give him INR 61 lakhs to settle his capital balance.

 

Tax Implications

A. Under section 9B and section 45 of the Act

Since neither ‘capital asset’ nor ‘stock in trade’ have been distributed to Partner ‘A’, the provisions of section 9B of the Act do not get triggered. However, the Firm would be liable to normal capital gains tax on the sale of Land ‘U’. Accordingly, an amount of INR 35 lakhs (50 – 15) shall be chargeable to tax in the hands of ‘FR’ under the head capital gains as long-term capital gains and tax liability of INR 7 lakhs (assuming no surcharge or cess) shall be payable.

B. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per the afore-mentioned formula.

Characterization of capital gains under section 45(4) of the Act

The capital gains of INR 40 lakhs shall be chargeable to tax in the hands of Firm ‘FR’ under section 45(4) of the Act.

C. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Characterization of capital gains under section 45(4) of the Act

Subsequently, when the Land ‘S’ or Land ‘T’ would be transferred by the Firm ‘FR’, the amount of attribution would get reduced from full value of consideration as per the provisions of section 48(iii) of the Act.

D. Characterization of capital gains

Since the amount of INR 40 lakhs charged to tax under section 45(4) of the Act has been attributed to Land ‘S’ and Land ‘T’, being long term capital assets, such amount shall be chargeable as long term capital gains as per Rule 8AA(5) of the Rules.

In effect, the final result in both Example 1 and 2 would be same due to operation of section 9B of the Act.

 

Example 3

 

Facts

There are three equal partners A, B and C in a Firm ‘FR’ having capital balance of INR 100 lacs each. The details of capital assets held by the firm are as under.

Characterization of capital gains under section 45(4) of the Act

Partner ‘A’ wishes to exit and accordingly the firm decides to give him INR 75 lacs in money and Land ‘S’ to settle his capital balance.

 

Tax Implications

A. Under section 9B of the Act

It shall be deemed that the Firm ‘FR’ has transferred the Land ‘S’ to Partner ‘A’. However, since the full value of consideration is equal to indexed cost of acquisition, there would be no capital gain tax in the hands of the Firm.

For Partner ‘A’, the cost of acquisition would be INR 45 lakhs.

B. Accounting in the books of Firm ‘FR’

The net book profit after tax of INR 15 lakhs (computed as amount of capital gains without indexation) shall be credited to each Partners capital account i.e. INR 5 lakhs each.

Pursuant to above, the capital balance of Partner ‘A’ would increase to INR 105 lakhs (100+5).

C. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per afore-mentioned formula.

Characterization of Capital Gain - Circular No. 14 of 2021 - Tax Circular - CBDT

The capital gains of INR 15 lakhs shall be chargeable to tax in the hands of Firm ‘FR’. 

D. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

d) Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Subsequently, when the Firm transfers ‘Patent’ or ‘Goodwill’, the amount of attribution would get reduced from full value of consideration as per the provisions of section 48(iii) or section 43(6)(c) or section 50 of the Act, as the case may be.

It may also be noted that for the purpose of computing depreciation under section 32 of the Act, the WDV of the block of asset of which ‘Patent’ is a part, shall remain INR 45 lakhs only and should not be increased to INR 60 Lakhs. Similarly, no depreciation would be allowed on self-generated ‘Goodwill’.

E. Characterization of capital gains

Since the amount of INR 15 lakhs charged to tax under section 45(4) of the Act has been attributed to asset forming block of asset i.e. Patent and to self-generated Goodwill, such amount shall be chargeable as short term capital gains as per Rule 8AA(5) of the Rules.

 
FM Comments

 

The detailed guidelines and notification issued by the CBDT is indeed a welcome move and shall certainly help in addressing various concerns of the taxpayers. However, beyond the 3 specific Examples illustrated, in our view, there would be certain other issues which may require similar deliberation and clarification.

It is pertinent to note that the substituted provisions 45(4) and section 9B of the Act are applicable w.r.e.f. 1 April 2021 (i.e. from tax year 2020-21 onwards), whereas the rules for attribution of income and its characterization have been notified on 2 July 2021. The notification is silent with respect to the date of its applicability.

Generally, such notifications come into force on the date of its publication in the Official Gazette, unless the effective date of its applicability is already provided in the notification itself. CBDT, while notifying Rule 8AA(5) and Rule 8AB, has not provided any ‘effective applicable date’ for the same and accordingly it may be inferred that such Rules are to be made effective from 2 July 2021. Thus, the question which may arise is whether Rule 8AA(5) and Rule 8AB would be applicable to the reconstitution of specified entities that have already been undertaken between 1 April 2020 to 1 July 2021.

It may further be noted that the earlier provisions of section 45(4) provided that the transfer of a capital asset on the dissolution of a firm was made chargeable to tax as the income of the firm. But the distribution of money on dissolution was neither chargeable to tax in the hands of the firm nor in the hands of the recipient Partner.

However, the new provisions of section 45(4) state that distribution of money or capital asset exceeding the balance in the capital account of Partner would now be chargeable to tax under the head “capital gains”. Accordingly, the new provisions create a charge of capital tax on the distribution of money. It may be noted that, generally, ‘money’ or ‘currency’ is not considered as a ‘capital asset’ and accordingly the issue which may arise is that whether the distribution of money could be taxed under the head ‘capital gains’ as there is no transfer of capital asset.

It is also pertinent to note that the attribution rules under Rule 8AB of the Rules would lead to a premature collection of the taxes by the Government, the benefit of which may or may not be obtained by the specified entity.

The specified entity would get the benefit of attribution only when they transfer the remaining capital assets subsequently, which is a contingent event, that may or may not happen. Further, in a case where the excess payment chargeable to tax under section 45(4) of the Act, relates to the valuation of self-generated goodwill, then the entity may not be able to claim the benefit of attribution unless the entity hives off its business undertaking, which is highly unlikely. Another interesting question that would arise is how the specified entity would be eligible to claim the benefit of attribution where remaining capital assets are transferred under tax-neutral arrangements.

Moreover, in a scenario, where the aggregate value of money received by the specified person exceeds the balance in his capital account and it does not relate to the revaluation of any capital assets, then the following issues may arise:

  • Characterization of capital gains as ‘Short-term’ or Long-term’ as no attribution of income would be made by the specified entity to the remaining capital assets under Rule 8AB.
  • Such excess payment may have been made by a specified entity due to other business reasons such as payment for non-compete, etc. Accordingly, the deductibility of such excess amount while computing the taxable income of the specified person, would be a challenge.

Going forward, it would be imperative for specified entities to carefully assess the impact of the above provisions while carrying out any reconstitution activity in order to avoid double taxation.

References: [1] “specified person” means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. [2] “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society). [3] Notification No. 76/2021 [4] Circular No. 14 of 2021 Image Credits: Photo by Nataliya Vaitkevich from Pexels

It is pertinent to note that the substituted provisions 45(4) and section 9B of the Act are applicable w.r.e.f. 1 April 2021 (i.e. from tax year 2020-21 onwards), whereas the rules for attribution of income and its characterization have been notified on 2 July 2021. The notification is silent with respect to the date of its applicability.

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CBDT notifies thresholds for determining ‘Significant Economic Presence’ in India

Background:
The concept of SEP was introduced under Income-tax Act, 1961 (“the Act”) vide Finance Act, 2018, by way of insertion of Explanation 2A to section 9 of the Act, to expand the scope of the term ‘Business Connection’ and includes:
(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed. It was further provided that the transactions or activities shall constitute significant economic presence in India, whether: (i) the agreement for such transactions or activities is entered in India; or (ii) the non-resident has a residence or place of business in India; or (iii) the non-resident renders services in India. The above-mentioned Explanation was inserted primarily for establishing Business Connection in India for Multinational entities carrying out business operations through digital means, without having any physical presence in India. However, its enforceability was deferred time and again as the discussion on this issue was ongoing under G20 – OECD BEPS project.
Read about the implications of the CBDT notification that has prescribed the ‘revenue’ and ‘users’ threshold for the purpose of determining SEP.

References

Image Credits: Photo by Markus Winkler from Pexels

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Income Tax Returns for AY 2020-21: Ready Referencer

With the extended time limit for filing of Income Tax Return (for AY 2020-21), u/s. 139(1), without late fees, for Non-Audit cases and for Non-Corporate assessees of 31st December 2020 fast approaching, given below is a quick guide for ready reference of some key changes that have been made in the respective Income tax return forms for this year.

Further, the conditions and features for eligibility of forms that are applicable for filing the correct income tax returns are also specified as follows:

Key Procedural Changes:

  • ITR 1 to ITR 4 can be filed using PAN or Aadhar by Individuals.
  • The submitted ITR forms display the ITR-V with a watermark ‘Not Verified’ until the same is verified either electronically by EVC or by sending the same via post after manual signing.
  • The unverified form ITR-V will not contain any income, deduction and tax details. The unverified form will only contain basic information, E-filing Acknowledgement Number and Verification part.
  • The unverified acknowledgement is titled as ‘INDIAN INCOME TAX RETURN VERIFICATION FORM’ & final ITR-V is titled as ‘INDIAN INCOME TAX RETURN ACKNOWLEDGEMENT’.
  • Return filed in response to notice u/s. 139(9), 142(1), 148, 153A, and 153C must have DIN.
  • There is a separate disclosure for Bank accounts in case of Non-Residents who are claiming income tax refund and not having a bank account in India.

COVID related Changes:

  • The Government had extended the time limit for claiming tax deduction u/CH VIA to 31st July 2020, and the details of the same need to be reported in Schedule DI (details of Investment).
  • The time limit for investing the proceeds or capital gains in other eligible assets, so as to claim exemptions u/s 54/ 54B/ 54F/ 54EC, had been extended to 30th September 2020.
  • Penal interest u/s. 234A @ 1% p.m., where the payments were due between 20-03-20 to 29-06-20 and such amounts were paid on or before 30-06-20, had been reduced to 75%, vide ordinance dated 31-03-20.
  • Period of forceful stay in India, beginning from quarantine date or 22-03-20 in any other case up to 31-03-20, is to be excluded, for the purpose of determining residential status in India.[1]

Consequences of Late filing of Return of Income:

  • Late Fees u/s. 234F of INR. 5,000 up to 31.12.20 and INR. 10,000 up to 31.03.21. In case of total income up to 5 Lacs, the penalty is INR. 1,000.
  • Penal Interest u/s. 234A @ 1% per month
  • Reduced to 75%. vide Ordinance dated 31.03.20, where the payments were due between 20.03.20 to 29.06.20, and such amounts were paid on or before 30.06.20.
  • Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.
  • In case of a belated return, loss under any head of Income (except unabsorbed depreciation) cannot be carried forwarded.
  • Deduction claims u/s. 10A, 10B, 80-IA, 80-IB, etc would not be allowed.

Consequences of Late filing of Return of Income:

  • Late Fees u/s. 234F of INR. 5,000 up to 31.12.20 and INR. 10,000 up to 31.03.21. In case of total income up to 5 Lacs, the penalty is INR. 1,000.
  • Penal Interest u/s. 234A @ 1% per month
  • Reduced to 75%. vide Ordinance dated 31.03.20, where the payments were due between 20.03.20 to 29.06.20, and such amounts were paid on or before 30.06.20.
  • Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.
  • In case of a belated return, loss under any head of Income (except unabsorbed depreciation) cannot be carried forwarded.
  • Deduction claims u/s. 10A, 10B, 80-IA, 80-IB, etc would not be allowed.

Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.

  1. Section 5A: Apportionment of income between spouses governed by the Portuguese Civil Code.
  2.  115BBDA: Tax on dividend from companies exceeding Rs. 10 Lakhs; 115BBE: Tax on unexplained credits, investment, money, etc. u/s. 68 or 69 or 69A or 69B or 69C or 69D.
  3. Inserted in sec 139(1) by Act No. 23 of 2019, w.e.f. 1-4-2020:

Provided also that a person referred to in clause (b), who is not required to furnish a return under this sub-section, and who during the previous year:

  • has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more current accounts maintained with a banking company or a co-operative bank; or
  • has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for himself or any other person for travel to a foreign country; or
  • has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards consumption of electricity; or
  • fulfils such other conditions as may be prescribed,

Shall furnish a return of his income on or before the due date in such form and verified in such manner and setting forth such other particulars, as may be prescribed.

4. Section 57: Deduction against income chargeable under the head “Income from other sources”.

5. Schedule DI: Investment eligible for deduction against income (Ch VIA deductions) to be bifurcated between paid in F.Y.19-20 and during the period 01-04-20 to 31-07-20.

6.High-value Transaction: Annual Cash deposit exceeding Rs. 1 crore or Foreign travel expenditure exceeding Rs. 2 Lakhs, Annual electricity expenditure exceeding Rs. 1 Lakh.
7.Schedule 112A: From the sale of equity share in a company or unit of equity- oriented fund or unit of a business trust on which STT is paid under Section 112A.

8. 115AD(1)(iii) proviso: for Non-Residents – from the sale of equity share in a company or unit of equity-oriented fund or unit of a business trust on which STT is paid under Section 112A.
9. Section 40(ba): any payment of interest, salary, bonus, commission or remuneration paid to a member in case of Association of Person (AOP) or Body of Individual (BOI).

10. Section 90 & 90A: Foreign tax credit in cases where there is a bilateral agreement; Section 91: Foreign tax credit in cases of no agreement between the countries.

[1] Circular No 11 of 2020 dated 08th May 2020.

References

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Extended Filing of Tax Returns – Some Issues

Due to the country’s ongoing COVID pandemic situation and the resultant disruption in normal business operations, several representations from professional bodies and other stakeholders, were made to the Hon’ble Finance Minister to further extend the due dates for Income Tax Audit, GST Audit and filing of Income tax returns.

In response, the Government has, through its Press Release dated 30th December 2020, agreed to extend the various due dates, key details of which are tabulated below:

Direct Tax:

Description Extended due date1 Further extended due date
Income tax return (Non audit cases) 31st December 2020 10th January 2021
Income tax return where Audit is applicable (Including partner of the firm) 31st January 2021 15th February 2021
Tax audit, Transfer pricing audit or any other audit 31st December 2020 15th January 2021
Declaration under ‘Vivad se Vishwas Scheme’ 31st December 2020 31st January 2021

Indirect Tax:

Description Extended due date Further extended due date
GST Annual return in GSTR 9 for F.Y. 2019-20 31st December 2020 28th February 2021
GST Audit report in GSTR 9C for F.Y. 2019-20 31st December 2020 28th February 2021

Some practical issues that arise post this extension:

  1. The further extension granted is certainly a relief measure from the Government. However, keeping in mind the severity of the disruption that continues to be impacting the business operations of the country at large, this short extension, when compared with the representations that were made before the CBDT, is unlikely to satisfy the needs and expectations of many stakeholders and professionals.
  2. It is likely that despite the extension announced by the Government, professionals and stakeholders would be keenly awaiting the outcome of the writ filed before the Mumbai High Court 2 and Gujarat High Court 3 appealing for further extension.
  3. The waiver of interest u/s. 234A for interest on late filing of return, granted in the earlier Press Release, dated 24th October 2020, shall also stand extended till the new due dates i.e., 10th January 2021 and 15th February 2021. However, it may be noted that this benefit has been extended only for small assessees having self-assessment tax liability (i.e., after reducing TDS/TCS, advance tax, etc) up to Rs. 1,00,000 and that too, only if the same is paid within the extended due date.
  4. In case of senior citizens (above 60 years of age) and super senior citizens (above 80 years of age) if their tax liability exceeds Rs 1 lac, the interest u/s. 234A would be charged, even if the return is filed within the extended due date. Ideally, the interest waiver should have been extended to all senior and very senior citizens, as practically, it is difficult for them to venture out during the ongoing pandemic and arrange for the required documents etc, so as to be able to compute and pay their taxes within the original due date.
  5. Further, the Government has not reduced the fee u/s. 234F for belated filing of a return, which would have been only Rs. 5,000 in case the return was filed after the original due date but within 31st December 2020. However, currently, since the December period has elapsed, assessees would have to pay an increased fee of Rs. 10,000 in case there is further delay in filing the return beyond the extended dates. In case of assessees having total income up to 5,00,000, the maximum late fees will be Rs. 1,000.
  6. It would be worthwhile to see if the Government extends the due date for filing of “belated return” and “revised return” for FY 19-20 (AY 20-21), the statutory due date for which is 31st March 2021. Considering the revised extended deadlines now, there is hardly any time left for filing revised or belated returns. Ideally, this date should have also been pushed by 6 – 9 months (30th September 2021 or 31st December 2021). However, the Government has been silent on this issue.
  7. The Government has also not addressed the issues concerning assesses who may still be stranded outside India and hence are unable to e-file their Income tax returns for FY 19-20 on time.

Some key issues on which clarity from Government is still awaited are as follows:

  1. Although the Government has extended Income tax return filing dates both for audit and non-audit cases, however, no similar extension has been announced by the Ministry of Company Affairs (MCA), vis-à-vis compliances under the Companies Act. This makes the income tax extension less meaningful or severely dilutes the essence of income tax extension relief in case of companies and LLPs.
  2. Considering that the country-wide lockdown norms are not yet lifted and with the prevailing disruption in carrying normal business activities, it has been difficult for stakeholders to pay advance tax for F.Y. 2020-21. However, the Government has not yet announced any relaxations, either with respect to payment of Advance tax or waiver of penal interest for any non-payment or short payment of advance tax.
  3. The CBDT had, vide Circular no 11/2020, clarified some tax residency issues arising for F.Y. 2019-20. However, no such clarification has been issued till date for F.Y. 2020-21 impacting determination of residential status and related Permanent Establishment (PE) or Place of effective management (POEM) issues getting triggered.
  4. The extension of statutory filing deadlines for F.Y. 2019-20 has resulted in the overlapping of limited time for F.Y. 2020-21 compliance; as such, there would be a need for the Government to reconsider the statutory time limits with respect to TDS compliances, assessments, re-assessments, audits etc.

With respect to GST annual return and GST audit for F.Y. 2019-20, professionals and stakeholders have raised serious concerns for time limit being extended only up to 28th February 2021; as the utility for GST annual return and that for reconciliation statement, is made available only in the month of December 2020 and secondly the same overlaps with the extended time limit for income tax audit return, which is 31st January 2021.

With respect to GST annual return and GST audit for F.Y. 2019-20, professionals and stakeholders have raised serious concerns for the time limit being extended only up to 28th February 2021; as the utility for GST annual return and that for reconciliation statement, is made available only in the month of December 2020 and secondly the same overlaps with the extended time limit for income tax audit return, which is 31st January 2021.

References

  1.  Notification No 88/2020/F. No. 370142/35/2020 – TPL dated 29th October, 2020.
  2. The Chamber of Tax Consultants & Another Vs Union of India & Another (Bombay High Court)
  3. The All-Gujarat Federation of Tax Consultants Vs. Union of India (Gujarat High Court); Filing (Stamp) Number: Special Civil Application – No. 23375 of 2020

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Guide to Income Tax Deduction from Salaries for the F.Y. 2020-21

Circular No 20/2020 (“the Circular”) was issued on 3rd December 2020 to provide procedures to be followed by employers for deducting Income tax (TDS) from the salary income of the Employee for Financial Year (F.Y.) 2020-21 relevant to Assessment Year (A.Y.) 2021-22 under section 192 of the Income tax Act, 1961 (“the Act”).

 

The guidelines/instructions laid down in the Circular are not exhaustive and in case of any doubt, reference may be made to the relevant provisions of the Act or the Income tax Rules 1962 (“the Rules”).

Here is a summary of the detailed Circular:

Rate of Tax:

The Circular notifies the rate of tax to be applied (depending upon the age of the Employee) to calculate Income tax of an individual on the income chargeable under the head “Salaries”. The tax so calculated is increased by applicable surcharges, if any, and Health and Education Cess. The tax on income under the head “Salaries” is to be calculated at the applicable rate or 20%, whichever is higher, as prescribed u/s. 206AA, in case of non-furnishing of Permanent Account Number (PAN) or Aadhar by the Employee. The Circular reiterates the allowability of Aadhar instead of PAN, in line with the Budget 2020 announcements, as valid compliance for the purpose of Section 206AA of the Act.

Finance Act 2020 had prescribed the choice of two alternate rates of tax i.e., old tax regime and the new tax regime for Individuals, as per their discretion. As such, an Individual / Assessee has the option to choose between the Old Regime i.e., Normal rate of tax or New regime i.e., Concessional rate of tax prescribed u/s. 115BAC of the Act, whichever is more beneficial to them.

Section 115BAC is an optional provision applicable to Individual and HUF, providing a concessional rate of tax, subject to the condition that the total income of the assessee shall be computed without specified exemptions or deductions, set off a loss or additional depreciation.

Further, in case of a person having income from business and profession, he would be required to exercise the option in the prescribed manner on or before the due date specified u/s. 139(1) of the Act. Such an option, once exercised, shall be applicable to all subsequent assessment years. However, the option once exercised can be withdrawn only once and such person shall never be eligible to exercise the option again unless such person ceases to have income from business and profession.

CBDT Circular No C1/2020, dated April 13, 2020 required an employee to intimate to his employer about the option he wishes to exercise between the old and the new tax regime, during each previous year and accordingly the Employer was required to calculate tax on the income of the employee. However, if no such intimation was given by the employee, the employer would have to make the TDS deduction without considering provisions of Section 115BAC. The intimation so made shall be only for the purposes of TDS during the previous year and cannot be modified during the year.

Method of Tax Calculation on Salary and Perquisite:

The Circular requires an employer to determine the estimated annual income under the head “Salaries” and calculate income tax on the same, by applying the applicable tax rate, based on the option chosen by the employee, as discussed above. The tax is to be then deducted at the applicable rate at the time of payment of salary to the employee.

No tax is to be deducted if the estimated salary income, including perquisite, does not exceed the basic exemption limit as provided by the Finance Act, 2020.

Also, the employer has been given an option to pay tax on the non-monetary perquisites given to the employee. To calculate tax on non-monetary perquisites, the Circular directs the employer to calculate the ‘average rate of tax’ and apply the said rate on the non-monetary perquisites to calculate tax on the same. The tax so paid by the employer based on the said calculation would be deemed as the TDS made from the salary of the employee.

As per Section 192(1C), an ‘eligible start-up’ as referred to in section 80-IAC, responsible for paying any income in the nature of perquisite u/s. 17(2)(vi) [Employee stock option plan or sweat equity shares] relevant to A.Y. 2021-22 or thereafter, is required to deduct or pay tax on such income within 14 days –

  1. After the expiry of 48 months from the end of the relevant A.Y.; or
  2. From the date of sale of specified security or sweat equity share by the assessee; or
  3. From the date of the assessee ceasing to be an employee,

whichever is the earliest, based on rates in force for the financial year in which the said specified security or sweat equity share is allotted or transferred.

More than one Employer:

In the case of more than one employer, the Circular requires the employer to deduct TDS on the aggregate income, including the salary received from former/another employer. The current employer is under the obligation to obtain details of income under the head “Salaries” due or received from former/other employer and deduct tax on the aggregate of such amount. The current employer is required to obtain such detail from the employee in writing and duly verified by the former/other employer.

Salary paid in Advance or Arrears:

In case of Salary paid in Advance or Arrears, the employee is entitled to claim relief u/s. 89 of the Act. The employee is required to furnish such particulars in Form No. 10E, duly verified by him, to the person responsible for deducting TDS and upon receipt of such information, the Employer is required to compute the said relief.

Income from other head:

The employer is required to consider the details of any other income submitted by the employee for the purpose of calculating the tax on salary. However, in case of loss, only loss under the head “Income from House Property” up to a maximum of Rs. 200,000 in a year can be considered and any other loss is to be ignored.

The employee is required to submit information regarding the computation of income and evidence of payment of interest under the head “Income from House Property” in Form 12BB.

(Notification No 36/2019 dated April 12, 2019, allows an employer to report only Income under the head “Income from House Property” and “Income from other sources”. Hence, any income under the head “Income from Business and Profession” and “Capital Gains” has to be ignored for the purpose of calculating TDS under the head “Salaries”)

Adjustment for excess or shortfall of deduction:

Section 192(3) of the Act allows the employer to adjust the shortfall or excess of tax deducted for any month in the subsequent months of the same financial year. There is no compulsion to deduct tax equally over the 12 months period.

Salary Paid in Foreign Currency:

In case of salary paid in foreign currency, the value of salary must be calculated by applying the “Telegraphic transfer buying rate”, prevailing on the date on which tax is required to be deducted at source, for the conversion of such currency and tax is to be calculated on the said converted value.

Person Responsible for deducting tax and their duties:

The Circular reiterates the provisions regarding the responsibility of the employer to deduct tax from the salary and emphasizes on timely deposit of TDS with the Central Government, furnishing of TDS return and the issue of Form 16, within the due dates as tabulated below:

Month Original Due Date Extended Due Date
April to June 31st July 2020 31st March 2021
July to September 31st October 2020 31st March 2021
October to December 31st January 2021 31st January 2021
January to March 31st May 2021 31st May 2021

The Circular also reminds about the penal consequences in cases of failure in payment of TDS, filing of TDS return, issuing certificate, or furnishing incorrect information, as prescribed in the Act.

  • TDS deducted for the month is to be deposited by the 7th of the subsequent month and 30th April of the subsequent financial year for the month of March in case of Non-Government Employer.

  • Interest @ 1% p.m. or part of the month is payable for non-deduction of TDS, from the date of which such tax was deductible up to the date of actual deduction.

  • Interest @ 1.5% p.m. or part of the month is payable for delayed payment of TDS from the date on which tax is deducted up to the actual date of payment of tax.

  • Delay in filing TDS return attracts penalty of Rs. 200 per day u/s. 234E, up to a maximum of the amount of TDS for the relevant quarter.

  • Penalty of Rs, 10,000 which may extend to Rs. 1,00,000 u/s. 271H for failure in furnishing statements or furnishing incorrect statements.

In case the employee has submitted a lower deduction certificate obtained from the income tax authorities, the employer is directed to deduct TDS at the rate mentioned in the certificate or deduct no TDS in the case of NIL rate, instead of the applicable tax rates.

TDS on Income from Pension:

In the case of pensioners who receive a pension from nationalized banks, not being family pension paid to the spouse, the instruction contained in this Circular would apply in a similar manner as they apply to salary income and TDS will be computed in the same manner as applicable in case of salary income. Further, all branches of the banks are bound u/s. 203 to issue a certificate of TDS in form 16 to the pensioners.

Refund of TDS in case of Non-Residents where TDS is borne by Employer:

Salary payment to non-residents for services rendered in India is regarded as income earned in India and is accordingly taxable in India. In cases where the non-resident is tax equalised and Indian taxes are borne by the employer, if any refund becomes due to the employee after he has already left India, by way of any order and the employee has no bank account in India, then the refund can be issued to the employer as the tax has been borne by it (Circular No 707 dated 11-07-1995).

On a separate note, in the case of non-residents, the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, is to be regarded as income earned in India.

Computation of Income under the head “Salaries”:

Whereas the first half of the Circular deals with clarifications regarding tax calculation, procedural requirements and penal consequences, the latter part explains the computation mechanism provided under the provisions of the Act. The Circular reiterates the definition of Salary, Perquisite and Profit in Lieu of Salary. It also explains the computation methodology for determining the value of perquisite and to tax the same.

Perquisite on Motor car provided by Employer:

The perquisite valuation in case of motor car provided by employee is tabulated below:

The Circular has reproduced the valuation mechanism for various other perquisites apart from the few mentioned above. The details of the same along with the relevant para reference is tabulated below for easy reference:

Incomes not included under the head salaries:

Para 5.3 of the Circular lists down the incomes which are exempted or is not included under the head “Salaries”. The list of such income is tabulated below for ready reference.

Para 5.3.16 of the Circular states that in the case of assessee opting for concessional tax regime under section 115BAC the assessee shall be entitled to exemption only in respect of the following allowances:

  • Transport allowance granted to an employee who is blind or deaf or dumb or orthopaedically handicapped;
  • Allowance granted to meet the cost of travel on tour or on transfer;
  • Allowance granted on tour or period of a journey to meet ordinary daily wages incurred by an employee on account of absence from his normal place of duty;
  • Conveyance allowance in the performance of duties.

Proof of Deduction and Proof of Claim for LTA Exemption:

The Circular re-emphasizes that any deduction shall be allowed only after obtaining the necessary proof or evidence of investment and expenditure as claimed by the employee in Form 12BB.

The Circular also reiterates the position that the employer shall be obliged to obtain evidence in respect of the claim of exemption for leave travel concession (LTC) before allowing the said exemption. All the relevant details along with proof shall be obtained in Form 12BB.

Due to the ongoing pandemic and nationwide lockdown resulting in disruption in transport services, employees have been unable to avail LTC. In view of this and with an intent to boost consumer demand the Government has, vide Press Release dated 29th October 2020 announced a relief package both for Government and private sector employees to avail LTC exemption. The said relief expands the scope of LTC exemption to include the purchase of specified goods/services (during the period 12th October 2020 to 31st March 2021) worth three times the fare for availing the one time leave.

HRA Exemption and Rent Payment:

The employer shall ensure to collect the PAN / Aadhar of the Landlord before allowing the claim for HRA exemption in cases where the rent exceeds Rs. 1,00,000 during the year.

In the case of an 80GG deduction claimed by the employee, the employer must obtain relevant information as required in Form 10BA, irrespective of the aggregate, before allowing the deduction.

Deduction U/CH VIA:

The Circular has reproduced all the exemptions and deduction under CH-VIA which are available to an employee and that needs to be considered while calculating TDS under the head “Salaries”.

With respect to deduction u/s. 80TTA and 80TTB, the same would be allowed only to the extent of income reported by the employer in Form 12BB, subject to the prescribed limit specified in the relevant section.

We have tried to provide a summary of the key provisions in the Circular. For detailed reading, Click here: Circular No 20/2020 dated 03-12-2020.

Section 115BAC is an optional provision applicable to Individual and HUF, providing a concessional rate of tax, subject to the condition that the total income of the assessee shall be computed without specified exemptions or deductions, set off a loss or additional depreciation.

References

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AAR: Subscription Fee for Online Scientific Database is Business Income, Not Royalty

IN BRIEF:

In the case of Elsevier B.V., a company incorporated in the Netherlands (the applicant), the Authority for Advance Ruling, Mumbai (AAR) held that subscription fees received from the Indian subscribers and customers for accessing a database containing e-books/e-journals/e-articles is not taxable as ‘Royalty’ as per section 9(1)(vi) of the Income Tax Act, 1961 (the Act) and Article 12 of the India-Netherlands Double Tax Avoidance Agreement (‘DTAA’) but is in the nature of ‘Business Income’.

THE CASE: 

The Applicant owns a database wherein a host of information on subject/topics relating to science, technology and health science is stored in the form of books, journals and articles. The applicant charges two different types of subscription fees from customers:

(i) ‘Pay-per-view’, and

(ii) ‘Subscription’ agreement.

Pay-per-view Agreement – The pay per view arrangement allows the customer in India to purchase a particular book, article or journal which exists in electronic format on the applicant’s website. After the online payment is made, the customer is entitled to view, download and print the content for its personal, non-commercial use, on a pre-condition that the customer will keep intact all copyright and other proprietary notices.

Subscription Agreement – The subscription model grants the customer non-exclusive, non-transferable right to access books, articles, and journals during the subscription period and the access is terminated once the subscription period concludes. The copyright notices as displayed by the Applicant have to be kept intact.

In essence, both the above transactions are similar in nature as the content being offered remains the same i.e., books, articles, and journals in electronic format. In both the above transactions, the customer cannot copy, display, distribute, modify, publish, reproduce, store, transmit, create derivative works from, or sell or license all or any part of the content obtained from this site, to ensure that the exclusive proprietary right, title, and interest of the Applicant are kept intact.

QUESTION BEFORE THE AAR:

The key question before the AAR was determining the taxability of the subscription fees received from Indian subscribers and customers for e-books/e-journals/e-articles as:

  • Royalty, as defined under section 9(1)(vi) of the Act and Article 12 of the DTAA; or
  • Business Income under section 28 of the Act and Article 7 of the DTAA.

APPLICANT’S CONTENTION:

The contentions of the Applicant are summarized below:

  • Exclusive proprietary right, title, and interest in the subscribed product remain with the applicant.
  • Several restrictions are placed on the subscribers/customers on the usage of content to ensure that the customers cannot venture into the business of distributing the data downloaded by it or providing access to it to others.
  • Both the transactions, in essence, are similar to the purchase of books, journals or articles in electronic format. The Applicant merely collects and collates the data and uses its experience and expertise to present the information/ data in a presentable manner to facilitate easy and convenient reference to the user.
  • In view of the above, the subscription fees received from the Indian customers for providing access to e-books/e-journals/e-articles is not taxable as ‘Royalty’ as per section 9(1)(vi) of the Act and Article 12 of the DTAA.
  • Further, the Applicant contended that the consideration received as subscription fees are taxable as ‘Business Profits’, but due to the absence of any Permanent Establishment in India, the subscription fee received by the Applicant would not be chargeable to tax in India.

REVENUE DEPARTMENT’S CONTENTION:

The contentions of the Revenue Department are summarized below:

  • The Applicant has intellectual property ownership (copyright) over the host of information relating to science, technology and health science in the database, hence subscription received by the Applicant falls under the ambit of ‘Royalty’ as per Explanation 2(i) to section 9(1)(vi) of the Act.
  • Further, the information which is made available to the subscribers is taxable as ‘Royalty’ under the DTAA, which includes “consideration for information concerning industrial, commercial or scientific experience”.

THE RULING:

The AAR dismissed the Revenue Department’s contention and upheld that of the Applicant, stating that the payments made to access a database containing books/ journals/ articles in electronic format with a limited right of printing, making e-copies, and storing information, is not ‘Royalty’ under Article 12 of the DTAA, but is in the nature of ‘Business Income’.

The AAR agreed to the Applicant’s contention that purchasing books, journals, articles online are akin to buying books from a bookstore. Thus, it does not tantamount to the use of any copyright in a scientific/literary work.

Further, the AAR held that the term ‘scientific experience’ referred to in Article 12(4) of the DTAA refers to the scientific experience of the recipient and not the scientific experience which is contained in the content put up on the portal, to be accessed electronically by the subscribers. By giving online access, there is no transfer of the know-how or the experience by the Applicant to its subscribers. Thus, the AAR held that the receipts from Indian subscribers for accessing the content do not tantamount to the transfer of any information concerning the scientific experience. Hence, the same is not taxable as royalty as per the DTAA.

Moreover, the AAR held that the earlier rulings in the case of Elsevier Information System, American Chemical Society and Dun & Bradstreet Espana, as relied upon by the Applicant, have similar facts as in the present case. In the aforesaid rulings, the subscription fee paid by Indian customers for information concerning “commercial experience” was not treated as royalty and concluded that subscribers have no withholding obligation u/s 195 of the Act.

ANALYSIS:

The taxation of royalty has been a vexed issue in the Indian context. There have been conflicting rulings on the issue relating to the characterization of payments made for cross-border services, especially for the use of software, online facilities or IT infrastructure. This ruling is a welcome decision given all the above complexities and conflicting views on this subject and has laid down a good precedent for cases that provide web access to compiled information on an electronic platform. However, with the recent introduction of the Equalization levy in the statute, going forward, such transactions of subscription fee would also need to be evaluated from the perspective of the Equalization levy, before deciding on the complete impact.

In essence, both the above transactions are similar in nature as the content being offered remains the same i.e., books, articles, and journals in electronic format. In both the above transactions, the customer cannot copy, display, distribute, modify, publish, reproduce, store, transmit, create derivative works from, or sell or license all or any part of the content obtained from this site, to ensure that the exclusive proprietary right, title, and interest of the Applicant are kept intact.

References

Authored by Sandip Mukherjee – Director International Tax, with inputs from Preeti Kothari & Piyush Milani

TS-696-AAR-2020

Image Credits: Gerd Altmann on Pixabay

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SC: Consideration Paid for Purchase of Computer Software, Not Royalty, No Obligation on Buyers to Deduct Tax at Source

IN BRIEF:

The Hon’ble Supreme Court of India (SC) has at long last, put to rest the two-decade old controversy in relation to taxability of the consideration paid for purchase of computer software from a non-resident distributor/ manufacturer. The controversy revolved around whether the consideration paid for purchase of the computer software would constitute ‘Royalty’ as per the provisions of section 9(1)(vi) of the Act, read with relevant Double Taxation Avoidance Agreement (‘DTAA’). There were divergent views of some High Courts as well as of the Authority for Advance Rulings on this issue, which, thankfully, has now been settled by the Hon’ble SC, against the Revenue and in favour of the taxpayers.

In the case of Engineering Analysis Centre of Excellence Private Limited1 and others (Appellants), the Hon’ble SC has held that the consideration paid for purchase of an off-the- shelf software from a non-resident seller does not tantamount to ‘Royalty’ as per Article 12 of the DTAA and hence there is no obligation on the Indian buyer to deduct tax at source under section 195 of the Income-tax Act, 1961 (‘the Act’), as the distribution agreements/ End-User Licence Agreements (EULAs) do not create any interest or right in such distributors/ end-users which would tantamount to the use of or right to use any copyright.

FACTS OF THE CASE:

The Appellants had imported/ acquired shrink wrapped computer software from non-residents distributor/ manufacturers. While making payment to those non-residents, the Appellants did not deduct tax at source under section 195 of the Act, on the premise that such amounts do not constitute ‘Royalty’; hence are not taxable in India as per the relevant DTAA and accordingly, there could not be any obligation on them to deduct tax at source under section 195 of the Act.

QUESTION BEFORE THE SC:

The key question before the Hon’ble SC was whether there would be any obligation on a resident buyer, acquiring computer software from a non-resident distributor/ manufacturer, to deduct tax at source, under section 195 of the Act, by classifying the consideration paid as ‘Royalty’ under section 9(1)(vi) of the Act, read with Article 12 of the relevant DTAA.

There were various appeals/ questions raised before the Hon’ble SC, which were grouped into four categories:

a) Computer software purchased directly by resident end-users from non-resident suppliers or manufacturers.
b) Resident distributors or resellers purchasing computer software from non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.
c) Non-resident distributors reselling the computer software to resident Indian distributors or end-users.
d) Computer software embedded into hardware and sold as an integrated unit/equipment by non-resident suppliers to resident Indian distributors or end-users.

APPELLANT’S CONTENTIONS:

The Appellant’s contentions have been summarized below:

  •  Computer software that is imported for onward sale constitutes ‘Goods’.
  • Definition of Royalty as per DTAA did not extend to a derivative product of the copyright. For example, a book or a music CD or software products.
  • Retrospective amendment to section 9(1)(vi) by Finance Act 2012 could not be applied to assessment years under consideration, as the law cannot compel one to do the impossible.
  • Provisions of DTAA would prevail over the provisions of the Act to the extent they are more beneficial to the deductor of tax under section 195 of the Act.
  • Distinguishment can be made between the sale of a copyrighted article v/s. the sale of copyright itself. As per section 14(b) of the Copyright Act, 1957 Act (“CA Act”), ‘Computer Program’ and a ‘copy of Computer Program’ are two distinct subject matters. In the instant case, no copyright was transferred, as the end-user only received a limited license to use the product by itself with no right to reproduce, sub-licence, lease, make copies, etc.
  • It was also contended that explanation 4 to section 9(1)(vi) of the Act would apply only to section 9(1)(vi)(b) of the Act and would not expand the definition of Royalty as contained in explanation 2 to section 9(1)(vi) of the Act. Further, reference was made to Circular No. 10/2002 issued by Central Board of Direct Taxes (CBDT), wherein, ‘remittance for royalties’ and ‘supply for computer software’ were addressed as separate distinct payments, the former attracting the ‘royalty’ provision and the latter taxable as business profits.
  • Based on the doctrine of first sale/ principle of exhaustion, it was argued that the foreign supplier’s distribution rights would not extend to sale of copies of the work to other persons beyond the first sale.

REVENUE’S CONTENTION:

The Revenue’s contentions have been summarized below:

  • The primary contention of the Revenue was that what was transferred in the transaction between the parties was copyright and accordingly the payment would constitute Royalty and Indian user/ importer would be required to deduct tax at source.
  • It was argued that explanation 2(v) to section 9(1)(vi) of the Act applies to payments to a non-resident by way of royalty for the use of or the right to use any copyright. Reliance was placed on the language of explanation 2(v) and it was stressed that the words “in respect of” have to be given a wide meaning.
  • The Revenue further contended that since adaptation of software could be made, albeit for installation and use on a particular computer, copyright was parted with by the original owner.
  • It was further pointed out that the Indian Government has expressed its reservations on the OECD Commentary dealing with the parting of copyright and royalty.
  • It was argued that in some of the EULAs, it was clearly stated that what was licensed to the distributor/end-user by the non-resident would not amount to a sale, thereby making it clear that what was transferred was not goods.
  • It was further argued that explanation 4 of section 9(1)(vi) of the Act existed with retrospective effect from 1976 and accordingly the Appellants ought to have deducted the tax at source even prior to the year 2012.
  • The Revenue placed reliance on the ruling of PILCOM v. CIT, West Bengal- VII, 2020 SCC Online SC 426 [“PILCOM”]2, which dealt with section 194E of the Act, for the proposition that tax has to be deducted at source irrespective of whether tax is otherwise payable by the non-resident assessee.
  • With respect to the doctrine of first sale/principle of exhaustion, it was argued that it would have no application since it is not statutorily recognised in section 14(b)(ii) of the CA Act. Accordingly, it was contended that when distributors of copyrighted software ‘license’ or ‘sell’ such computer software to end-users, there would be a parting of a right or interest in copyright; in as much as, such “license” or sale would be hit by section 14(b)(ii) of the CA Act.

THE RULING:

  • Provisions of CA Act

The Hon’ble SC placed reliance on the provisions of the CA Act and observed as under:

The expression ‘copyright’ means the “exclusive right” to do or authorise the doing of certain acts “in respect of a work”. In the case of a computer program, section 14(b) read with section 14(a) of the CA Act prescribes certain acts as to how the exclusive rights with the owner of the copyright may be parted with. Thus, the nature of rights prescribed under section 14(a) and section 14(b) of the CA Act would be referred to as “copyright”, which would include the right to reproduce the work in any material form, issue copies of the work to the public, perform the work in public, or make translations or adaptations of the work.

Section 16 of the CA Act states that no person shall be entitled to copyright otherwise than under the provisions of the CA Act or any other law for the time being in force. Accordingly, it is held that the expression ‘copyright’ has to be understood only as is stated in section 14 of the CA Act.

On perusal of the distribution agreements, the Hon’ble SC observed that what is granted to the distributor is only a non-exclusive, non-transferable licence to resell computer software and it was expressly stipulated that no copyright and no right to reproduce the computer program, in any manner, is transferred either to the distributor or to the ultimate end user.

It further observed that the ‘license’ that is granted under EULA, conferring no proprietary interest on the licensee, is not a licence that transfers an interest in all or any of the rights contained in sections 14(a) and 14(b) of the CA Act. The SC held that there must be a transfer by way of license or otherwise, of all or any rights mentioned in section 14(b) read with section 14(a) of the CA Act.

  • Sale of Goods

The SC further observed that what is ‘licenced’ by the non-resident supplier/ distributor is in fact a sale of a physical object, which contains an embedded computer program and thereby held the same as “sale of goods” by placing reliance on the ruling of Hon’ble SC in the case of Tata Consultancy Services v. State of A.P., 2005 (1) SCC 308.3

  • Royalty in the DTAA vs the Act

It was observed that DTAA provides an exhaustive definition of ‘Royalty’ as it uses the expression “means” whereas the definition of ‘Royalty’ contained in the Act is wider in nature. Accordingly, Article 12 of the DTAA defining the term ‘Royalty’ would be relevant to determine taxability under DTAA, as it is more beneficial to the assessee as compared to section 9(1)(vi) of the Act.

It was further observed that explanation 4 to section 9(1)(vi) of the Act (retrospectively introduced vide Finance Act, 2012) is not clarificatory of the position as of 1 June 1976, but it expands the existing position and hence it does not clarify the legal position as it always stood.

The SC relied on two legal maxims, lex non-cogit ad impossibilia, i.e., the law does not demand the impossible and impotentia excusat legem, i.e., when there is a disability that makes it impossible to obey the law and further relied on various judicial precedents and held that any ‘person’ cannot be expected to do the impossible and accordingly the expanded definition of Royalty inserted by explanation 4 to section 9(1)(vi) of the Act cannot apply retrospectively, as such explanation was not actually and factually in the statute.

  • PILCOM Ruling

It was observed that the PICLOM ruling was in respect of section194E of the Act which deals with a different set of TDS provisions, without any reference to chargeability to tax under the Act. As already held in GE Technology4, deduction of tax under section 195 can be made only if the non-resident assessee is liable to pay tax under the provisions of the Act and accordingly it had no application to the present facts of the case.

  • Doctrine of First Sale/ Principle of Exhaustion

The SC relied on various judicial precedents to explain the concept of the doctrine of first sale/ principal of exhaustion, which enables free trade in material objects on which copies of protected works have been fixed and put into circulation, with the right holder’s consent. The said principle was introduced in the CA Act, vide amendment made in the year 1999.

Based on the above principle, it is held that the distribution rights subsist with the owner of the copyright, to the extent such copies are not already in circulation. Thus, it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental, ‘any copy of computer program’. The distributor who resells the computer program to the end-user cannot fall within its scope.

  • Interpretation of treaties and OECD Commentary

India has reserved its right under the OECD Commentary with respect to taxation of royalties and fees for technical services. However, in this regard, the SC has noted that, after India took such positions, no bilateral amendment was made by India and the other Contracting States to change the definition of royalties. Accordingly, the OECD commentary would only have persuasive value with respect to the interpretation of the term ‘Royalties.

  • CBDT Circular No. 10/2202 dated 9 October 2002

The SC further referred to the above-mentioned Circular, wherein the Revenue itself has made a distinction between royalties and remittance for the supply of computer software (which is treated as business profits and taxability depends upon the existence of permanent establishment in India).

  • Ruling

In light of the aforementioned reasoning, the Hon’ble SC held that the consideration paid for the purchase of an ‘off-the-shelf’ software from a non-resident seller did not amount to ‘Royalty’ as per Article 12 of DTAA, as the distribution agreements/ EULAs did not create any interest or right in such distributors/ end-users, which tantamounted to the use of or right to use any copyright. Since the amount was not chargeable to tax in India, there was no obligation on the Indian resident buyer to deduct tax at source under section 195 of the Act.

FM COMMENTS:

The taxation of royalty has always been a vexed issue in the Indian context. There have been conflicting rulings on the issue relating to the characterization of payments towards the purchase of computer software. This is indeed a welcome ruling, which has finally put to rest a long litigation.

However, it is pertinent to note that the Finance Act, 2020 has introduced the provisions of ‘equalisation levy’ leviable on a non-resident e-commerce operator from e-commerce supply of services. These transactions are exempted from Income-tax under section 10(50) of the Act.

Further, vide, Finance Bill 2021, it has been clarified that exemption under section 10(50) will not apply to royalty or fees for technical services, that are taxable under the Act read with the DTAA. Hence, as a corollary, it may be deduced that, based on this SC ruling, if a non-resident takes shelter under the DTAA, for payments that are made to it for purchase of computer software, the non-resident could still be liable to pay equalisation levy on the satisfaction of certain prescribed conditions. It is therefore advised that going forward, such issues are analysed carefully and separately, before arriving at any conclusion on the effective taxability that arises. Additionally, in cases where the payments are being made to parties residing in non-DTAA countries, suitable arguments would require to be made, on a case-to-case basis using this decision as a persuasive tool.

1 Civil Appeal Nos 8733 – 8734 of 2018
2 [2020] 271 Taxman 200 (SC)
3 [2004] 271 ITR 401
4 [2010] 327 ITR 456
This article expounds a recent decision regarding tax liability on the purchase of computer software from a non-resident distributor/ manufacturer.

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Income-tax Residency Circular - Circular No 2 of 2021

For Financial Year 2019-2020 – Circular 11 of 2020

Considering the exceptional circumstances caused by pandemic, Central Board of Direct Taxes (‘CBDT’) had issued Circular No 11 of 2020 dated 8th May 2020 to address the genuine hardship faced by stranded Individual during the F.Y. 2019-20. In this Circular, the CBDT had clarified that the forced stay in India due to Covid-19 between 22nd March 2020 to 31st March 2020 or due to quarantine will not be considered for the purpose of determining the residential status of an Individual in India.
For Financial Year 2020-2021 – Circular 2 of 2021 Similarly, based on several representations received by the CBDT for relaxation in determination of residential status for the Previous Year (P.Y) 2020-21, the matter was examined by the Board and a Circular has now been issued with following observations / explanations:
  •  CBDT has observed that as per the domestic tax laws, an individual needs to satisfy a minimum number of days stay in India in order to qualify as an Indian resident. Generally, an individual becomes a resident in India only if he/she has stayed in India for 182 days or more and hence any forced short stay will not result in Indian residency. Further, even in exceptional case if an individual becomes resident, he/she will most likely become “not ordinarily resident” and hence his/her foreign income shall not be taxable unless it is derived from business controlled in or profession set up in India.
  • CBDT has observed that most of the countries have the condition of stay of 182 days or more for determining residency. If a general relaxation of 182 days is provided, there may be possibilities of double non-residency and eventually the individual might end up not paying tax in any country.
  • Similar condition of stay in India, generally 182 days or more, is also present in Double tax Avoidance Agreement (DTAA) under the employment Article, in order to tax income from Salaries, where the said employment is exercised in India. CBDT has highlighted that even if an Individual qualifies as a resident of two countries, he/she can still avail the DTAA benefit by applying “Tie-breaker rule”. In the event of non-applicability of Tie-breaker rule, the individual can apply for Mutual Agreement Procedure benefit to resolve the residency issue.
  • CBDT has also highlighted that even in a case of Double taxation, a resident Indian is also entitled to claim credit of taxes paid in other country, in accordance with Rule 128 of the Income tax Rules, 1962.
  • CBDT has also observed that a similar view has been adopted by the Organisation for Economic Co-operation and Development (OECD) that DTAAs contain the necessary provisions to deal with the cases of dual residency arising due to COVID – 19 cases. Also, globally, there have been very few countries that have provided relief in this regard.

Hence, after detailed examination and explanation as provided above, CBDT has endorsed the view taken by OECD and most other countries that in light of the domestic tax law read with relevant DTAA’s, there does not appear a possibility of double taxation of Income.

Accordingly, if any individual even after considering DTAA relief faces Double taxation issues, then such individuals can apply electronically to the Principal Chief Commissioner of Income tax (PCIT) in Form – NR up to 31st March 2021, which can then be examined by the CBDT on a case-to-case basis.

Our Comments:
This Circular is rather academic in its entire narrative and provides limited relief as it is deals only with respect to a generic kind of residency situations. The Circular does not per se attempt to address specific issues such as non-treaty country situation taxability. Similarly, the taxability of employees who became Indian residents due to their evacuation to home country from no-tax jurisdictions (eg. UAE etc) during the pandemic, thus making their foreign income exposed to tax in India. The Circular is also silent on the risk of exposures vis-à-vis “Permanent Establishment (PE)” or “Place of Effective Management (POEM)” that may be triggered in India due to presence of Key personnel of Multinational Companies (MNC) exercising their duties during the pandemic months, while being forced to be present in India.

It would help if the CBDT were to bring out a more detailed Frequently Asked Questions (FAQ) quickly to deal with the unanswered questions/situations.
This article provides a summary of the Circular addressing the issue of residential status in light of travel restrictions due to COVID.

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