Tax planning with respect to amalgamation and mergers
Under Income Tax Act, 1961 Section 2(1B) of Income Tax Act defines „amalgamation‟ as merger of one or more companies with another company or merger of two or more companies to from one company in such a manner that:1. All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation. 2. All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation 3. Shareholders holding at least three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamated company or its nominee) becomes the shareholders of the amalgamated company by virtue of the amalgamation. (Example: Say, X Ltd merges with Y Ltd in a scheme of amalgamation and immediately before the amalgamation, Y Ltd held 20% of shares in X Ltd, the above mentioned condition will be satisfied if shareholders holding not less than 75% in the value of remaining 80% of shares in X Ltd i.e. 60% thereof, become shareholders in Y Ltd by virtue of amalgamation) The motive of giving this definition is that the benefits/concession under Income Tax Act, 1961 shall be available to both amalgamating company and amalgamated company only when all the conditions, mentioned in the said section, section, are satisfied. „Amalgamating company‟ means company which is merging and „amalgamated company‟ means the company with which it merges or the company which is formed after merger. However, acquisition of property of one company by another is not „amalgamation‟. Income Tax Act defines „amalgamation‟ as merger of one or more companies with another company or merger of two or more companies to from one company. Let us take an example of X Ltd and Y Ltd. He re following situations may emerge:(a)
X Ltd Merges with Y Ltd. Thus X Ltd goes out of existence. Here X Ltd is Amalgamating Company and Y Ltd is Amalgamated Company.
(b)
X Ltd and Y Ltd both merges and form a new company say, Z Ltd. Thus both X Ltd and Y Ltd goes out of existence and form a new company Z Ltd. Here X Ltd and Y Ltd are Amalgamated Company and Z Ltd is Amalgamated Company.
Tax Benefits in case of Amalgamation and merger If an amalgamation takes place within the meaning of section 2(1B) of the Income Tax Act, 1961, the following tax reliefs and benefits ben efits shall available:-
1. Tax Relief to the Amalgamating Company:
a) Exemption from Capital Gains Tax [Sec. 47(vi)] : Under section 47(vi) of the Incometax Act, capital gain arising from the transfer of assets by the amalgamating companies to the Indian Amalgamated Company is exempt from tax as such transfer will not be regarded as a transfer for the purpose of Capital Gain. b) Exemption from Capital Gains Tax in case of International Restructuring [Sec. 47(via)] : Under Section 47(via), in case of amalgamation of foreign companies, transfer of shares held in Indian company by amalgamating foreign company to amalgamated foreign company is exempt from tax, if the following two conditions are satisfied: c) At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and d) Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated 2. Tax Relief to the shareholders of an Amalgamating Company: a. Exemption from Capital Gains Tax [Sec 47(vii)]: Under section 47(vii) of the Incometax Act, capital gains arising from the transfer of shares by a shareholder of the amalgamating companies are exempt from tax as such transactions will not be regarded as a transfer for capital gain purpose, if: The transfer is made in consideration of the allotment to him of shares in the amalgamated company; and Amalgamated company is an Indian company.
3. Tax Relief to the Amalgamated Company : a) Carry Forward and Set Off of Accumulated loss and unabsorbed depreciation of the amalgamating company [Sec. 72A]: Section 72A of the Income Tax Act, 1961 deals with the mergers of the sick companies with healthy companies and to take advantage of the carry forward of accumulated losses and unabsorbed depreciation of the amalgamating company. But the benefits under this section with respect to unabsorbed depreciation and carry forward losses are available only if the followings conditions are fulfilled:There should be an amalgamation of – (a) a company owning an industrial undertaking (Note 1) or ship or a hotel with another company, or (b) a banking company referred in section 5(c) of the Banking Regulation Act, 1949 with a specified bankNote 2), or (c) one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business. The amalgamated company should be an Indian Company. The amalgamating company should be engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for 3 years or more. The amalgamating company should held continuously as on the date of amalgamation at least three-fourth of the book value of the fixed assets held by it two years prior to the date of amalgamation.
The amalgamated company holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths in the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation The amalgamated company continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation. The amalgamated company fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.
b) Expenditure on scientific research [Sec. 35(5)] : When an amalgamating company transfers any asset represented by capital expenditure on the scientific research to the amalgamated Indian company in a scheme of amalgamation provisions of section 35 shall be applicableUnabsorbed expenditure on scientific research of the amal gamating company will be allowed to be carried forward and set off in the hands of the amalgamated company, If such asset ceases to be used in the previous year for scientific research related to the business of amalgamated company and is sold by the amalgamated company the sale price to the extend of cost of asset shall be treated as business income and the excess of sale price over the cost shall be subject to the provisions of capital gain.
c) Amortization of expenditure in case of Amalgamation [Sec. 35DD]: Under Sec 35DD for expenditure incurred in connection with the amalgamation the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation takes place. d) Treatment of preliminary expenses [Sec. 35D(5)]: When and amalgamating company merges with an amalgamated company under a scheme of amalgamation, the amount of preliminary expenses of the amalgamating company to the extend not yet written off shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company. e) Expenditure for obtaining a licence to operate telecommunication services [Sec. 35ABB(6)]: Where in a scheme of amalgamation, the amalgamating company sells or otherwise transfer its licence to the amalgamated company (Being an Indian Company), the provisions of Section 35ABB which were applicable to the amalgamating company shall become applicable in the same manner to the amalgamated company, consequently: The expenditure on acquisition on license, not yet written off, shall be allowed to the amalgamated company in the same number of balance installments. Where such licence is sold by the amalgamated company, the treatment of the deficiency/surplus will be same as would have been in the case of amalgamating company.
f) Treatment of capital expenditure on family planning [U/S 36(1)(ix)]: If Asset representing capital expenditure on family planning is transferred by the amalgamating company to the amalgamated company under a scheme of amalgamation, such
expenditure shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company. g) Treatment of bad debts [Sec. 36(1)(vii)]: When due to amalgamation debts of the amalgamating company has been taken over by amalgamated company, and subsequently, such debts turn out to be bad, it shall be allowed as deduction to the amalgamated company. Double Taxation Treaties
To finance the welfare and the administrative expenditure, governments around the world impose certain taxes on their subjects. In cases, where cross country economic activity is carried out, it is a tricky affair to identify and justify the appropriate jurisdiction of tax authorities. In order to mitigate the hardships of multiple jurisdictions, the Governments enter into bilateral arrangements, which are commonly denoted as “Double Taxation Avoidance Agreements” Double Taxation Avoidance Agreements DTAA refers to an accord between two countries, aiming at elimination of double taxation. These are bilateral economic agreements wherein the countries concerned assess the sacrifices and advantages which the treaty brings for each contracting nation. It would promote exchange of goods, persons, services and investment of capital among such countries.
Indian Government is actively pushing DTAA negotiations with several countries to help its residents in understanding their tax jurisdictions and accountability towards the appropriate authorities. So far India has signed DTAA with 81 countries and discussion is on with many others. The natures of DTAA‟s entered by India are greatly diverse in their nature and contents. Objectives DTAA treaties must help in avoiding and alleviating the burden of double taxation prevailing in the international arena. The tax treaties must clarify the taxpayer to know with certainty of his potential tax liability in the country, where he is carrying on economic activities. Tax Treaties must ensure that there is no prejudice between foreign tax payers who has permanent enterprise in the source countries and domestic tax payers of such countries. Treaties are made with the aim of allocation of taxes between treaty nations and the prevention of tax avoidance. The treaties must also ensure that equal and fair treatment of tax payers having different residential status, resolving differences in taxing the income and exchange of information and other details among treaty partners. Classification Double taxation avoidance agreements may be classified into comprehensive agreements and limited agreements based on the scope of such agreements. Comprehensive Double Taxation Avoidance Agreements provide for taxes on income, capital gains and capital investments whereas Limited Double Taxation Avoidance Agreements denote income from shipping and air transport or legacy and gifts. Comprehensive agreements ensure that the taxpayers in both the
countries would be treated on equitable manner in respect of the issues relating to double taxation. Active & Passive Income Passive Income refers to income derived from investment in tangible / intangible assets eg. Immovable property, dividend, interest, royalties, capital gains, pensions etc. Active income is the income derived from carrying on active cross border business operations or by personal e ffort and exertion in case of employment eg. Business profits, shipping, air transport, employment etc. Current Scenario in India The Indian Income Tax Act, 1961 administrates the taxation of income accrued in India. As per Section 5 of the Income Tax Act, 1961 residents of India are liable to tax on their global income and non-residents are taxed only on income that has its source in India. The Provisions of DTAA override the general provisions of taxing statute of a particular country. It is now well settled that in India the provisions of the DTAA override the provisions of the domestic statute. Moreover, with the insertion of Sec.90 (2) in the Indian Income Tax Act, it is clear that assessee have an option of choosing to be governed either by the provisions of particular DTAA or the provisions of the Income Tax Act, whichever are more beneficial. Further if Income tax Act itself does not levy any tax on some income then Tax Treaty has no power to levy any tax on such income. Section 90(2) of the Income Tax Act recognizes this principle. Relief to the tax payer In order to prevent the hardship of double taxation, relief is provided to the tax payer. Such relief is provided by two ways: Bilateral Relief Bilateral relief is provided in section 90 and 90A of the Indian Income Tax Act. Bilateral relief is provided through following methods: (i) Exemption Method One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes. (ii) Credit Method This method reflects the underline concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself. (iii) Tax Sparing One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign investment flows in India from foreign developed countries. One way to achieve this aim is to let the investor to preserve to himself/itself benefits of tax incentives available in India for such investments. This is done through “Tax Sparing”. Here the tax credit is allowed by the country of its residence, not only in respect of taxes actually paid by it in India but also in respect of those taxes India forgoes due to its fiscal incentive provisions under the Indian Income Tax Act.
Unilateral Relief Unilateral Relief is provided in section 91 of the Income Tax Act. The aforesaid method is depending on bilateral activity of both the countries. However, no country will have such an agreement with every country in the world. In order to avoid double taxation in such cases, country of residence itself may provide relief on unilateral basis. Apart from relief to persons of a country where India has entered in Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that, he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less shall be allowed as deduction u/s 91 while calculating his tax liabilities on such income.
TAX PLANNING IN CASE OF FOREIGN COLLABORATIONS AND JOINT VENTURE
There are two types of foreign collaborations: a) Financial collaboration (foreign equity participation) where foreign equity alone is involved . b) Technical collaboration (technology transfer) involving licensing of technology by the foreign collaborator on due compensation. There are two approving authorities 1) Reserve Bank of India, and 2) Department of Industrial Development in the Ministry of Industry, Government of India. Government Policy The Government of India‟s policy on foreign private investment is based mainly on the Approach adopted in 1949. The basic policy is to welcome foreign private investment on a selective basis in areas advantageous to the Indian economy. The conditions under which foreign capital is welcome are as follows: a) All undertakings (Indian or foreign) have to conform to the general requirements of the Government‟s Industrial Policy. b) Foreign enterprises are to be treated at par with their Indian counterparts. c) Foreign enterprises would have the freedom to remit profits and repatriate capital subject to foreign exchange considerations. The Industrial Policy 1991, is based on the view that while freeing Indian Industry from official controls, opportunities for promoting foreign investments in India should also be fully exploited. It is felt that foreign investment would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports. Areas of Foreign Collaboration The Government of India issues from time to time a list of industries indicating where foreign investments may be permitted. The lists so issued are illustrative only The Government of India (Foreign Investment Promotion Board) also considers import of technology in Industries listed in
Annexure A & Annexure B of Schedule 1 of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 subject to compliance with the provisions of the Industrial Policy and Procedures as notified by Secretariat for Industrial Assistance (SIA) in the Ministry of Commerce and Industry Government of India from time to time. Technical Collaboration The Industrial Policy, 1991, also provides that equity collaboration need not necessarily be accompanied with technical collaborations. The salient features of the Policy relating to Foreign Technology Agreements are outlined below:
Paragraph 39C - Foreign Technology Agreements. Standard Conditions Attached to Approvals for Foreign Investment & Technology Agreements 1) The total non-resident shareholding in the undertaking should not exceed the percentage(s) specified in the approval letter. 2) A) The royalty will be calculated on the basis of the net ex-factory sales price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, customs duties, etc. The payment of royalty will be restricted to the licensed capacity plus 25% in excess thereof for such items requiring industrial licence or on such capacity as specified in the approval letter. This restriction will not apply to items not requiring industrial licence. In case of production in excess of this quantum, prior approval of Government would have to be obtained regarding the terms of payment of royalty in respect of such excess production. B) The royalty would not be payable beyond the period of the agreement if the orders had not been executed during the period of agreement. However, where the orders themselves took a long time to execute or were executed after the period of agreement, then in such cases the royalty for an order booked during the period of agreement would be payable only after a Chartered Accountant certifies that the orders in fact were firmly booked and execution began during the period of agreement and the technical assistance was available on a continuing basis even after the period of agreement. C) No minimum guaranteed royalty would be allowed. 3) The lumpsum shall be paid in three instalments as detailed below, unless otherwise stipulated in the approval letter:i. First 1/3rd after the approval for collaboration proposal is obtained from Reserve Bank of India and collaboration agreement is filed with the Authorised Dealer in Foreign Exchange. ii. Second 1/3rd on delivery of know-how documentation. iii. Third and final 1/3rd on commencement of commercial production, or four years after the proposal is approved by Reserve Bank of India and agreement is filed with the Authorized Dealer in Foreign Exchange, whichever is earlier. The lumpsum can be paid in more than three instalments, subject to completion of the activities as specified above. 1) All remittances to the foreign collaborator shall be made as per the exchange rates prevailing on the date of remittance.
2) The applications for remittances may be made to the Authorised Dealer in Form A2 with the undernoted documents:a) A No Objection certificate issued by the Income-tax authorities in the standard form or a copy of the certificate issued by the designated bank regarding the payment of tax where the tax has been paid at a flat rate of 30% to the designated bank. b) A certificate from the Chartered Accountant in Form TCK/TCR (depending upon the purpose of payment). c) A declaration by the applicant to the effect that the proposed remittance is strictly in accordance with the terms and conditions of the collaboration approved by RBI/Government. 3) The agreement shall be subject to Indian Laws. 4) A copy of the foreign investment and technology transfer agreement signed by both the parties may be furnished to the following authorities:a) Administrative Ministry/Department. b) Department of Scientific and Industrial Research, New Delhi. c) Concerned Regional Officer of Exchange Control Department, RBI. d) Authorised Dealer designated to service the agreement. 5) All payments under the foreign investment and technology transfer agreement including rupee payments (if any) to be made in connection with the engagement/deputation of foreign technical personnel such as passage fare living expenses, etc. of foreign technicians, would be liable for the levy of ces under the Research and Development Cess Act, 1986 and the Indian Company while making such payments should pay the cess prescribed under the Act. 6) A return (in duplicate) in Form TCD should be submitted to Regional Office of the Reserve Bank of India in the first fortnight of January each year. Withholding Tax for NRIs and Foreign Companies: Withholding Tax Rates for payments made to Non-Residents are determined by the Finance Act passed by the Parliament for various years. The current rates are: i) Interest 20% ii) Dividends paid by domestic companies : Nil iii) Royalties 10% iv) Technical Services 10% v) Any Other Services Individuals: 30% of the income Companies: 40% of the net income The above rates are general and in respect of the countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).
Tax consideration in MAKE or BUY
Management decision should be based on careful consideration of all the factors, including implication as regard to tax liability. Keeping view various tax implications that are relevant while taking some specific management decision under different provision of Income tax Act have dealt with:
Make or Buy:
One of the vital investment subject to the influence of tax factor is “Make or buy decision”. Most of the companies have to decide sometimes or the other whether they should buy a part from a market and stop making it themselves or whether they should stop buying it and start making it. There are various consideration affecting this decision, chief of which is cost. In other words, in making this sort of decision the various cost of making the product or part component of product is compared with its purchase price in market. A host of other consideration such as capacity utilization, supply position of the article to be bought, terms of purchase, ill effect of layoffs etc. are kept in view while taking such decision. Tax planning can be helpful in decision as regards making or buying a particular product, component etc. The decision ‘to make or buy ’ is a costing decision and is also influenced by many general factors which are as follows:
Availability of financial resources Investment required in fixed assets Availability of skilled and unskilled labour Availability of suppliers Existence of idle capacity in organization Price at which the product is available in the market Other miscellaneous factors Apart from costing considerations following factors also go in decision making process:
Utilization of Capacity
Inadequacy of funds
Latest Technology
Dependence of Supplier
Labor problem in the factory What are the cost involved in making of a part Fixed Cost
Variable Cost
What are the cost involved in buying of a part from outside agency:
Buying cost
Inventory cost
Comparision of both the cost shall determine which decision the company shall follow, therefore tax saved in both the cases are same.
Tax Consideration
Establishing a new unit: If the decision to manufacture a part or a component involves a setting up separate industrial unit than tax incentives available u/s 10a,10b, 32, 80 IA,80 IB should be considered. Export: If “Make or Buy” decision is taken for exporting goods then tax incentives available under section 80 HHC depends upon whether goods manufactured by tax player himself are exported or goods manufactured by others are exported by tax players.
Sale of plant and machinery: If buying is cheaper than manufacturing and the assessee decides to buy parts or components for a long period of time, he may like sell the existing plant and machinery. Tax implications as specified by section 50 has to be considered. If the decision is taken to produce a part, then any other industrial unit to be established. When a separate industrial unit is established then the company may get tax benefits and also deductions under various sections to a company which decides to produce a part, are:
1. Deduction in respect of profits and gains from newly established small scale undertakings in rural area (Sec 80 HHA) A tax players deriving a profits and gains from a new small scale industries undertaking set up in rural area will entitled to deduction of an amount equal to 20% of such profits and gains. The deduction will be admissible for a period of 10 previous years in which the small scale industrial undertaking commences production of an y article. 2. Deduction in respect of profits and gains from industrial undertaking (Ship or Hotel etc.): (Sec 80-1) Under sction-80-1, a deduction will be allowed in respect of profits and gain derived from industrial undertakings, ship or hotel established after a certain date. The deduction will be of an amount equal to 30% of such industrial undertakings or Ship or Hotel, If its company and 25% in categories of assesses. 3. Deduction in respect of profits and gains from newly established small scale undertakings or Hotel business in Backward area (Sec 80 HHA) All assesses are entitled to a deduction of 20% of the profit derived by them for new industrial undertakings and Hotel setup in backward area. The deduction will be allowed in respect of the ten assessment year relevant to previous year in which the industrial undertaking begins to manufacture or produce articles. 4. Depreciation Allowance A company which produces a part or a component will be allowed an allowance in respect of depreciation of buildings, machinery, plant or furniture owned and used the assesee for the purpose of business and profession.
Two primary factors which have a decisive influence on the choice of make or buy are the cost and availability of production capacity. Facilities are made available and other things being equal cost consideration assumes primacy. If the cost of making an item inhouse is going to be higher than the cost of acquiring it from an outside supplier, the
choice is to buy it. On the other hand, if the cost of making the item in ones own plant is cheaper than buying it from the supplier, the choice is to make it. A good make-or-buy decision, nevertheless, requires the evaluation of several less tangible factors in addition to the two basics ones. Considerations which favor making the parts are:
1. Cost considerations less expensive to make the part 2. Desire to integrate plan operations 3. Productive use of excess plant capacity to help absorb fixed overheads. 4. Needs to exert direct control over production and/or quality 5. Design secrecy. 6. Unreliable suppliers. 7. No suitable supplier quotation 8. Desire to maintain a stable workforce in periods of de clining sales Considerations which favor buying the part:
1. Cost considerations less expensive to buy the part 2. Suppliers research and specialized know-how 3. Small volume requirements 4. Limited production facilities 5. Desire to maintain stable workforce in periods of rising sales. 6. Desire to maintain multiple source policy. 7. Government policy favoring ancillary industries. 8. Monopoly items which are rationed by the government and on which, the buyer has no option. Other Factors
Some companies, by tradition, prefer to make almost every component of their products. Others prefer to buy as much as possible from outside suppliers. In general, an aggressive company in an industry that is expanding rapidly with many technological changes (e.g. electronics), will prefer to buy many of its components from outside suppliers. In such industries, the company has many opportunities to employ its capital profitably through horizontal diversification, expanding its line of finished products. Tax Consideration in Make or Buy decision:
If a business house/company decides to make a product/part instead of buying it and the making of product involves setting up of new industrial undertaking then a business house should mak e a
detailed analysis of following tax incentives available to new industrial undertaking under Income-Tax Act: (a)Tax holiday u/s 10 A (b)Tax holiday u/s 10 B (c)Tax holiday u/s 80 1A (d)Deduction u/s 80 1B If the decision to buy the product or component will render the plant machinery, furniture, land and building etc; earlier used in manufacturing the product, idle then the business house may have to sell these assets. In such a case, before taking decision „to buy‟, the provision related to capital gain tax should also be studied. LEASE VS. PURCHASE
With the concept of leasing gaining immense popularity in recent times, any business management is faced with the choice to purchase assets or to go in for leasing the asset. One must resolve this issue on economic consideration taking into account the different tax shield effects. If asset is purchased, the assessee can claim depreciation. Besides interest n capital is borrowed to finance investment in plant and machinery can also claim as deduction. If, however, asset is obtained on lease, deductions can be claimed in respect of lease rentals and lease management fees. INSTALMENT VS HIRE
If an asset is purchased by instalments, then the taxpayer claim depreciation under section 32. Besides interest payable on unpaid purchase price can also be claimed as deduction. In the case of obtaining an asset n hire, deduction can be claimed in respect of hire charges. By comparing present value of cash outflows a correct decision can be taken. TRANSFER PRICING
The existence of different tax rates in different countries offers a potential incentive to multinational enterprises to manipulate their transfer prices to recognize lower profit in countries with higher taxes and vice versa. In order to monitor transfer prices for goods, facilities and services, transfer pricing regulations were introduces in the form of sections 92 and 92A to 92F. The basic intention underlying the transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country‟s tax base. Provisions relating to computation of income from international transactions – sec 92
1) Income to be computed as per arms length price 2) Section not to apply when arms length prices decreases income or increases loss.
Associated enterprise means an enterprise which participates, directly or indirectly, in management or control or capital of other enterprise. Further, if one or more persons participate, directly or indirectly in the management or control or capital of two enterprises those two enterprises are associated enterprises. Deemed associated enterprises: two enterprises are deemed to be associated enterprises. If, at any time during the PY, a) One holds, directly or indirectly shares carrying 26% or more o f voting power in other enterprise. b) Any person holds, directly or indirectly shares carrying 26% or mo re voting power in both of them. c) A loan advanced by one to the other constitutes 51% or more of BV of total assets of other. d) One enterprise guarantees 10% or more of the total borrowings of the other enterprise. e) One appoints more than half of board of directors or one or more executive directors of the other. f) Any person appoints more than half board of directors or one or more executive directors of both. g) Manufacture/ processing of goods or business carried on b y one is fully dependent on use of know how, patents, copyright, etc. owned by the other, or in respect of which other has exclusive rights.
h) 90% or more of RM required by one are supplied by the other or by persons specified by other, and prices and other conditions relating to the supply are influenced by the other enterprise. i) Goods manufactured/ processed by one are sold to the other enterprise or to persons specified by other, and the prices and other conditions relating thereto are influenced by such other enterprise. j) Where one enterprise is controlled by an individual/HUF, the other enterprise is also controlled by such individual/ HUF or his relatives or jointly by such individual/HUF and such relative. k) One enterprise is a firm/AOP/BOI and other enterprise holds 10% or more interest in such firm/AOP/BOI. l) There exists between the two enterprises, any relationship of mutual interest, as may be prescribed. Section 92B
in tern ational tr ansaction
It means a transaction entered into between two or more associated enterprise (at least one is a non resident) for purchase/sale/ lease of tangible/ intangible property or pro vision of services or
lending/ borrowing money or any other transaction (including sharing agreements for common costs) having bearing on income and assets. Deemed associated transaction: If an associated enterprise and a third person determine the terms of a transaction between third person and another associated enterprise, such transaction shall be regarded as having being entered into between two associated enterprise. Section 92C methods under which arm’s length price is determined
1) Arms length price (ALP) means a price applicable in a uncontrolled transaction i.e. a transaction between non associated enterprises, in uncontrolled conditions. 2) Methods for computation of arms length price: arms length price is determined by the most appropriate of the following methods, selected as per the mode prescribed by the board – a) Comparable uncontrolled price method b) Resale price method c) Cost plus method d) Transaction net margin method e) Profit split method f) Other prescribed method. 3) When more than one price determined : by the most appropriate method, the arms length price shall be taken to be the lower of the following – a) The arithmetical mean of such prices, or, b) A price varying up to 5% of such arithmetical mean.
ASSESSMENT PROCEDURE Assessment of income relating to one PY starts in the succeeding financial year, which is called AY. Assessment procedure begins when an assessee files his return of income to the income tax department. Filing of return [Sec 139 (1)] A person has to file return of income in the prescribed form within the specified time limit if his total income exceeds the maximum non-taxable limit. As per section 139(1), it is compulsory for companies and firms to file a return of income for every previous Year. Filing of return of income is mandatory for certain category of assessees. Incidental provisions for accompaniments to the return of income, error correction, belated returns have been made. Now filing of the return electronically has been made mandatory for certain category of assessees. Return of income is the format in which the assessee has to furnish information as to his total income and tax payable. The format for filing of returns by different assessees is notified by the CBDT. ‘Due date’ means -
(a) 30th September of the assessment year, where the assessee is (i) a company; or
(ii) a person (other than a company) whose accounts are required to be audited under the Income-tax Act, 1961 or any other law in force; or (iii)a working partner of a firm whose accounts are required to be audited under the Incometax Act, 1961 or any other law for the time being in force. RETURN BY WHOM TO BE SIGNED [Section 140] Managing director or where for any unavoidable reason managing director is not able to sign or where there is no managing director, by any director thereof. Exceptions : (a) where the company is being wound up : by the liquidator (b) where the management of the company has been taken over by the Government : the principal officer thereof (c) company is not resident in India : a person who holds a valid power of attorney Return of loss [Sec 139 (3)] Return can also be filed in the prescribed form in respect of loss suffered by the assessee. It is not compulsory to file a return of loss, but certain losses can be carried forward only on filing return of loss
Belated return [Sec 139(4)] If the return is not furnished within the time, the person may furnish the return of any PY at any time before the end of one year form the end of the relevant AY or before making assessment whichever is earlier. An assessee who files belated return are liable for penal interest Revised return [Sec 139(5)] If after filing a return of income or in pursuance of a notice the assessee discovers any omission or wrong statement in return originally filed, he can file a revised return. It should be filed within one year from the AY or before the completion of assessment whichever is earlier. Defective return [Sec 139(9)] Where the AO finds that the return filed by an assessee is defective he should intimate the assessee about the defect and give him an opportunity to rectify the defects within 15 days from the date of intimation or within such further extended time as the AO may allow. If the defect is not rectified within the time allowed, the return will be treated as invalid and it will be deemed that no return has been filed by the assessee attracting penal interest TYPES OF ASSESSMENT 1. Self assessment [Sec 140A] When a return is furnished the assessee will have to pay tax, if any payable on the basis of return. He has also to pay interest up to the date of filing the return along with self-assessment of tax. The return of income is to be accompanied by proof of payment of both tax and interest. Assessing officer may make an enquiry for getting full information in respect of assesse’s income. The assessee shall be given an opportunity of being heard in respect of any material gathered on the basis of any enquiry so made. The assessing authority may also direct the assessee to get his accounts audited by an accountant nominated by chief commissioner, even if the accounts of the assessee have been audited under nay other provision. 2. Summery assessment [Sec 143(1)] If on the basis of return filed, any tax or interest is due the A.O shall send intimation to the assessee specifying the sum so payable. If any refund is due on the basis of such return it shall be granted to the assessee. Such intimation shall be deemed to be a notice of demand. Such an
intimation should be send before the expiry of 2 years from the end of the AY in which income was first assessable 3. Assessment in response to an order [Sec 143(2)] Assessment of income after receiving a notice from income tax authorities is called assessment in response to an order. A.O can send notice if he considers it necessary to ensure that the assessee has not understated the income or has not underpaid tax. After hearing such evidence as the assessee may produce in response to the notice and after taking into account all relevant materials, which the A.O has gathered, he shall pass an assessment order in writing determining the total income of the assessee and the sum payable or refund due to the assessee on the basis of such assessment order. 4. Best Judgment Assessment [Sec 144] In the following situation the A.O can make a best judgment assessment after considering all relevant materials, which he has gathered. a. if the assessee has not filed a return or a belated return or a revised return b. if he fails to comply with the terms of the notice or fails to comply with the direction to get his account audited c. if he fails to comply with the terms of the notice requiring the presence or production of evidence and documents d. if the A.O is not satisfied with the correctness or completeness of the accounts of the assessee The best judgment assessment can be made only after giving the assessee a reasonable opportunity of being heard. Assessee has a right to file an appeal or to make an application for revision to the commissioner. 5. Income escaping assessment or reassessment [Sec 147] If the AO has reason to believe that any income chargeable to tax has escaped assessment for any AY he may assess or re assess such income. If an assessee has not furnished a return of income although total income is above the taxable limit or where a return of income has been made but assessee is found to have understated his income where an assessment is made but income chargeable to tax has been under assessed, reassessment can be made. Rectification of mistakes [Sec 154] The AO may amend any order passed by it or amend nay intimation sent by it if he finds that a mistake apparent from record is made. This is called rectification of mistake. Where a rectification has the effect of enhancing tax liability or reducing the refund, the AO is required to issue a notice of its intention to do so the assessee and give the assessee a reasonable opportunity of being heard. Rectification of mistakes may be made either on its own motion or on the application of the assessee. Rectification can be made only within 4 years from the end of financial year in which the order sought to be rectified was passed.
Tax Deduction at source (TDS)
The provisions of the Income Tax Act relating to “Tax Deduction at source (TDS)” are of very important in the present scenario when TDS collections contribute almost 39% of total collection of Direct Taxes. The Income Tax Act also provides for penalty & prosecution for any default in respect of deduction of tax at source or deposit of the deducted amount in the Government account. Thus, the Tax Deductors need to be well conversant with the provisions relating to Tax Deduction at Source as provided in sections 192 to 198 of the Income Tax Act.
The Indian Income Tax Act provides for chargeability of tax on the total income of a person on an annual basis. The quantum of tax determined as per the statutory provisions is payable as: a) Advance Tax b) Self Assessment Tax c) Tax Deducted at Source (TDS) d) Tax Collected at Source (TCS) Tax deducted at source (TDS), as name imply aims at collection of revenue at the very source of income. It is an indirect method of collecting tax with the concepts of “collect as it is being earned.” Its significance to the government lies in the fact that it pre-pones the collection of tax & to ensures a regular source of revenue. The concept of TDS requires that the person, on whom responsibility has been cast, is to deduct tax at the appropriate rates, from payments of specific nature which are being made to a specified recipient. The deducted sum is required to be deposited to the credit of the Central Government. The recipient from whose income, tax has been deducted at source, gets the credit of the amount deducted in his personal assessment.
TDS RATES FOR THE A.Y. 2012-13 (IN %) Nature of Payment Made To Residents
Threshold (Rs.)
-
Company / Firm / Co-operative Society / Local Authority Rate (%) NA
5000
10 10 10
Rate (%) Average rates as applicable 10 10 10
10000 10000 5000 30000 75000
10 30 30 2 2
10 30 30 1 1
20 30 30 20 20
-
-
-
20
20000 -
10 -
10 -
20 -
2500 1000 1000
10 20 20 20 10
10 20 20 10
20 20 20 20 20
Section - Description
192 - Salaries 193 - Interest on securities 194 - Dividends 194A - Interest other than interest on securities Others 194A - Banks 194B - Winning from Lotteries 194BB - Winnings from Horse Race 194 C - Payment to Contractors - Payment to Contractor - Single Transaction - Payment to Contractor - Aggregate During the F.Y. - Contract - Transporter who has provided valid PAN 194D - Insurance Commission 194E - Payment to Non-Resident Sportsmen or Sports Association - Applicable up to June 30, 2012 - Applicable from July 1, 2012 194EE - Payments out of deposits under NSS 194F - Repurchase Units by MFs 194G - Commission - Lottery
Individual / HUF
If No / Invalid PAN Rate (%) 30
20 20 20
194H - Commission / Brokerage 194I - Rent - Land and Building 194I - Rent - Plant / Machinery 194J - Professional Fees 194LA - Immovable Property 194LB - Income by way of interest from infrastructure debt fund (non-resident) Sec 194 LC - Income by way of interest by an Indian specified company to a non-resident / foreign company on foreign currency approved loan / long-term infrastructure bonds from outside India (applicable from July 1, 2012) 195 - Other Sums 196B - Income from units 196C-Income from foreign currency bonds or GDR (including long-term capital gains on transfer of such bonds) (not being dividend) 196D - Income of FIIs from securities
5000 180000 180000 30000 100000 -
10 10 2 10 10 5
10 10 2 10 10 5
20 20 20 20 20 20
-
5
5
20
-
-
30
-
Average rates as applicable 10 10
10 10
20 20
20
20
20
20
