Foundation for International Taxation Conference, 2010: Day Three

Day three was dedicated to transfer pricing and the disputes involved in the process. The session saw light with an interesting discussion on the podium among Mr. Mukesh Bhutani, Partner BMR India, Mr. Jerome Libin, Partner, Sutherland Asbill & Brennan, US, Mr. Vijay Mathur, Advisor, PwC and Mr. RN Dash on the Transfer Pricing Dispute Resolution Mechanisms. The question that arose related to the debate between substance and form of the entities involved and which one should be looked into for the purposes of taxation. The panel concluded in unison that undertaking Transfer Pricing issues were fact based and consequently it was a long drawn process. The discussion left the questions of Advance Pricing Agreements and Safe Harbour Rules open.

The technical session on Transfer Pricing Disputes and their Prevention was chaired by Mr. Samir Gandhi, Partner, Deloitte, India. Ms. Caroline Silberztein, Head of Transfer Pricing Unit, OECD, Paris praised India for a number of good quality judgments in Transfer Pricing, led by the Maruti Suzuki case, rendered by the Delhi High Court.

Her presentation was followed by an impressive presentation on the Transfer Pricing issues and the outlook towards them by the courts by Mr. Al Meghji, Partner, Osler, Hoskin & Harcourt, Canada. He highlighted how the process of litigation was transparent, open to challenge while the process undertaken by the competent authority was often opaque. He had argued the case on behalf of the assessee in the recent case of GlaxoSmithKline Inc. v. The Queen, 2010 FCA 201.

The next presentation by Mr. Vispi T. Patel on the Indian Judicial Transfer Pricing Disputes provided an insight into the view of the courts in India on TP disputes. Marketing intangibles was a highly debatable question in his opinion and the Maruti Suzuki case found mention in his speech. He concluded with the note that the TP officers need not be mechanical in their approach and mere quantification analysis was not the relevant criteria, for the protection of the taxpayer.

The Indian Perspective on Advance Pricing Agreements and Safe Harbour Rules was provided by Ms. Anuradha Bhatia, Director of International Tax (Transfer Pricing), Mumbai. She gave her view on the introduction of the safe harbor rules and how the matter is being approached by the authorities. This analysis was consorted by the Ms. Caroline Silberztein.

The final question and answers session saw the presence of the CBDT chairman Mr. SSN Moorthy. The session turned out to be an anti-climax as it did not reveal anything new. Most questions were met with the response that the Government will look or was looking into the matter and would take a call on that basis. The panel, however, conceded that the process of the Dispute Resolution Panel (DRP) needed a relook and vowed to take necessary steps to correct the same.

The post Q&A session was a session to be recorded by UTV and was marked by the presence of Mr. T.P. Ostwal, Mr. SSN Moorthy, Chairman, CBDT, Mr. Ketan Dalal, Mr. Arvind Datar, Mr. Girish Dave, Mr. Nihar Jambusaria. They discussed the policy implications of the Vodafone Judgment, the Maruti Suzuki case and the Linklaters Judgment.

This concluded the 3 day conference and the vote of thanks was given by Prof. Roy Rohatgi, the conference director.

Foundation for International Taxation Conference, 2010: Day Two

This was the most awaited session in the sense that the chairperson for the first session was the tax guru, Mr. Soli Dastur, Senior Advocate, India. The day was dedicated to the Resolution of International Tax Disputes and country experiences in the same.

Mr. Jerome Libin, Partner, Sutherland Asbill & Brennan, US spoke on Advance Pricing Agreements and its forms such as unilateral, bilateral and multilateral. He listed the procedure for solving disputes through the Mutual Agreement Procedure (MAP). He suggested an alternative in the form of a Panel of Experts which would provide non-binding advice to the parties and try to reach a settlement.

Prof. Kees van Raad, Professor of Law, University of Leiden, The Netherlands focalized his presentation on arbitration as a method, to be invoked if the MAP fails. He confessed how arbitration could be used only as a mechanism to expedite the MAP process.

On similar lines, Mr. Dave Hartnett, Head of Tax, Her Majesty’s Revenue & Customs, UK threw light on how Alternative Dispute Mechanisms in Taxation had resulted in speedy dispute resolution and a higher tax collection for his department. In his opinion, the formulation of a litigation settlement strategy for his ‘customers’ – the taxpayer, seemed to be the most effective in resolving disputes.

Next was the erudite dissertation from Mr. Soli Dastur who pinpointed the loopholes in the existing and proposed provisions. He sought answers to questions such as: Whether matters pertaining TDS Deductions can be referred to MAP?; What happens to MAP procedures when the underlying treaty goes away?; If the same issue has been decided by different High Courts laying down different principles, which one would be followed?, inter-alia. Definitely some food for thought for the drafters!

In the session which highlighted the inter-country experience, the view of the judiciary was expatiated by Mr. R. V. Easwar, President, ITAT. This was followed by the New Zealand experience and the US experience where Ms. Carmel Peters, Advice Division, Inland Revenue, NZ and Mr. Marc Levey, Partner, Baker & MacKenzie, US shared their thoughts, respectively. Next, Mr. Porus Kaka, Senior Advocate was called upon to share his experience as a practitioner for 20 years, which he ably fulfilled. He also gave certain suggestions to improve the dispute resolution process in India.

In the following panel session, Ms. Anita Kapur, Director General of Income Tax (Administration), put forth the Governments’ stand on arbitration, and its non-inclusion in the Indian DTAA’s and other related matters. She expressed her view that the arbitration process was highly unfair as it is non-binding on the assessee. Her concern was that the method would also be used as a Damocles sword on the competent authority, which would not be able to function efficaciously under this constant threat. The other panelists included previous speakers who also discussed arbitration as an effective ADR mechanism and concluded the discussion for the day.

Foundation for International Taxation Conference, 2010: Day One

The Foundation for International Taxation organized a conference from December 2 – 4, 2010 at the ITC Maratha Hotel & Hyaat Regency Hotel, Mumbai. The chairpersons and speakers were nationally and internationally recognized lawyers, chartered accountants and professors.

The oft-discussed Direct Taxes Code (DTC) was the first topic of discussion. Mr. Rahul Garg, Partner PwC, India spoke on the issues involving Branch Profits Tax including on the attribution of profits to the branches of MNC’s in India.

However, what stood out the most in the session was Mr. Mukesh Bhutani’s presentation. He is the Managing Partner and Tax Practice Leader at BMR Legal, India and the author of ‘Transfer Pricing: An Indian Perspective’ published by LexisNexis. He spoke on Transfer Pricing Issues and their Resolution. The highlights of the presentation included issues involving marketing intangibles and he further questioned their non-inclusion in the DTC. He generally took us through Advance Pricing Agreements (APA’s) and General Anti-Avoidance Rules (GAAR’s) and also specifically argued for the inclusion of ‘expert witnesses’ in tax matters.

The session came to a close with Mr. S Mahalingam, Executive Director and CFO, Tata Consultancy Services sharing his experience from the corporate viewpoint, with the audience.

The Technical Session was on International Tax Structuring for Investing Abroad and chaired by Mr. Nishith Desai, Founder, Nishith Desai Associates. The session was marked by country experiences viz. Brazil, Chile, Coloumbia where lawyers analyzed and shared the taxation and corporate laws in their countries. Mr. Sudir Kapadia, Partner Ernst & Young, India was highly critical of the definition of the Place of Effective Management (PoEM) rules that were being included in the DTC. He also questioned the lack of clarification in the DTC on virtually enabled board meetings or e-Board Meetings (eBM). The high spot in his presentation was the test for a Controlled Foreign Corporation (CFC) and his comparison of the Indian Rules with the UK CFC Rules.

The sponsored sessions were a look into the low tax jurisdictions and with that the presentations for the day concluded.

International Taxation Conference, 2010

The Foundation for International Taxation organizing its annual International Taxation Conference from 2-4 December, 2010 in Mumbai, India.

This Conference is the sixteenth in the annual conferences orgainsed by the FIT. The speakers include the top authorities on International Taxation.

For those interested, more details available at the FIT website.

Capital Gains and Full Value Consideration

Section 50C of the Income Tax Act, 1961 was introduced as a measure to curb shady deals and the circulation of black money in the property dealings. It seeks to impose capital gains tax on the seller on the basis of the value adopted by the ‘stamp valuation authority’. However, it is not clear what the effects would be on the purchaser and his income. The problematic question arises as to whether this amount would be included in the income of the purchaser section 69 as well?

1. Preliminary:

1. It has been held by the Hon’ble High Court of Judicature at Bombay in the latest case of Bhatia Nagar Cooperative Society v. Union of India[i] that the provisions of section 50C are constitutionally valid and thus, the same shall have applicability.

2. Scope of Section 50C:

2. Upon the reading of the provisions of section 50C, it is clear that the provision is a deeming provision and it specifically targets to charge the seller-assessee. The scope of Section 50C, which is a deeming provision, is restricted by the Act itself, as the Act must be read as a complete code,[ii] whereby section 50C has no applicability on the buyer in this case. Through the deeming provision as under Section 50C, and specifically the present case whose purpose can be ascertained to be taxation of the income of the seller-assessee, full effect is required to be given to the statutory fiction and it should be carried to its logical conclusion and cannot be extended beyond the purpose for which it is enacted.[iii] It cannot thus be extended to rope in the purchasers on grounds of section 69.

3. In the case of Dinesh Kumar Mittal vs. ITO and Ors.[iv] the Hon’ble High Court of Judicature of Allahabad while holding that the value determined for the purpose of stamp duty was not the actual consideration passing between the parties to a sale, observed at para 3:

“We are of the opinion that we cannot recognise any rule of law to the effect that the value determined for the purpose of stamp duty is the actual consideration passing between the parties to a sale. The actual consideration may be more or may be less. What is the actual consideration that passed between the parties is a question of fact to be determined in each case, having regard to the facts and circumstances of that case.”

3. Genesis of Section 69

4. Under the genesis of section 69 it is clear that it does not embody the legal fiction by which the value assessed by stamp authorities could be considered to be the actual consideration paid by the purchaser of the property and further, there is no presumption that unexplained investment must necessarily be added to the assessee’s income. It has been held that even the unsatisfactoriness of the explanation need and did not automatically result in deeming the value of investment to be the income of the assessee.[v] Thus it may be concluded that the scope of Section 50C is limited to the extent that it cannot be utilised as a tool for additions to the income in the hands of a purchaser.

4. Hitting the nail on the head:

The latest case of ITO v. Harley Street Pharmaceuticals Ltd.[vi] as decided on 16.03.2010 held that Section 50C creates a legal fiction for taxing capital gains in the hands of the seller and it cannot be extended for taxing the difference between apparent consideration and valuation done by Stamp Valuation Authorities as undisclosed investment under section 69. This fiction cannot be extended any further and, therefore, cannot be invoked by AO to tax the difference in the hands of the purchaser.

5. Conclusion and effect:

Thus, from the above discussion it is clear that there shall be no effects of the circle rates for the purposes of stamp duty valuation in regard to the income of the seller for the purposes of capital gains, on the purchaser. There shall be no repercussions on the purchaser in this regard and no income can be added to the income of the purchaser by the Income-tax Officer/Assessing Officer.

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[i] Writ Petition No. 1305 of 2009, decided on 15.03.2010

[ii] Commissioner Of Income-tax Bangalore v. B. C. Srinivasa Setty , [1981] 128 ITR 294 (SC),(para 10).

[iii] CIT v. Bharani Pictures, (1981) 129 ITR 244 (Mad), State of Travancore v. Shanmugha Vilas Cashwenut Factory, AIR 1953 SC 333 (para 49), CIT v. T.S. Rajam, (1980) 125 ITR 207, CIT v. Bharani Pictures, (1981) 129 ITR 244 (Mad), CED v. Smt. Krishna Kumari Devi, (1988) 173 ITR 561(All), CIT v. Kar Valves Ltd, (1987) 168 ITR 416(Ker), Addl CIT v. Durgamma, (1987) 166 ITR 776(AP)

[iv] (1992) 193 ITR 770 (All)

[v] (1980) 123 ITR 3 (Ker), (1995) 216 ITR 301 (AP)

[vi] (2010) 35 (II) ITCL 128 (Ahd `B'-Trib)

Service Tax and Construction of Property

In the Finance Act of 2010, the government has decided to impose service tax on the purchase of under-construction properties. However, this tax is applicable only if the consideration (either in full or in part) has been paid by the buyer to the developer prior to the issuance of a completion certificate by an ‘appropriate authority’. The activity of construction has been deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax is charged accordingly. The ‘authority competent’ to issue completion certificate has been widened to include authorities other that the government authorities[1]. Completion certificate issued by an architect or chartered engineer or licensed surveyor can be now taken to determine the service tax liability.

After these were brought forward in the Finance Bill, 2010, views were expressed that the tax liability on construction sector has been tightened at a time when the sector was recovering after recession. Keeping this in mind the government provided that the abatement which could be claimed by the builders in respect of these services was increased from 67%[2] to 75%[3]. Therefore, the service tax is leviable on only 25% of the amount paid before the issuance of the completion certificate. At 10.3%, this turns out to be roughly 2.575%(10.3% of 25%) of the total value. Therefore, a flat worth Rs. 40 Lakhs becomes dearer by around Rs. Lakh. Importantly seventy five percent abatement will be applicable only if the gross value of commercial or residential complex or unit includes cost of land. Otherwise the existing rate of abatement of 67% would continue to apply.[4] Service Tax exemption is provided to construction done under the Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana.[5]

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[1] Notification No.28/2010- Service Tax, dated 22nd June, 2010

[2] Notification No. 1/2006-Service Tax, dated the 1st March, 2006

[3] Notification 29/2010-Service Tax, dated 22nd June, 2010

[4] D.O.F.No.334/03/2010-TRU

[5] Notification No.28/2010- Service Tax, dated 22nd June, 2010