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Search And Seizure - Application Of Assets Seized Or Requisitioned

November 26, 2013 LD/62/49 Chironjilal Sharma HUF vs. UOI (SC) Section 132B read with Section 132 of the Income-tax Act, 1961 

Where in search, cash seized was in excess of tax liability, appellant would be entitled to interest for the period from expiry of period of six months from the date of order under Section 132(5) to the date of regular assessment order.

Search was conducted in the house of the appellant on 31.1.1990 and a cash amount of R2,35,000/- was recovered. On 31.5.1990, an order under Section 132(5) came to be passed. The Assessing Officer calculated the tax liability and the cash seized in the search from the appellant's house was appropriated. However, the order of the Assessing Officer was finally set-aside by the Tribunal on 20.2.2004. The revenue accepted the order of the Tribunal. Consequently, the appellant has been refunded the amount of R2,35,000/- along with interest from 4.3.1994 (date of last of the regular assessments by the Assessing Officer) until the date of refund. The appellant (assessee) claims that he is entitled to interest under Section 132B(4)(b) which was holding the field at the relevant time for the period from expiry of period of six month's from the date of order under Section 132(5) to the date of regular assessment order. In other words, the order under Section 132(5) having been passed on 31.5.1990, six months expired on 30.11.1990 and the last of the regular assessments was done on 4.3.1994, the assessee claims interest under Section 132B(4)(b) from 1.12.1990 to 4.3.1994.


The Supreme Court held as follows:

A close look at section 132B and, particularly, clause (b) of Section 132B(4) clearly shows that where the aggregate of the amounts retained under Section 132 exceeds the amounts required to meet the liability under Section 132B(1)(i), the department is liable to pay simple interest at the rate of fifteen percent on expiry of six months from the date of the order under Section 132(5) to the date of the regular assessment or re-assessment or the last of such assessments or reassessments, as the case may be. It is true that in the regular assessment done by the Assessing Officer, the tax liability for the relevant period was found to be higher and, accordingly, the seized cash under Section 132 was appropriated against the assessee's tax liability but the fact of the matter is that the order of the Assessing Officer was over-turned by the Tribunal finally on 20.2.2004. As a matter of fact, the interest for the post assessment period i.e. from 4.3.1994 until refund on the excess amount has already been paid by the department to the assessee. The department denied the payment of interest to the assessee under Section 132B(4)(b), on the ground that the refund of excess amount is governed by Section 240 and Section 132B(4)(b) has no application. But, Section 132B(4)(b) deals with pre-assessment period and there is no conflict between this provision and Section 240 or for that matter 244(A). The former deals with pre assessment period in the matters of search and seizure and the later deals with post assessment period as per the order in appeal. The view of the department is not right on the plain reading of Section 132B(4) (b) as indicated above. The appellant is entitled to the simple interest at the rate of fifteen percent per annum under Section 132B(4) (b) from 1.12.1990 to 4.3.1994.
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DTAA Between India & Belize


Agreement For Exchange Of Information With Respect To Taxes With Belize

Notification No. 3/2014[F.NO.503/4/2012-FTD-I]/SO 48(E), Dated 7-1-2014

Whereas, an agreement (hereinafter referred to as the said agreement) was entered into between the Government of the Republic of India and the Government of Belize for the exchange of information with respect of taxes was signed at Belmopan, Belize on the 18th day of September, 2013;

And whereas, the date of entry into force of the said agreement is the 25th day of November, 2013, being the date of later of the notification of completion of the procedures as required by the respective laws for entry into force of the said agreement, in accordance with the Article 10 of the said agreement;
Paragraph 2 of the Article 10 of the said agreement provides that the provisions of the said agreement shall enter into force on the date of the later of the notifications referred to in paragraph 1 of this Article and shall thereupon have effect forthwith;

Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of said agreement between the Government of the Republic of India and the Government of Belize for the exchange of information with respect to taxes as set out in the Annexure hereto, shall be given effect to in the Union of India with effect from the date of entry into force of said agreement i.e., the 25th day of November, 2013.

ANNEXURE

Agreement Between The Government Of The Republic Of India And The Government Of Belize For The Exchange Of Information With Respect To Taxes

The Government of the Republic of India and the Government of Belize, desiring to facilitate the exchange of information with respect to taxes, have agreed as follows:

ARTICLE 1

OBJECT AND SCOPE OF THE AGREEMENT

The competent authorities of the Contracting Parties shall provide assistance through exchange of information that is foreseeably relevant to the administration and enforcement of the domestic laws of the Contracting Parties concerning taxes covered by this Agreement. Such information shall include information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters. Information shall be exchanged in accordance with the provisions of this Agreement. The rights and safeguards secured to persons by the laws or administrative practice of the requested Party remain applicable to the extent that they do not unduly prevent or delay effective exchange of information.

ARTICLE 2

JURISDICTION

Information shall be exchanged in accordance with this Agreement without regard to whether the person to whom the information relates is, or whether the information is held by, a resident of a Contracting Party. However, a Requested Party is not obliged to provide information which is neither held by its authorities nor is in the possession or control of persons who are within its territorial jurisdiction.

ARTICLE 3

TAXES COVERED

1. The taxes which are the subject of this Agreement are:

(a) in India, taxes of every kind and description imposed by the Central Government or the Governments of political subdivisions or local authorities, irrespective of the manner in which they are levied;

(b) in Belize, taxes of every kind and description imposed by the Central Government or local authorities, irrespective of the manner in which they are levied.

2. This Agreement shall also apply to any identical or substantially similar taxes imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting Parties shall notify each other of any substantial changes, to the taxation and related information gathering measures which may affect the obligations of that Party pursuant to this Agreement.

Belize Ruins

ARTICLE 4

DEFINITIONS

1. For the purposes of this Agreement, unless otherwise defined:

(a) the term "India" means the territory of India and includes the territorial sea and airspace above it, as well as any other maritime zone in which India has sovereign rights, other rights and jurisdiction, according to the Indian law and in accordance with international law, including the U.N. Convention on the Law of the Sea;

(b) the term "Belize" means the land and sea areas as defined in Schedule 1 to the Belize Constitution, including the territorial waters and any other area in the sea and in the air within which Belize, in accordance with international law, exercises sovereign rights or its jurisdiction;

(c) the term "Contracting Party" means India or Belize as the context requires;

(d) the term "competent authority" means:

(i) in the case of India, the Finance Minister, Government of India, or its authorized representative;

(ii) in the case of Belize, the Minister of Finance or his authorised representative.

(e) the term "person" includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting Parties;

(f) the term "company" means any body corporate or any entity that is treated as a body corporate for tax purposes;

(g) the term "publicly traded company" means any company whose principal class of shares is listed on a recognised stock exchange provided its listed shares can be readily purchased or sold by the public. Shares can be purchased or sold "by the public" if the purchase or sale of shares is not implicitly or explicitly restricted to a limited group of investors;

(h) the term "principal class of shares" means the class or classes of shares representing a majority of the voting power and value of the company;

(i) the term "recognised stock exchange" means:

(i) in India, the National Stock Exchange, the Bombay Stock Exchange, and any other stock exchange recognised by the Securities and Exchange Board of India;

(ii) in Belize, the International Stock Exchange of the United Kingdom and Republic of Ireland Limited, the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers' Automated Quotation System of the United States of America or any other stock exchange approved for this purpose by the Minister of Finance; and

(iii) any other stock exchange which the competent authorities agree to recognise for the purposes of this Agreement.

(j) the term "collective investment fund or scheme" means any pooled investment vehicle, irrespective of legal form.

(k) the term "public collective investment fund or scheme" means any collective investment fund or scheme provided the units, shares or other interests in the fund or scheme can be readily purchased, sold or redeemed by the public. Units, shares or other interests in the fund or scheme can be readily purchased, sold or redeemed "by the public" if the purchase, sale or redemption is not implicitly or explicitly restricted to a limited group of investors;

(l) the term "tax" means any tax to which this Agreement applies;

(m) the term "requesting Party" means the Contracting Party-

(i) submitting a request for information to, or
(ii) having received information from, the requested Party.

(n) the term "requested Party" means the Contracting Party—

(i) which is requested to provide information, or

(ii) which has provided information.

(o) the term "information gathering measures" means laws and administrative or judicial procedures that enable a Contracting Party to obtain and provide the requested information;

(p) the term "information" means any fact, statement, document or record in whatever form;

2. As regards the application of this Agreement at any time by a Contracting Party, any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a common meaning pursuant to the provisions of Article 9 of this Agreement, have the meaning that it has at that time under the law of that Party, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party.

Belize Events and Festivals

ARTICLE 5

EXCHANGE OF INFORMATION UPON REQUEST

1. The competent authority of the requested Party shall provide upon request information for the purposes referred to in Article 1. Such information shall be exchanged without regard to whether the requested Party needs such information for its own tax purposes or whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.

2. If the information in the possession of the competent authority of the requested Party is not sufficient to enable it to comply with the request for information, that Party shall use all relevant information gathering measures to provide the requesting Party with the information requested, notwithstanding that the requested Party may not need such information for its own tax purposes.

3. If specifically requested by the competent authority of the requesting Party, the competent authority of the requested Party shall provide information under this Article, to the extent allowable under its domestic laws, in the form of depositions of witnesses and authenticated copies of original records.

4. Each Contracting Party shall ensure that its competent authority, for the purposes of this Agreement, has the authority to obtain and provide upon request:

(a) information held by banks, other financial institutions, and any person, including nominees and trustees, acting in an agency or fiduciary capacity;

(b) information regarding the legal and beneficial ownership of companies, partnerships, collective investment funds or schemes, trusts, foundations, "Anstalten" and other persons, including, within the constraints of Article 2, ownership information on all such persons in an ownership chain; in the case of collective investment funds or schemes, information on shares, units and other interests; in the case of trusts, information on settlors, trustees and beneficiaries; in the case of foundations, information on founders, members of the foundation council and beneficiaries; and equivalent information in case of entities that are neither trusts nor foundations.

5. This Agreement does not create an obligation on the Contracting Parties to obtain or provide ownership information with respect to publicly traded companies or public collective investment funds or schemes unless such information can be obtained without giving rise to disproportionate difficulties.

6. The competent authority of the requesting Party shall provide the following information to the competent authority of the requested Party when making a request for information under the Agreement to demonstrate the foreseeable relevance of the information to the request:

(a) the identity of the person under examination or investigation;

(b) the period for which information is requested;

(c) the nature of the information requested and the form in which the requesting Party would prefer to receive it;

(d) the tax purpose for which the information is sought;

(e) grounds for believing that the information requested is present in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;

(f) to the extent known, the name and address of any person believed to be in possession or control of the requested information;

(g) a statement that the request is in conformity with the laws and administrative practices of the requesting Party, that if the requested information was within the jurisdiction of the requesting Party then the competent authority of the requesting Party would be able to obtain the information under the laws of the requesting Party or in the normal course of administrative practice and that it is in conformity with this Agreement;

(h) a statement that the requesting Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.

7. The competent authority of the requested Party shall forward the requested information as promptly as possible to the requesting Party. To ensure a prompt response, the competent authority of the requested Party shall:

(a) Confirm receipt of a request in writing to the competent authority of the requesting Party and shall notify the competent authority of the requesting Party of deficiencies in the request, if any, within 60 days of the receipt of the request.

(b) If the competent authority of the requested Party has been unable to obtain and provide the information within 90 days of receipt of the request, including if it encounters obstacles in furnishing the information or it refuses to furnish the information, it shall immediately inform the requesting Party, explaining the reason for its inability, the nature of the obstacles or the reasons for its refusal.

ARTICLE 6

TAX EXAMINATIONS ABROAD

1. At the request of the competent authority of the requesting Party, the requested Party may allow representatives of the competent authority of the requesting Party to enter the territory of the requested Party, to the extent permitted under its domestic laws, to interview individuals and examine records with the prior written consent of the individuals or other persons concerned. The competent authority of the requesting Party shall notify the competent authority of the requested Party of the time and place of the intended meeting with the individuals concerned.

2. At the request of the competent authority of the requesting Party, the requested Party may allow representatives of the competent authority of the requesting Party to be present at the appropriate part of a tax examination in the requested Party, in which case the competent authority of the requested Party conducting the examination shall, as soon as possible, notify the competent authority of the requesting Party about the time and place of the examination, the authority or official designated to carry out the examination and the procedures and conditions required by the requested Party for the conduct of the examination. All decisions with respect to the conduct of the tax examination shall be made by the Party conducting the examination.

Heritage Point Condos in Belize

ARTICLE 7

POSSIBILITY OF DECLINING A REQUEST FOR INFORMATION

1. The competent authority of the requested Party may decline to assist:

(a) where the request is not made in conformity with this Agreement; or

(b) where the requesting Party has not pursued all means available in its own territory to obtain the information, except where recourse to such means would give rise to disproportionate difficulty; or

(c) where disclosure of the information would be contrary to public policy (ordre public) of the requested Party.

2. This Agreement shall not impose on a Contracting Party the obligation:

(i) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, provided that information described in paragraph 4 of Article 5 shall not be treated as such a secret or trade process merely because it meets the criteria in that paragraph; or

(ii) to obtain or provide information, which would reveal confidential communications between a client and an attorney, solicitor or other admitted legal representative where such communications are:

(a) produced for the purposes of seeking or providing legal advice or

(b) produced for the purposes of use in existing or contemplated legal proceedings; or

(iii) to carry out administrative measures at variance with its laws and administrative practices, provided nothing in this subparagraph shall affect the obligations of a Contracting Party under paragraph 4 of Article 5.

3. A request for information shall not be refused on the ground that the tax claim giving rise to the request is disputed.

4. The requested Party shall not be required to obtain and provide information which the requesting Parly would be unable to obtain in similar circumstances under its own laws for the purpose of the administration or enforcement of its own tax laws or in response to a valid request from the requested Party under this Agreement.

5. The requested Party shall not decline to provide information solely because the request does not include all the information required under Article 5 if the information can otherwise be provided according to the law of the requested Party.

ARTICLE 8

IMPLEMENTATION LEGISLATION

The Contracting Parties shall enact any legislation necessary to comply with, and give effect to, the terms of the Agreement. Such legislation shall be enacted within six months of entry into force of this Agreement.

ARTICLE 9

MUTUAL AGREEMENT PROCEDURE

1. Where difficulties or doubts arise between the Contracting Parties regarding the implementation or interpretation of the Agreement, the competent authorities shall endeavour to resolve the matter by mutual agreement. In addition, the competent authorities of the Contracting Parties may mutually agree on the procedures to be used under Articles 5, 6 and 8 of this Agreement.

2. The competent authorities of the Contracting Parties may communicate with each other directly for purposes of reaching agreement under this Article.

ARTICLE 10

ENTRY INTO FORCE

1. The Contracting Parties shall notify each other in writing, through diplomatic channels, of the completion of the procedures required by the respective laws for the entry into force of this Agreement.

2. This Agreement shall enter into force on the date of the later of the notifications referred to in paragraph 1 of this Article and shall thereupon have effect forthwith.


ARTICLE 11

TERMINATION

1. This Agreement shall remain in force until terminated by either Contracting Party.

2. Either Contracting Party may, after the expiry of five years from the date of its entry into force, terminate the Agreement by serving a written notice of termination to the other Contracting Party through diplomatic channels.

3. Such termination shall become effective on the first day of the month following the expiration of a period of six months after the date of receipt of notice of termination by the other Contracting Party. All requests received up to the effective date of termination shall be dealt with in accordance with the provisions of the Agreement.

In witness whereof, the undersigned, being duly authorised thereto, have signed this Agreement.

Executed at Belmopan on 18th September, 2013, each in the Hindi and English languages, both texts being equally authentic. In case of divergence of interpretation, the English text shall prevail.

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 DTAA Between India & Albania 


Agreement For Avoidance Of Double Taxation And Prevention Of Fiscal Evasion With Albania

December 4th, 2013. The Government of India signed an Agreement for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (DTAA) with Government of Albania. The Agreement was signed by Dr. Sudha Sharma, Chairperson, Central Board of Direct Taxes (CBDT), on behalf of the Government of India and Mr. Fatos Kerciku, Ambassador, Republic of Albania on behalf of the Government of Albania.

The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a Permanent Establishment (PE) in the source state. The Agreement provides for fixed place PE, building site, construction & installation PE, service PE and agency PE.The Agreement incorporates para 2 in Article 9 concerning Associated Enterprises. This would enhance recourse to Mutual Agreement Procedure to relieve double taxation in cases involving Transfer Pricing adjustments.


Dividends, Interest and Royalties & Fees for Technical Services income will be taxed both in the country of residence and in the country of source. The low level of withholding rates of taxation for dividend (10%), interest (10%) and royalties & fees for technical services (10%) will promote greater investments, flow of technology and technical services between the two countries. The Agreement further incorporates provisions for effective exchange of information between tax authorities of the two counties in line with latest international standard, including exchange of banking information and supplying of information without recourse to domestic interest.



The Agreement also contains an Article on Assistance in Collection of Taxes. This article also includes provision for taking measure of conservancy. The Agreement incorporates anti-abuse (limitation of benefits) provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries. The Agreement will provide tax stability to the residents of India and Albania and will facilitate mutual economic cooperation between the two countries. It will also stimulate the flow of investment, technology and services between India and Albania.

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India and Fiji signed Double Taxation Avoidance Agreement 


January 30th, 2014. Government of India and the Government of Fiji on 30 January 2014 signed a Double Taxation Avoidance Agreement (DTAA) for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income. On  behalf of India the agreement was signed by P. Chidambaram, Union Minister of Finance and on behalf of Fiji it was signed by Aiyaz Sayed-Khaiyum, Attorney General and Minister of Justice, Anti-Corruption, Public Enterprises, Communications, Civil Aviation, Tourism, Industry and Trade. The negotiation on the DTAA was reached in 2011 and this agreement will provide tax stability to the residents of India and Fiji. It will also facilitate in mutual economic cooperation as well as stimulate the flow of investment, technology and services between the two countries. It also incorporates provisions for an effective exchange of information and assistance in collection of taxes between tax authorities of the two countries including exchange of banking information. The maximum rate of tax that should be charged in the country of source will not exceed the prescribed limit for such dividends, royalties, interest and fees for technical services. The capital gains that are earned by the sale of shares will be taxable in the country of source. The anti-abuse provisions have been incorporated in the agreement to ensure that the benefits of Agreement are availed of only by the residents of the two countries and to prevent any abuse of treaty.

The agreement will also help the two countries in

•    As per the DTAA the business profit will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in the source country
•    Profits derived by an enterprise from the operation of aircraft in international traffic shall be taxable in the country of place of effective management of the enterprise
•    Dividends, interest, royalty income and fees for technical or professional services will be taxed both in the country of residence and in the country of source
Cairn UK Did Not Pay Tax On Rs 24,503.50 Crores Of Capital Gains: Income Tax Department


Jan 27, 2014, The Income Tax Department has assessed that Cairn Energy Plc of UK did not pay tax on Rs 24,503.50 crores of capital gains made on transferring India assets to a new company. The department, in a seven-page order dated January 22, said the gains came after the Edinburgh-based firm transferred its entire India business from subsidiaries incorporated in Jersey, a tax haven, to newly incorporated Cairn India for Rs 26,681.87 crores in 2006. This payment that the UK firm received was against its entire investment of Rs 2,178.36 crores (251.22 million pounds) in the India business.  "Since Cairn India Ltd has paid an amount of Rs 26,681.87 crores to Cairn UK Holdings Ltd for acquiring 251.224 million shares of Cairn India Holdings Ltd, there is a prima facie short-term capital gain of Rs 24,503.50 crores," the order said. It has so far not raised a tax demand on Cairn Energy. The I-T Department, however, ordered Cairn India not to allow the transfer of Cairn Energy's stake in the company. It also ordered that the shares cannot be pledged or mortgaged. After transferring the assets, the Scottish explorer listed Cairn India on the stock exchanges through an initial public offering (IPO) in 2006 that raised Rs 8,616 crores. In 2011, Cairn Energy sold its majority stake in Cairn India to mining group Vedanta for USD 8.67 billion. It still holds a 10.3 per cent stake in Cairn India. "the principal officer of Cairn India Ltd is directed not to do/permit any transfer of these shares to anybody," it said. "So far as the receivables by Cairn UK Holdings Ltd in the books of Cairn India Ltd are concerned the Principal Officer of Cairn India Ltd is directed not to remit/pay any amount to Cairn UK Holdings Ltd." Cairn Energy was widely seen as a likely participant in the Indian firm's share buyback, which opened on January 23. The I-T Department started an investigation on January 15 to establish if capital gains tax was due from Cairn Energy's transfer of shares of Indian assets to Cairn India in 2006. "Cairn (Energy) has been contacted by the Income Tax Department of India to discuss income-tax assessments for the year ending March 31, 2007. Cairn is cooperating to provide the necessary documentation and information as requested," the Edinburgh-based company had said in a statement on January 24. "the Income Tax Department has instructed Cairn Energy Plc to hold its shares in Cairn India," it had added. The I-T Department had 'surveyed' Cairn India's Gurgaon office on January 15. It is investigating the matter under Section 9 of the Income-Tax Act, which deals with income deemed to accrue or arise in India. Cairn India plans to buy 17.09 crores shares, or 8.9 per cent of the equity, from the open market at not more than Rs 335 apiece, aggregating up to Rs 5,725 crores.


India Detects ‘Visa Fraud And Tax Evasion’ In US Embassy School


January 17, 2014, India has reportedly detected violation of visa and tax laws in the American Embassy School in New Delhi. A number of teachers are working there illegally, allege Indian government sources. This comes after the arrest of Indian diplomat Devyani Khobragade in New York for visa fraud relating to her claims about the wages she was paying her housekeeper Sangeeta Richard. Since then, New Delhi has carried out three weeks of investigations, including the scrutiny of bank accounts and school records. The New York Times reported Thursday that a handout released by the school ensnared it in the diplomatic row. Addressed to new teacher couples, the handout asks spouses to list their occupation on visa applications as “housewife” and not to declare that they would be working. This amounts to visa fraud, say Indian government sources contacted by The Indian Express. They cite a 1973 agreement under which 16 American teachers are to be given visas with “tax-free” status; any teachers beyond that number would have to pay tax. The sources allege the school has been hiring couples in what they call a “piggyback” scheme, with one partner coming on a “work” visa and the spouse on a “spouse” visa.  The salary of the spouse, too, is allegedly being credited to the bank account of the partner on a work visa, so that the spouse could evade tax. This is an “institutionalised fraud”, one source told The Indian Express.

The sources said the school charges up to $30,000 a year as fees. Located next to the embassy, it has about 1,500 students, nearly 500 of them American. The rest include some Indians. The  New York Times report quoted a senior Indian official as estimating that the school has at least 16 teachers working illegally. “We have seen reports (about the school),” external affairs ministry spokesperson Syed Akbaruddin told The Indian Express. “These are serious matters relating to the Indian visa regime and tax laws. We will examine them very carefully and take appropriate decision.” The US embassy, when contacted, did not comment on India’s allegations. It drew attention to a US statement released early this week that said issues pertaining to the school are among those raised by the external affairs ministry with the US government and which figured in discussions between Deputy Secretary of State William J Burns and Indian Ambassador S Jaishankar in Washington. “Deputy Secretary Burns conveyed that we take their concerns very seriously and will continue to address them via appropriate diplomatic channels,” the statement said.

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Vodafone, Shell May Face New Tax Demands In India 

 




January 30th, 2014. Fresh orders against Indian units of Vodafone, Shell can potentially lead to tax demands for a combined Rs.24,960 crore.

Mumbai: The transfer pricing wing of the income-tax (I-T) department has passed fresh orders against the Indian units of Europe’s largest oil producer Royal Dutch Shell Plc and largest phone firm Vodafone Group Plc that can potentially lead to tax demands for a combined Rs.24,960 crore, adding to the tax troubles of the two companies. In the case of Shell India Markets Pvt. Ltd, the tax authority has added Rs.72,000 crore to its taxable income for the financial year 2010-11. It has added Rs.3,200 crore to the taxable income of Vodafone India Services Pvt Ltd for 2009-10. The orders do not specify the tax demand, but back-of-the-envelope calculations show that Shell India and Vodafone India can face demands to pay Rs.24,000 crore and Rs.960 crore, respectively. Foreign investors have been concerned about a raft of tax demands raised by the I-T department, alleging underpayment of tax, despite reassurances by finance minister P. Chidambaram that India was committed to a stable and non-adversarial tax regime.

“This approach of the revenue department would only add to the huge number of litigations already pending on account of transfer pricing adjustments and will negatively impact the FDI (foreign direct investment) flows into the country,” said Amit Maheshwari, partner, Ashok Maheshwary and Associates, a law firm. An email sent to the spokesperson of the Central Board of Direct Taxes remained unanswered. The transfer pricing orders passed against Shell and Vodafone stem from the alleged undervaluation of the shares issued by the Indian firms to their parent companies. Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

The tax authority issued a show-cause notice to Shell India on 22 January and Vodafone India on 17 January before passing the orders, making the additions to their taxable income. Both Vodafone India and Shell India moved the Bombay high court seeking relief from the I-T show-cause notice on 27 January, fearing a tax demand order.

Funding a subsidiary by issuing shares is a common practice among multinational companies, which they typically view as a capital transaction and out of the transfer pricing net. The I-T department, however, disputes this claim. Analysts point out that there is still a long way to go before a final legal solution is reached on the contentious interpretation by the tax department. “In the last year of transfer pricing audits, share valuation has become one of the biggest issues,” said Karishma Phatarphekar, partner and practice leader, transfer pricing services, Grant Thornton India LLP, a tax consultancy. “The ruling of the dispute resolution panel in the Vodafone case has gone in favour of the income-tax department. DRP (dispute resolution panel) has ruled that if any adjustment takes place, even if on notional income, under Section 92 of the Income Tax Act (which deals with transfer pricing), it doesn’t matter if it’s a capital or a revenue transaction,” she said.

“But I don’t think it is the correct technical interpretation since the section very specifically mentions that there has to be an income arising out of the transaction,” Phatarphekar said. The share sale of Shell India to its parent company in 2010 was valued by the firm at Rs.8,000 crore; the tax department valued it at Rs.80,000 crore, according to a lawyer familiar with the case. “Now the fresh transfer pricing show-cause notice has sought to tax the differential amount of Rs.72,000 crore,” the lawyer said, requesting anonymity. On Thursday, a division bench of the high court headed by chief justice Mohit Shah heard the cases for the first time. The court stayed the tax department from taking any action against the two firms as the DRP of the tax authority is hearing a case filed by Vodafone India challenging the jurisdiction of the tax department over such offshore transactions.

The DRP is expected to pass its order by 24 February. The high court will hear both the cases next on 7 March. “We confirm that we have challenged the show-cause notice received for FY09-10 (fiscal year 2009-10) in the Bombay high court and the court has stayed further proceedings,” said a Shell India spokesperson in an emailed response. “The issue is similar to that of FY08-09, which is pending in the Bombay high court. Shell holds to its view that an equity injection is a capital receipt on which income tax cannot be levied.”

Vodafone declined to comment

The transfer pricing office of the I-T department had passed the orders against the two companies on 29 January, said Beni Chatterjee, a lawyer representing the tax authority. “The companies will soon receive the orders,” he said. Tax disputes have hurt India’s image as a destination for foreign investment, some analysts say. In 2007, Vodafone International Holdings BV, a Dutch unit of the British telecom firm, bought the Indian business operations of Hutchison Telecommunications International Ltd through the sale of a Cayman Islands-based firm called CGP Investments Ltd, a unit of Hutchison, in a $11 billion deal. The Indian tax department estimated the company’s liability at around Rs.11,000 crores for not withholding a part of the amount as tax while paying Hutchison.

In 2012, the Supreme Court ruled in favour of Vodafone and held that the deal was not taxable in India. To counter this, the government introduced a retrospective amendment to laws to bring such indirect transfers of shares under the tax net. It also introduced a validation clause that effectively made Vodafone liable to pay tax in India, sparking large-scale protests from the investor community.

Presently, Vodafone and the government are holding talks for an informal reconciliation of the case, according to Harish Salve, a lawyer representing Vodafone. He said a final decision on the case is likely by July. Tax disputes like the ones with Vodafone and Shell risk damaging India’s reputation in the international investor community, according to Mark Runacres, secretary at the British Business Group, a platform for India-UK business relations. “These problems also distract corporates from their primary interest, namely growing in this market, and that can only be a bad thing,” said Runacres. According to a World Bank report published in October, India has slipped three positions to the 134th spot in the latest Ease of Doing Business list, which is topped by Singapore.

Besides Vodafone and Shell, other multinational companies recently involved in tax disputes in India include International Business Machines Corp. (IBM), Nokia Oyj, Sanofi SA and WNS (Holdings) Ltd.

All these cases are a fallout of the retrospective amendments introduced in the national budget of 2012. This is not the first time that Vodafone has challenged a transfer pricing tax order. The firm has taken the tax authority to high court over two other transfer pricing tax orders that raised a demand of Rs.3,700 crore and Rs.400 crore on Vodafone India. Both cases are pending in the Bombay high court. The high court on Thursday also heard an appeal filed by the tax authority challenging the interim order of its tribunal that stayed the Rs.3,700 crore tax demand raised on Vodafone India. The case has been adjourned to 6 February. This tax dispute, the first of the three transfer pricing cases, relates to a Rs.8,500 crore transfer pricing adjustment made by the I-T department on Vodafone India.


Foreign Investors Trading Indian Cos’ Shares Abroad Won't Be Liable To Capital Gains Tax



January 29th, 2014, After allowing unlisted Indian companies to list overseas, the finance ministry has decided to sweeten the deal for such listings. Foreign investors buying or selling shares of Indian companies listed overseas will not be liable to capital gains tax. The finance ministry has decided to treat the shares issued by unlisted Indian companies on overseas bourses on par with American depository receipt (ADR) and global depository receipt (GDR) schemes. "Shares issuance on the overseas exchanges would be treated on par with ADR and GDR scheme," a senior finance ministry official told ET. The Central Board of Direct Taxes, the apex direct taxes body, will soon issue a notification in this regard. Unlisted companies were allowed to list overseas in 1990, but the government banned such listings in 2005. 
The Central Board of Direct Taxes, the apex direct taxes body, will soon issue a notification in this regard. Unlisted companies were allowed to list overseas in 1990, but the government banned such listings in 2005. This was essentially aimed at preventing export of Indian market overseas and shift in regulatory jurisdiction for such companies to foreign regulators. High current account deficit and the need for long-term stable capital flows prompted a rethink last year. In September, the government again allowed unlisted companies to list on foreign bourses. It also brought in a balance in policy as unlisted companies are already allowed to raise foreign debt. The scheme, launched by the department of economic affairs, will run for two years on a pilot basis. However, lack of clarity on taxation has held back Indian companies from pursuing overseas listing. At present, foreign investors trading in ADR/GDRs of Indian companies do not have to pay capital gains tax on their profits. The same tax regime would be extended to this scheme. Experts say a clarification in this regard is welcome. "This would help the scheme take off. A clarification would give certainty to tax outcomes," said Rahul Garg, leader, direct tax practice, PWC. Foreign investors trading Indian co.s' shares won't be liable to capital gains tax. The clarification would be issued under Section 115AC of the Income-tax Act. Companies in sectors that are better understood and appreciated overseas can benefit by the scheme, for instance those in the storied information technology sector. As per the scheme, companies can use capital raised to retire outstanding overseas debt for operations abroad including for acquisitions, but will have to remit the funds raised to India within 15 days if they are not utilised. The listing company will also have to comply with the foreign direct investment policy and sectoral caps. Listing has been allowed only on exchanges in IOSCO or Financial Action Task Force-compliant jurisdictions or those jurisdictions with which market regulator SEBI has signed bilateral agreements.
Google : Not Liable To Pay Taxes For Indian Operations


January 31st, 2014, United States multinational Google has submitted to Delhi High Court that it is not liable to pay any taxes in India for its internet activities, as it is not providing any taxable services or earning income from here nor does it have a permanent establishment in the country. The submission has been made in an affidavit filed by the website in the High Court which is hearing a plea by a former BJP leader seeking protection of children from online abuse and recovery of taxes from the websites on their income from operations in India. The website's claim has been opposed by the petitioner, KN Govindacharya, who in his affidavit has contended that sites like Facebook and Google are liable to pay taxes as they generate huge revenue through agreements with Indian advertisers as well as sale of games and applications to internet users here.  The case is slated to be heard tomorrow by a bench headed by Justice B D Ahmed. Google India has contended in its affidavit that it "is not providing any taxable services in India, neither has a permanent establishment in India nor is it earning any income which is arising from or accruing in or deemed to be arising or accruing from India. "Furthermore, Google is not receiving any payment in the nature of 'royalty' which may be taxable either under the relevant Indian laws or under the Double taxation Avoidance Agreement between India and USA." In his affidavit filed through advocate Virag Gupta, Govindacharya has alleged that the website has "incorrectly" submitted before the court that no tax is payable by them in India. Govindacharya has also alleged that the tax department has "failed to initiate penal provisions" or "demanded the outstanding taxes for previous year(s)" from the websites "which has caused irreparable loss to the Indian economy and exchequer."

This blog is Created by CA Anil Kumar Jain.