Monday, April 18, 2011

News Updates: New Return Forms for AY 2011-12

CBDT notifies New Income Tax Return Forms for the Assessment Year 2011-12 (available here).

OECD Updates

1. Valuation of intangibles in the area of Transfer Pricing is a contentious issue and is subject to debate. The OECD met with business commentators on the valuation of intangibles for transfer pricing purposes for a seamless and consistent application of the valuation techniques. The objective is to make sure that the Transfer Pricing valuation is done in accordance with the arms length principle. The meeting is reported here.

2. The Global Forum of Transparency has added Ghana, Georgia and Nigeria to its member list (see here). OECD reports that the pressure has been kept up on the global fight against tax evasion. The updates are available here.

Monday, April 11, 2011

Sale of a Capital Asset to a non-resident, even though the capital asset is situated in India, would be taxable in the other state: AAR

D.B.Zwirn Mauritius Trading v. Director of Income-tax, decided on 28th March, 2011

AAR NO. 878 OF 2010

Assessment Year: 2009-10

Relevant Facts:

1. The applicant, D.B. Zwirn Mauritius Trading No. 3 Ltd. is a company incorporated in Mauritius and was issued a Tax Residence Certificate by the Mauritius Tax Authorities. It is engaged in the business of investments in different sectors.

2. The applicant held 5,33,333 equity shares of Quippo Telecom Infrastructure Limited, an Indian company. These were acquired on 19th September, 2007, for a consideration of Rs.2,13,33,320.

3. On 10th November, 2009, the applicant entered into a share purchase agreement to sell these 5,33,333 shares to Geraldton Finance Limited, a Mauritius based company, for a consideration of Rs.5,59,99,965.

4. The applicant realized capital gain of Rs.2,98,67,010.

Questions for consideration:

1. Whether the Applicant, in relation to the transaction involving sale of shares as explained in the statement of facts, is liable to capital gains tax in Mauritius in terms of Article 13(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius?

2. Whether the transaction of sale of shares of an Indian company as per Share Purchase Agreement dated November 10, 2009 attracts capital gain tax liability in terms of provisions of Income Tax Act 1961 and Double Taxation Avoidance Agreement between India and Mauritius?

3. Whether, in respect of the transaction of sale of shares explained in statement of facts, there is any withholding tax liability under section 195 of the Income-tax Act, 1961.

Upholding the application of the assessee, the Hon’ble Authority held that:

Para 9: “On the facts presented by the applicant and in the light of legal position discussed, the applicant is not liable to pay capital gains tax in India in respect of the transfer of shares held in Quippo Telecom Infrastructure Limited (Indian Company) to Geraldton Finance Limited, a Mauritius based company having regard to the provisions of India-Mauritius DTAA.”

The decision is available here.


Sunday, April 10, 2011

If a foreign company is liable to tax in India, even if not actually paying tax, has to necessarily file a return u/s 139(1): AAR

Also held:

The transfer pricing provisions from section 92 to 92F of the Act not attracted when sale and purchase of shares between non- resident companies.

VNU International v. Director of Income Tax, 28th March, 2011

AAR No. 871 of 2010

Relevant Facts:

  1. The applicant states that it is a tax resident of the Netherlands and does not have any permanent establishment in India.

2. The applicant first transferred 50% of shares it held in ORG-IMS, a company incorporated in India to IMS-AG, a company incorporated in Switzerland. After the transfer, the applicant was left with 50,765 shares of ORG-IMS, amounting to 50% of the total shares.

3. In a subsequent SPA, the applicant transferred 50% of the shares (50,765 shares) to IMS-AG & Interstatistik AG for a total consideration of ` 74,08,643. The shares were acquired for a consideration of ` 4,61,500.

Questions for consideration:

1. On the facts and circumstances of the case, whether any capital gain earned by VNU International on transfer of 50,765 shares of ORG-IMS to the purchasers would be liable to tax in India as per the provisions of the Act and the Tax Treaty between India and the Netherlands?

2. On the facts and circumstances of the case, if the capital gain is not taxable in India, whether the applicant is required to file any return of income under section 139 of the Act?

3. On the facts and circumstances of the case, whether the transfer of shares by the applicant to IMS AG attracts the transfer pricing provisions of section 92 to 92F of the Act?

4. On the facts and circumstances of the case, whether IMS AG were liable to withhold taxes under section 195 of the Act and if so, on what amount would the tax have to be deducted?

Partly upholding the application of the applicant, the Hon’ble Court held that:

Para 7: “ Transfer pricing provisions from section 92 to 92F of the Act would not be attracted as the sale and purchase of shares is between non- resident companies of the Netherland and Switzerland. Since there is no income chargeable to tax, there would be no liability to deduct tax u/s.195 of the Act.”

Para 8: “We are in agreement with the Learned Advocate that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the Netherlands, the state in which the transferor is a resident.”

Para 13: “...Then, as per the third proviso, every company is required to file its return of income, whether it has an income or a loss. The applicant being a foreign company, is covered within the definition of a company under section 2(17) of the Act. The applicant does not dispute that the income arising from the sale of shares is liable to be taxed in India by virtue of section 5(2) of the Act, though no tax is actually paid in India. It is a different matter that by virtue of DTAA the applicant is actually paying tax in the Netherlands. If the power to tax be granted it is difficult to appreciate the argument that when the resulting income is nil, there is no obligation to file return of income. It may be mentioned that where it is not necessary for a non- resident to furnish return under section 139(1) of the Act, the statue has specifically provided, as is the case under section 115AC(4) of the Act. Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a vide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules 1962. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income tax department.”

The decision is available here.

Saturday, April 9, 2011

Circular 1 of 2011

The Income tax department has issued Circular No. 1 of 2011 dated 6th April, 2011.

The Circular is entitled "Explanatory notes to the provisions of the Finance Act, 2010".

The circular is available here.

Wednesday, April 6, 2011

Stock in a new business to be taken on market value basis rather than cost basis: Delhi High Court

Madhu Rani Mehra v. CIT, decided on 21st March, 2011

ITR No. 541/1992

Assessment Year: 1980-81

Relevant Facts:

1. The assessee was one of the 2 partners in a firm being run under the name and style of M/s. Mehrae-Di-Hatti holding 50% share in the firm. Consequently, the firm was dissolved.

3.2 It is not in dispute that the Petitioner took over the assets and liabilities of the dissolved firm and carried on the same sort of business which related to gold and diamond jewellery.

3.3 On the date of dissolution of the firm i.e., 10.11.1979, the firm had in its possession stock, comprising of gold and diamond jewellery of a substantial value. The said stock was evidently valued at average cost price by the firm. As per the books the closing stock was valued by the firm as on 10.11.1979 at Rs 35,16,785/-. It is not in dispute that the market price of the firms closing stock, as on 10.11.1979 was Rs 49,19,491/-

Questions of law:

1. Whether on the facts and in the circumstances of the case, the ITAT was correct in law in taking the value of the opening stock in law in taking the value of the opening stock as on 11.11.1979 at Rs. 35,16,785/- which stock was received by the assessee on dissolution of the firm M/s Mehrae-Di-Hatti on 10.11.1979, at which point of the dissolution the said stock was valued at market price of Rs.49,19,491/-?

2. Whether, on the facts and in the circumstances of the case, the Income-Tax Appellate Tribunal was correct in law in valuing the opening stock at cost though the said stock was received on the dissolution of the firm as capital by the assessee, which was converted by her into stock-in-trade?

Upholding the appeal of the assessee, the Hon’ble Court held that:

Para 19: “The partnership firm was dissolved. One individual of the erstwhile firm continued to make a living out of a business, which by sheer coincidence happened to be again jewellery business, in which, distributed capital was introduced in the form of stock. The stock on introduction in the business, stood converted into stock-in-trade. The value of this stock will have to be the market value on the date of introduction. In the facts of this case, the undisputed market value of the stock is Rs.49,19,491.”

Para 20: “A business has attributes of physicality as well as form. For continuation of business both have to remain intact, at least in large measure. In the instant case, the erstwhile firm disappeared on its dissolution. The proprietorship business gave birth to new business, in a different form. A somewhat similar situation obtained in ALA Firm's (supra) case, where the court was called upon to determine the value of the closing stock though of the dissolved firm. A converse situation arose in Sakthi Trading Co. Ltd. (supra) case where substantially both in terms of its physicality and form the business remained the same. We are thus of the opinion that the Tribunals decision to value the stock at cost rather than the market value cannot be sustained.”

The decision is available here.