1. Introduction

Rapid strides in the field of technology has made it possible for businesses to participate in the economic life of a jurisdiction without local physical presence. Advancement of technology and digitalization of economy has resulted in tax challenges such that the present international taxation framework lagged in creation of a mechanism for appropriate taxation of digital transactions. The current tax treaty rules allocate taxing rights to a (market) jurisdiction based on physical presence i.e. existence of a permanent establishment (‘PE’) is the threshold to tax businesses which participate in a jurisdiction.

International community has identified tax challenges posed by digitalized economy and took note of the business structures used by many multinational enterprises such that their overall tax bill was negligible or low. At OECD level, this was identified as one of the focus area of Base Erosion and Profit Shifting (‘BEPS’) Action Plan, which resulted in 2015 BEPS Action Plan 1 Report¹. Further work on this subject was undertaken by the OECD/G20 Inclusive Framework on BEPS (‘Inclusive Framework’) which has an agenda of delivering a consensus-based solution to tackle tax challenges arising from digitalization of the economy. The Inclusive Framework has developed a two-pillar project – aimed at introducing equity and fairness in the tax systems. Pillar One is focused on nexus and profit allocation aspects and Pillar Two is focused on a global minimum tax. The work of Inclusive Framework is ongoing, and it is expected that a consensus-based solution will be delivered soon.

With specific focus on developing countries, tax consequences of digitalized economy were also recognized by the UN Committee of Experts on International Cooperation in Tax Matters (‘UN Tax Committee’), which started engaging itself in this work in the 15th session. It was decided to focus on developing tax treaty provision which will enable jurisdictions to apply their domestic law and tax digital business models. The objective of UN Tax Committee was to deliver a solution which is relatively simple to comply, and which will result in a definite tax share for the market jurisdictions. It was identified that taxing rights with respect to income from automated digital services (‘ADS’) should be distributed amongst treaty partners by adding Article 12B to the UN Model Double Taxation Convention (‘UN MC’).

This article discusses the finalized version of Article 12B and related Commentary proposed to be inserted in the UN MC. It also discusses how few members / countries have expressed their concerns on inclusion of Article 12B in their bilateral tax treaties; how jurisdictions have started adopting uncoordinated unilateral measures and the inter-play of Article 12B with the OECD/ G20’s two-pillar project (an approach largely backed by developed nations).

2. The Background

During the 20th session of UN Tax Committee, a Drafting Group was formed of 13 (later 14) members to develop an additional provision in the UN MC to allocate additional taxing rights with a view to supplement resources of developing countries. The Drafting Group presented a proposal for inclusion of a new Article 12B (“Income from Automated Digital Services”) in the UN MC, which was circulated to all the members of the UN Tax Committee for comments.

Further, an amended draft of Article 12B was discussed in the 21st session and the members voted to include an Article 12B in the 2021 version of the UN MC. Later, finalized version of Article 12B and its Commentary was presented during the 22nd Session held in April 2021 and it was decided to include the finalized version in the 2021 update of UN MC².

The objective of new Article 12B is to draw a new nexus rule allowing contracting states to tax income from certain digital services, with a view to achieve reallocation of profits to market jurisdictions through a bilateral approach. With this background, this article proceeds to discuss the contents of Article 12B, mechanism prescribed to allocate taxing rights and views of certain dissenting members on the new nexus rule.

3. Understanding Article 12B: Taxing Automated Digital Services

3.1 Introductory remarks

Article 12B consists of 11 paragraphs and its construct is broadly similar to other passive income articles like dividend, interest, royalty, etc. The first paragraph provides for taxing right to the contracting state where the income recipient is a resident, however, it does not provide that such income will be exclusively taxed in the state of residence.

Further, the second paragraph gives taxing right to the contracting state in which the income from ADS arises in accordance with the domestic law of such state. However, if the beneficial owner of such income is a resident of other contracting state, this paragraph limits the taxing right to a fixed gross rate, to be mutually agreed by the two treaty partners. In this regard, the UN Tax Committee, in the finalized version of the Commentary recommends a ‘modest’ tax rate of 3 or 4 percent³.

In addition to the above and unlike other passive income Articles of UN MC, Article 12B provides an option to the beneficial owner of income from ADS to elect for net basis taxation on its ‘qualified profits’ in the source state. The mechanics of net basis taxation rule is discussed in detail hereinafter at section 3.3 below.

3.2 Scope of ‘Automated Digital Services’

3.2.1 Definition of ADS

The term ‘ADS’ is defined in para 5 of Article 12B to mean “any service provided on the internet or another electronic network, in either case requiring minimal human involvement from the service provider”. Further, para 6 of Article 12B lists examples of digital services which may constitute ADS.

The Commentary explains the scope of above definition in the below manner:

• A service is regarded as automated if users can avail such service automatically through equipment and systems being in place;

• The test of minimum human involvement is to be applied from perspective of the service provider; it is possible that a user may have to input certain parameters to use an automated system to obtain the desired result;

• As an indicator of the concept of automated services, the Commentary discusses the ability of service provider to scale-up and offer the services to new customers / users with no or minimal human involvement; and

• The aspect of providing a service over the internet or other electronic network is different from other service provision methods such as on-site physical performance of a service.

Therefore, the general definition of ADS has two keys thresholds – (i) mode of service provision/ manner in which service is provided to the user and (ii) level of human intervention by the service provider. The Commentary also discusses that the test of human involvement should be applied at the stage of provision of service and hence, human involvement in the course of developing, maintaining and updating the system will be irrelevant here.

3.2.2 Activities which may constitute ADS

Paragraph 6 of Article 12B starts with the words “The term automated digital services includes especially….” and then it goes on to list the services. Use of these words may give an impression that the said para deals with an inclusion list i.e. services which will qualify as ADS. However, the Commentary states that services listed in para 6 are those which will often constitute as ADS. An important passage of the Commentary (para 57) reads as under:

“Paragraph 6 therefore simply provides an indication that an activity may constitute an automated digital service; it does not provide that an activity listed therein necessarily is an automated digital service.”

Therefore, every service listed in para 6 of Article 12B will be subject to the test of general definition of ADS. The services listed in para 6 and a brief description of such services is tabulated below:

Service nomenclature	Brief description of the service
Online advertising services	Online services which are aimed at placing advertisements on a ‘digital interface’. This includes services for purchase, storage and distribution of advertising messages, and for monitoring of advertising and measurement of its performance.
Supply of user data	This is understood to mean supply of data (such as a user’s habits, spending, personal interests, etc.) to a third-party customer in respect of users of a digital interface, which is collected, compiled, aggregated or otherwise processed into data through an automated algorithm.
Online search engines	This means making a digital interface available to users for the purpose of allowing them to search across the Internet, where users are charged for access (for instance, a subscription model).
Online intermediation platform services	This involves providing a digital interface to users to enable interactions between them, for sale, hire, advertisement of goods, services, etc.
Social media platforms	A platform available on a digital interface to facilitate interaction between users for a range of activities such as social and professional networking websites, video or image sharing platforms, etc.
Digital content services	This implies automated provision of content in digital form such as computer programs, applications, music, videos, books etc. The service is beyond simply making a digital interface available to the users, there should be ability to access digital content.
Online gaming	This implies making a digital interface available to users to interact with each other in the same game environment i.e. multiplayer gaming environment.
Cloud computing services	This service includes provision of standardized on-demand network access to information technology resources including infrastructure as a service, platform as a service or software as a service. For instance, storage service, webhosting, computing service, etc.
Standardized online teaching services	This implies provision of online education program to unlimited number of users, which does not require (a) live presence of an instructor; or (b) significant customization for users. An example of such a service is pre-recorded series of lectures.

3.2.3 Activities outside the scope of ADS

Article 12B has a specific paragraph to deal with the inter-play of this Article with Articles dealing with ‘royalty’ and ‘fees for technical services’. Paragraph 7 of Article 12B provides that provisions of Article 12B will not apply if the payments underlying the income from ADS services qualify as ‘royalty’ or ‘fees for technical services’ under Article 12 / 12A of the UN MC. Interestingly, from Indian treaty network perspective, generally, royalty and fees for technical services is subject to tax in the source state at the gross tax rates of 10 or 15 percent. This means that in case of a conflict, inter-play is likely to retain a higher taxing rate with the source state (assuming the contracting states negotiate a modest tax rate for Article 12B).

Further, the Commentary provides a list of services which should not qualify as ADS; this is intended to avoid uncertainty in interpretation of scope of ADS. The exclusion list includes services which require customization (i.e. human involvement) to cater to specific user requirements or those where goods / service delivery does not happen over an electronic network.

The exclusion list is described in the below table:

Service nomenclature	Brief description of the service
Customized professional services	These services, though delivered online, require customization to each client, through use of professional judgement and bespoke interactions. For instance, services such as legal, accounting, financial, architecture etc.
Customized online teaching services	Here the service is customized to the needs of a student or limited group of students. Internet or electronic network is only used as a means to establish communication between the teacher and the student.
Services providing access to Internet / an electronic network	This means providing access to the internet or to an electronic network irrespective of the mode of delivery, namely over wire, lines, cables, etc.
Online sale of goods and services other than ADS	This category applies to sellers who use a digital platform to sell their own non-digital goods and non-digital services to the customers.
Revenue from the sale of a physical good, irrespective of network connectivity (‘internet of things’)	This means sale of physical goods even if affected through digital network should not qualify as ADS if there is no separate identifiable payment for ADS.

3.3 Alternate profit allocation rule: Net basis taxation

As discussed in section 3.1 above, the beneficial owner of income from ADS is offered a choice to opt for net basis taxation for the whole of a tax year under consideration. Paragraphs 3 and 4 of Article 12B provides for such option, wherein the beneficial owner may request the contracting state, in which the income arises, to be taxed on net basis at the tax rate provided in the domestic law of such state. The Commentary explains the rationale of this alternate profit allocation rule by referring to a situation wherein application of gross basis taxation may result in higher tax liability for the beneficial owner compared to application of net basis taxation. For instance, gross basis taxation would not be beneficial for taxpayers who have a global business loss or a loss in the relevant business segment during the taxable year.

The mechanism prescribed to exercise net basis taxation is as under:

• Beneficial owner (referred as ‘taxpayer’ in this section) is required to compute ‘profitability ratio’ of ADS business segment and in case segmental accounts are not maintained, the overall ‘profitability ratio’ will be considered;

• ‘Profitability ratio’ is understood to mean annual profits divided by annual revenue as per the financial statements of the taxpayer. Further, unless bilaterally agreed, annual profits would be profit before tax, with certain adjustments such as exclusion of dividend income, gains/ losses in connection with shares, add back of expenses not deductible for corporate income-tax purposes, etc.⁴;

• Taxpayer will have to apply the profitability ratio to the gross annual revenue derived from the source state. This will result in determination of overall profits vis-s-vis ADS revenue from the source state and 30 percent of such overall profits (known as ‘qualified profits’) is considered as taxable in the source state⁵;

• The ‘qualified profits’ will then be taxed at the rate of tax provided in the domestic tax law of the source state.

In case the taxpayer belongs to a multinational enterprise group⁶, the profitability ratio will have to be computed at the group level, provided it is higher than the taxpayer level profitability ratio. The rationale of this, as explained in the Commentary, is to neutralize the possible reduction of entity level profitability due to tax driven related party transactions.

A peculiar feature of net basis approach, with reference to a taxpayer who belongs to a multinational enterprise group, is that if the source state does not possess the segmental or overall profitability ratio of the multinational enterprise group, net basis taxation will not be permitted in such cases and accordingly, gross basis taxation will have to be followed by the taxpayer. In this regard, the Commentary discusses that the information can be supplied under the exchange of information mechanism or the taxpayer may share such information to the tax authorities of source state.

The above discussion on computation of net basis taxation is summarized in the below table:

Therefore, though referred to as net basis taxation, strictly speaking, the above-mentioned profit allocation rule differs from the arm’s length principle to allocate taxing rights. This is having regard to the following:

• This approach views ‘revenue’ at par with ‘assets’ and ‘employees’ in terms of its contribution in generation of profits; based on which profits attributable to the source state is deemed to be 30 percent;

• Computation of overall profits from ADS revenue derived from the source state is based on group level profitability ratio – it is assumed that inter-group arrangements will be driven by tax considerations; and

• Mechanism to compute annual profits (before tax) is not finalized and some brief guidance on this is discussed in the Commentary. An aspect here will be possibility of the ultimate parent of the multinational enterprise group (located in a third country) adopting accounting standard rules which may not be compatible with computation mechanism agreed by treaty partners.

3.4 Revenue sourcing rule

The revenue sourcing rule is incorporated in paras 9 & 10 of Article 12B. Paragraph 9 specifies that income from ADS arises in the contracting state in which the payer is a resident or in which the payer has a PE or fixed base (and such payment is borne by the PE or fixed base). Further, paragraph 10 deems income from ADS not to arise in the contracting state in which the payer is a resident if the payment towards ADS is borne by the PE or fixed base in a third state.

An important feature of the sourcing rule narrated above is that it does not give regard to the location of users of the service. In other words, it is not necessary that the consumption of services should take place in the contracting state in which the payer is a resident or has a PE or fixed base.

To illustrate the above, let us take an example⁷ of an enterprise of State A which provides search engine services to users that are located in State B, without requiring any payment in consideration for such services, it collects data regarding those users’ profile. Such information allows that enterprise to provide online advertising services to a person resident in State C that is interested in reaching potential consumers of its own services and products in State B. Therefore, the enterprise of State A receives payment from person resident in State C to target advertisements to specific potential consumers in State B. In this case, application of Article 12B will allocate taxing right to State C (i.e. jurisdiction where the advertiser is a resident), however, State B does not get any taxing right.

In the above example, the target audience for the advertiser is in State B. In other words, use of search engine facilitates targeted marketing for the advertiser in State B and enables it to engage with its (prospective) customers. Such non-physical interaction improves the value of advertiser’s products / services and increases the sales in market jurisdiction. In such cases, taxing the advertisement revenue in the jurisdiction where the advertiser is located, and ignoring the market jurisdiction completely, may fail to achieve the objective of fair and equitable distribution of taxing rights.

Another example could be in the case of an arrangement consisting of online marketplace which lists accommodation facilities for accommodation seekers.

In the above case, Mr A who lives in State S books an accommodation in State D through a facilitator Company B located in State R. Here, application of Article 12B would result in the facilitation fee being subject to tax in State S, being the state of residence of the payer. However, State D, where the accommodation is booked will not get any right to tax the facilitation fee earned by the service provider.

4. Implementation: Key challenges

Certain members of the UN Tax Committee have expressed concerns on practical implementation of the above-discussed bilateral approach. The Commentary discusses some of the issues flagged by such members, which are as under:

• Reallocation of profits of multinational enterprise group to market jurisdictions is best achieved through a multilateral approach (work on which is ongoing at the OECD/G20 level);

• The sourcing rule does not adequately address the value generated by data collected in relation to users of free digital services (example discussed in the previous section);

• Another concern relates to application of Article 12B to small payments and payments by individuals acquiring services for personal use; this is likely to increase the administrative burden since withholding tax mechanism may not be feasible in such situations;

• Foreign service providers may pass on additional tax costs on to the consumers through ‘gross-up’ clauses in the contracts.

A specific mention is made in the Commentary that countries sharing the above concerns may not wish to include Article 12B in their bilateral tax treaties. While the Commentary does not list down the names of countries which hold such view, it will be interesting to see how many nations will proceed to adopt Article 12B in their tax treaties, especially the developed nations. Also, should the Inclusive Framework, which includes participation by developing countries, arrive at a consensus-based multilateral solution, the countries will have to elect one of the approach. The choice will depend on various factors such as administrative convenience, level of allocation of taxing rights, ability to provide certainty to taxpayers, etc.

5. Taxing digital transactions: The Indian Approach

In 2016, India had introduced digital tax in the form of ‘equalization levy’ on online advertisement services at the rate of 6 percent. Thereafter, in April 2020, the scope of ‘Equalisation Levy’ was expanded to include a 2 percent levy on e-commerce transactions, involving online sale of goods or provision of services by non-resident e-commerce operators.

Further, the concept of significant economic presence (‘SEP’) was introduced in the domestic law in 2018 with the intent to bring non-resident technology giants deriving significant revenue from large user base in India within the tax net. However, the said concept remained inapplicable on account of the thresholds not being specified. Recently, the Indian Government has notified⁸ the relevant thresholds for non-residents to constitute SEP in India – these rules are applicable from financial year 2021-22 onwards.

India has been announcing that its measures to tax digital transactions is temporary until a global consensus is reached. It will be interesting to see if India approaches its treaty partners to insert Article 12B in its tax treaties – considering it is a sizeable market jurisdiction for digital transactions. This will also depend on how OCED/G20 proceeds to arrive at a global consensus on the two-pillared approach.

Like India, many other countries have introduced digital services tax (DST) regimes in their local tax laws. The scope of taxes introduced on digital transactions by such jurisdictions is varied; in form of direct and / or indirect taxes. With reference to many such DST regimes (for instance, India, Australia, Italy, Spain, etc.), the US has perceived the same to be a discriminatory move targeting the US Digital Hub. In January 2021, the office of the U.S. Trade Representative (‘USTR’) issued reports and findings that such DSTs discriminates against US companies, is inconsistent with prevailing principles of international taxation, and burdens or restricts US companies.

6. Conclusion

Article 12B proposed to be introduced in the 2021 update of UN MC is a one of the stepping stone in addressing the tax challenges posed by digitalization of the economy. It is fairly easy to understand and has moved fast compared to the OECD/G20 Inclusive Framework. Further, officials from the World Bank and International Monetary Fund have welcomed and expressed support to the UN approach. With more and more countries looking at adoption of digital service tax regime in their domestic law (may be an interim measure), Article 12B just gives an option to implement a bilateral solution.

Also, it is a known fact that UN’s approach on tax policy matters is usually in the interest of developing countries; however, with the consensus-based solution being developed at the OECD/G20 level, one will have to wait and see if the developed economies show interest in adopting the bilateral approach and incorporate Article 12B in the tax treaties. Also, there are some implementation related concerns which will require attention of the jurisdictions desirous of adopting Article 12B in their tax treaties.

 

1. Addressing the tax challenges of the Digital Economy, Action 1 – 2015 Final Report, OECD/G20 BEPS Project.

2. For ease of reference, the finalized version of Article 12B and the related Commentary proposed to be introduced in UN MC, hereinafter, will be referred as ‘Article 12B’ and ‘the Commentary’ respectively.

3. Para 29 of the Commentary lists various factors which contracting states should consider while deciding the level of taxation at source. For instance, it discusses that a high rate of tax might result in non-resident pass over the tax cost to the consumers in the source state.

4. Discussed in paragraph 47 of the Commentary on Article 12B. It may be noted that the above-mentioned adjustments discussed in the Commentary are not a definite list of exclusions and appear to be in nature of examples. This may become a subject matter of discussion for contracting states and hence, treaty partners may negotiate a specific formulaic approach for calculation of annual profits – with a view to ensure certainty in application of this rule.

5. Allocation of 30 percent of profits to source jurisdiction is prescribed keeping in view the contribution of markets in generation of profits and by assigning equal weightage to the role of assets, employees and the revenue in generation of profits. In view of UN Tax Committee, this rate is a fair and reasonable share to both jurisdictions and is adopted with a view to achieve certainty [Reference: Para 50 of the Commentary].

6. Paragraph 4 of Article 12B reads as under:

   “4. For the purposes of paragraph 3, multinational enterprise group” means any “group” that includes two or more enterprises, the tax residence for which is in different jurisdictions. Further, for the purposes of paragraph 3, the term “group” means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public stock exchange.”

7. This example is discussed in paragraph 75 of the Commentary to Article 12B.

8. Notification No. 41 /2021/ F. No. 370142/11/2018-TPL dated 3 May 2021.

Introduction

CBDT has notified the ITR forms applicable for the A.Y 2021-22 vide Notification No. 21/2021, dated 31/03/2021. Considering the Covid-19 pandemic, there are no significant changes in the ITR forms as compared to the previous year forms and most of the changes are to give effect to the amendments made in the Finance Acts and to bring out more transparency in the returns.

Scope – The writeup covers the amendment relating to computation and filing of income tax returns and does not cover amendment relating to TDS/TCS/Equalization levy.

Crucial Amendments applicable from the A.Y 2021-22

• Abolishing the Dividend Distribution Tax (DDT) and shifting tax liability of dividends in the hands of shareholders

Hitherto, companies distributing dividends to shareholders carried the burden of paying a dividend distribution tax of 15% on those dividends (after taking into account the surcharge and cess, the effective rate was in fact 20.56%). Such dividend income was exempt in the hands of the respective shareholders. The DDT has been abolished and thus from the A.Y 2021-22 dividend income is taxable in the hands of the shareholders at the respective applicable tax rates depending on the status and income of the shareholder.

As dividend income is taxable in hands of recipient shareholders, various provisions of IT Act have been amended and accordingly even the ITR forms have been updated to incorporate the changes. Earlier Schedule OS (in Income from Other Sources) required disclosure of dividend income only which is taxable in the hands of taxpayer i.e., Dividend income taxable u/s 115BBDA. With abolishment of DDT, section 115BBDA shall not be applicable for dividend declared on or after 31/03/2020. Now, in the ITR forms of the A.Y 2021-22, Schedule OS has been updated to include disclosure of dividend income u/s 2(22)(e) and other dividend income. Further, quarterly break up of dividend income is also required in order to calculate interest u/s 234C.

Section 10(34) of the IT Act has been amended to provide a much needed clarification where dividend is declared and DDT is paid by the domestic company on or before 31/03/2020 but received by the shareholder on or after April 1, 2020 and hence there should no incidence od double taxation.

Further, Section 57 of the IT Act has been amended to allow a taxpayer to claim a deduction of interest expenses incurred in connection with earning dividend income subject to a maximum limit of 20% of the gross dividend income. New proviso to section 57 is also added which states that no deduction of any expenditure other than interest (subject to limit) shall be allowed from dividend income or income from Mutual Fund specified u/s 10(23D) or income from units from a specified company defined in explanation to section 10(35). Further, disclosure of interest expense claimed against dividend income is to be reported separately in the ITR forms.

• No depreciation on goodwill of business or profession and change in WDV of 25% block of asset

Goodwill of a business or profession was not specifically provided as an asset either in the definition of block of asset under section 2(11) or under section 32 of the IT Act relating to depreciation. The question whether goodwill of a business is an asset within the meaning of section 32 of the IT Act and whether depreciation on goodwill is allowable is an issue which came up before Hon’ble Supreme Court in case of Smiff Securities Ltd 348 ITR 302, where Hon’ble Supreme Court held that goodwill of a business or profession is a depreciable asset under section 32 of the IT Act.

Thus, till the A.Y 2020-21, Goodwill of a business or profession was considered to be a depreciable asset in various judicial pronouncements including that of Smiff Securities Ltd 348 ITR 302 (Supreme Court). However, Finance Act, 2021 with immediate effect from A.Y 2021-22, has amended various provisions of the IT Act to provide that goodwill of a business or profession would not be considered as a depreciable asset and accordingly no depreciation will be allowed on goodwill from A.Y 2021-22 and onwards.

Finance Act, 2021 has made necessary amendments in section 43(6)(c) of the IT Act to provide that the Written Down Value of block of assets shall be reduced by the actual cost of goodwill falling within such block of asset. However, the actual cost of goodwill shall first be reduced by the:

1. Amount of depreciation actually allowed to the assessee for such goodwill before the Assessment Year 1988-89, and

2. Amount of depreciation that would have been allowable to the assessee from the Assessment Year 1988-89 as if the goodwill was the only asset in the relevant block of assets.

It should be noted that while computing the WDV for the assessment year 2021-22, if the depreciation was claimed on the goodwill forming part of the block of assets in the immediately preceding previous year, the amount of reduction calculated above shall not exceed the WDV of the block of assets.

Although the amendment is made applicable from the F.Y 2020-21, the same was announced on 01/02/2021 and by that time many taxpayers would have already paid their advance tax liability for first three quarters by considering the claim of depreciation on goodwill based on numerous favourable pronouncements wherein it is held that depreciation on goodwill is allowed. Now given the fact that the amendment was announced on 01/02/2021 i.e., almost after the year gone by, in such circumstances a question may arise whether the assessee is liable to pay interest under section 234C of the IT Act for the default in payment of advance taxes. In case of CIT v. National Dairy Development Board [2017] 83 taxmann.com 109, Gujurat High Court has held that interest u/s 234C should not be levied on increase in advance tax liability on account of retrospective amendment. Hence, clarification from CBDT in this regards would be appreciated by the taxpayers or in absence, a detailed examination of liability of interest u/s 234C under the circumstances would be required.

The Minimum Alternate Tax (MAT) provisions are not amended and hence if depreciation is debited to the profit and loss account of the taxpayer in accordance with the accounting policies and standards then there is no requirement of adding back the depreciation while computing book profits under section 115JB of the IT Act.

Special provision for computation of capital gains in case of transfer of Goodwill where depreciation was claimed by taxpayer

Under the special provisions for computation of capital gains in case of depreciable assets, a new proviso has been inserted to section 50(2) that the CBDT may prescribed a manner to determine the WDV of the block of asset and short term capital gain if goodwill is forming part of block of asset and depreciation has been claimed on it.

Section 55 of the IT Act which provides for cost of acquisition for computation of capital gains, has been amended to provide that in relation to a capital asset being a goodwill of a business or profession, in respect of which depreciation is claimed by the taxpayer in the years prior to A.Y 2021-22, then the total depreciation claimed as a deduction should be reduced from the amount of cost of acquisition.

• Change in definition of Slump Sale and manner of calculation of Gains thereon

The term slump sale has been defined to mean the transfer of one or more undertakings as a result of sale for lump sum consideration without value being assigned to individual assets and liabilities in such cases. Section 50B of the IT Act provides for computation of capital gains in case of slump sale as Actual monetary consideration receivable – Net worth of the undertaking.

Now from A.Y 2021-22, the definition of slump sale has been amended to mean the transfer of one or more undertaking by any means for a lump sum consideration without value being assigned to individual assets and liabilities in such transfer. Thus now slump sale may include all types of transfer such as sale, exchange, relinquishment and extinguishment of rights.

Section 50B of the IT Act has also been amended with immediate effect from A.Y 2021-22, to provide that the fair market value of the capital assets (being an undertaking or division transferred by way of slump sale) as on the date of transfer shall be calculated in the prescribed manner. Pursuant to this amendment, Rule 11UAE has been inserted in the IT Rules, 1962 vide Notification dated 24/05/2021.

The issue therefore arises from which assessment year the amended provisions will be applicable? One can surely argue that the amended provisions cannot apply to A.Y 2021-22 for the reason that there was no prescribed manner in the relevant previous year till 31/01/2021. Moreover sale of undertaking which has taken place in the FY 20-21, especially prior to 01/02/21 should not be subject to amended provisions as no such provisions were in force at the relevant time. Therefore taxpayer may claim that the profit on sale of undertaking has to be determined as per earlier provisions. In this regards, reference may be drawn to the Supreme Court decision in case of Essar Teleholdings Limited [401 ITR 445], wherein it was held that the applicability of the provisions of section would come into force in the year in which such rules or method are prescribed. Furthermore, the prescribed rules determine fair market value on the basis of individual assets is contrary to the scope of provisions of section 50B of the IT Act as slump sale refers to transfer of undertaking without values being assigned to the individual assets and liabilities.

• Employees contribution to a fund not covered u/s 43B

Based on various judicial decisions, deduction of employee’s contribution to provident fund or superannuation fund or any other employee welfare fund was claimed as allowable if such payment was made by employer on or before the due date for filing its return of income.

Decisions in favour of Assessee

• In case of PCIT v. Rajasthan State Beverages Corporation Ltd (2017) 84 taxmann.com 185(SC), the Hon’ble Supreme Court has dismissed the SLP filed by the Income Tax Department holding that amount claimed on payment of Provident fund having been deposited on or before the due date of filing of returns could not be disallowed u/s 43B r.w.s 36(1)(va).

• In case of CIT v. Ghatge Patil Transports Ltd (2015) 53 taxmann.com 141, Hon’ble Bombay High Court has held that both employees and employer contribution to employee welfare funds are covered u/s 43B and hence same is allowable if deposited on or before the due date of filing of return of income.

• Similar verdicts have also been given by Delhi High Court and Jammu & Kashmir High Court in case of CIT v. Aimil Ltd [2010] 188 taxman 265 and Kashmir Tubes v. ITO [2017] taxmann.com 299 respectively. Even Mumbai Tribunal and Kolkata Tribunal has followed the above mentioned pronouncements.

Decision in favour of Revenue

• In case of PCIT v. Suzlon Energy Ltd [2020] 115 taxmann.com 340 Hon’ble Gujarat High Court disallowed employees contribution towards PF as the same was not deposited within the due date as prescribed under the PF Act.

In light of the above, there was uncertainty with regards to applicability of section under which the claim of deduction with respect to the employee’s contribution to various welfare Fund is allowed to the employers. The Finance Act, 2021 with immediate effect from A.Y 2021-22 has amended provisions of section 43B and section 36(1)(va) of the IT Act to provide that the said deduction shall be allowed to the employer only and only if the employer makes the payment of such employee contribution in the respective funds on or before the due prescribed under the relevant Act / Rule / Notification. Hence even if there is a delay in making payment of the employee’s contribution by one day, the deduction could be lost forever.

• Change in Residential status for person of Indian origin

Residential status of an individual is of utmost importance since it determines the scope of taxable income under the IT Act. Types of status–

1. Residential and Ordinarily Resident in India [ROR]

2. Resident but not ordinarily Resident in India [RNOR] and

3. Non Resident in India [NR]

The residential status is determined primarily by number of days’ stay of an individual in India along with other prescribed conditions.

Earlier Indian citizens or persons of Indian Origin (person who himself or any of his parents or any of his grandparents was born in Undivided India before 15th August, 1947) coming to India for a visit were considered residents only if their stay in a financial year was 182 days or more.

Now with effect from A.Y 2021-22 such individuals may become a resident of India if any one of the following condition is satisfied:

• Stay in India > 182 days in Financial Year

• Stay in India > 120 days in Financial Year and > 365 days in prior 4 Financial years and Indian income* is above ₹ 15 Lakhs in a Financial Year

However, individuals who become resident since their stay is 120 days or more but less than 182 days as per above condition have been accorded status of RNOR.

Deemed Indian Resident

With the existing tax laws, it is possible for an individual to arrange his business affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year.

Keeping this in mind, the Finance Act 2020 with effect from A.Y 2021-22 has made an amendment to provide that ‘’Any Indian citizen having Indian income* above ₹ 15 lakhs in any financial year would be deemed to be a resident in India if he is not liable to tax in any other country by way of residence or domicile or any other criteria.’’ However, such deemed Indian residents shall be treated as RNOR.

*Indian income shall also include foreign income derived from business controlled in or profession set up in India.

• Tax on receipt of money or capital asset by partner in connection with reconstitution of firm/AOP/BOI

The Finance Act, 2021 has amended provisions of section 45(4) of the IT Act to provide that where a partner/member receives during the previous year any capital asset or money or both from a firm/AOP/BOI in connection with the reconstitution of the firm/AOP/BOI then any profits and gains arising from such receipt of money by the partner/member shall be deemed to be the income of the firm/AOP/BOI under the head Capital Gains of the previous year in which such capital asset or money or both were received by the partner/member. The profits and gains shall be computed in accordance with the following formula;

A = B + C – D

A = Income chargeable to income-tax under this provision as income of the firm/AOP/BOI under the head capital gains;

B = Value of money received by partner/member on the date of such receipt;

C = Fair market value of the capital asset received by the partner/member on the date of such receipt; and

D = Balance in the capital account of the partner/member in the books of accounts of the firm at the time of reconstitution.

Where the value of A is negative, it shall be deemed to be nil.

While computing the balance in the capital account of partner in the books of accounts of firm, increase in capital account due to the following shall not be taken into account:

1. Revaluation of any asset;

2. Self-generated goodwill (goodwill acquired without incurring any cost for purchase or which has been generated during the course of business or profession);

3. Other self-generated assets.

Reconstitution of the firm/AOP/BOI means:

1. One or more of its partners or members ceases to be partner or members;

2. One or more new partners or members are admitted. However, at least one existing partner or member should continue to be partner or member of the specified entity after admission of the new partner(s) or member(s); or

3. All the partners or members continue with change in their respective share or in share of some of them.

• Income on receipt of capital asset or stock in trade by a partner/member from a firm /AOP/BOI

Section 9B of the IT Act has been inserted which provides that where a partner receives during the previous year any capital asset or stock in trade or both from a specified entity in connection with the dissolution or reconstitution of such entity, then the entity shall be deemed to have transferred such capital asset or stock in trade or both, as the case may be, to the partner/member in the year in which such capital asset or stock in trade or both is received by the partner/member.

Further, it provides that any profits and gains arising from such deemed transfer of capital asset or stock in trade or both, as the case may be, by the specified entity shall be deemed to be the income of the specified entity of the previous year in which stock or capital asset were received by the partner and chargeable to income tax under the head Business or Profession or Capital gains in accordance with the provisions of IT Act.

Moreover, the fair market value of the capital asset or stock in trade on the date of its receipt by the partner shall be deemed to be the full value of consideration while computing profits and gains arising from deemed transfer.

The term specified entity and specified person are defined as under;

1. “Specified entity” means a firm or other Association of Persons (AOP) or Body of Individuals (BOI), not being a company or a co-operative society.

2. “Specified person” means a person who is a partner of a firm or member of other AOP or BOI (not being a company or a co-operative society) in any previous year.

Calculation of capital gain under section 9B could be as follows:

Particulars	Amount
Full value of consideration received or accrued (FMV of Capital Asset)	XXX
Less: a) Expenditure incurred wholly in connection with transfer b) Cost of acquisition / Indexed cost of acquisition c) Cost of improvement / Indexed cost of improvement d) Amount chargeable to tax as income of firm u/s 45(4) which is attributable to capital asset being transferred by the entity e) Exemption u/s 54 to 54GB (if available)	(XXX)
Income taxable under the head Capital Gains	XXX

• Alternate Tax regime for Individuals/HUFs under section 115BAC

From the A.Y 2021-22, Individuals and HUFs have an option of opting for the alternate tax regime under section 115BAC of the IT Act. The said option has to be exercised before the due date of filing the return of income u/s 139(1).

Following table shows the new slab rates under section 115BAC:

Total Income	Tax Rate
Up to ₹ 2.5 lakh	Exempt
Above ₹ 2.5 lakh to ₹ 5 lakh	5%
Above ₹ 5 lakh to ₹ 7.5 lakh	10%
Above ₹ 7.5 lakh to ₹ 10 lakh	15%
Above ₹ 10 lakh to ₹ 12.5 lakh	20%
Above ₹ 12.5 lakh to ₹ 15 lakh	25%
Above ₹ 15 lakh	30%

Note 1:

• The option u/s 115BAC can be opted every year in case of Individual/HUF not having business/professional income. In other case, once such option is exercised it can be withdrawn only once in subsequent year unless such Individual/HUF ceases to have business/professional Income.

• Alternate Minimum Tax (AMT) provisions will not be applicable if one opts for Section 115BAC.

• In order to opt for new regime, individual/ HUF shall have to opt for the same and file the return of income within the due date prescribed u/s 139(1).

• The individual/HUF will not be able to set off any loss from house property against any other head of income. However the said loss can be carried forward to the subsequent years as per the extant provisions.

• In case one opts to pay tax under the new tax regime, certain exemptions and deductions cannot be claimed (Refer Note 2).

• The individual/HUF will not be able to set-off any loss brought forward or depreciation attributable to exemptions/deductions mentioned in Note 2 below. Though set-off of loss of earlier years on account of unabsorbed depreciation is not allowed, corresponding adjustment in WDV of such block of assets shall be allowed.

• Form 10-IE has to be furnished electronically by the assessee before filing the return of income u/s 139(1).

Note 2:

• In case one opts to pay tax under the new tax regime, the following exemptions and deductions cannot be claimed:

  1. Leave travel concession u/s 10(5)- applicable for persons in employment

  2. House rent allowance u/s 10(13A) – applicable for persons in employment

  3. Allowances u/s 10(14) – applicable for persons in employment other than:

     1. Transport allowance to divyang employee commuting between residence and office

     2. Conveyance allowance to meet expenses during conveyance on duty

     3. Any allowance to meet cost of travel on tour or transfer

     4. Daily allowance on account of absence from normal place of duty

  4. Standard deduction (INR 50,000), deduction for entertainment allowance and profession tax u/s 16 against salary income

  5. Allowances to MPs/MLAs u/s 10(17)

  6. Allowance for income of minor u/s 10(32)

  7. Exemption for SEZ units u/s 10AA

  8. Interest on loan taken for self-occupied or vacant property u/s 24

  9. Additional depreciation u/s 32(1)(iia)

  10. Donations or expenditure on scientific research u/s 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA)

  11. Deductions u/s 32AD, 33AB, 33ABA, 35AD, 35CCC applicable to business income

  12. Family pension u/s 57(iia)

  13. Any deduction under Chapter VI-A such as life insurance premium, investment in PPF, ELSS, repayment of housing loan, mediclaim premium, donations, deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc other than
      contribution to pension scheme u/s 80CCD(2), deduction in respect of new employees u/s 80JJAA and income of unit in IFSC u/s 80LA(1A).

• Alternate Tax regime for Co-operative Society under section 115BAD

From the A.Y 2021-22, Co-operative societies have an option of opting for the alternate tax regime under section 115BAD of the IT Act. The said option has to be exercised before the due date of filing the return of income u/s 139(1).

The income-tax payable by a co-operative society under this regime is 22% and Surcharge at the rate of 10% and Education Cess of 4% on the total income without any basic exemption limit.

Conditions for availing benefit under this regime:

1) The total income of the co-operative society should be computed without claiming the following deduction/exemption/incentives:

• Section 10AA – Deduction for units established in Special Economic Zones

• Section 32(1)(iia) – Additional depreciation

• Section 32AD – Deduction for investment in new plant and machinery in notified backward areas

• Section 33AB – Deduction in respect of tea, coffee or rubber business

• Section 33ABA – Deduction in respect of business consisting of prospecting or extraction or production of petroleum or natural gas in India

• Section 35(1)(ii), Section 35(1)(iia), Section 35(1)(iii) and Section 35(2AA) – Scientific research deductions

• Section 35AD – Deduction in respect of capital expenditure incurred in respect of certain specified business i.e., Cold chain facility, warehousing facility etc

• Section 35CCC – Deduction for expenditure on agriculture extension project

• Chapter VI-A deductions except deduction u/s 80JJAA

2) The co-operative societies shall not be allowed to set off brought forward losses or depreciation from any earlier assessment years if such loss is attributable to the deductions mentioned above. Though set-off of loss of earlier years on account of unabsorbed depreciation is not allowed, corresponding adjustment in WDV of such block of assets shall be allowed.

3) This option once exercised should be followed in all subsequent years.

4) Form 10-IF has to be furnished electronically by the resident co-operative society before filing the return of income u/s 139(1).

• Increase in safe harbour limit for section 43CA, Section 50C and Section 56(2)(X)

Section 43CA deals with scenarios where consideration received for transfer of land or building, other than capital asset, is less than value adopted for stamp duty valuation. Similarly, Section 50C deals when land and building is transferred as capital asset. As per provisions of both sections, in such case, value assessed by stamp duty authority is considered as a sales consideration for Income Tax Act. However, if the value assessed by stamp duty authority does not exceed 105% of sales consideration then actual consideration shall be considered as sales consideration.

In the A.Y 2020-21, if the difference between the consideration and the stamp duty value of the asset being land or building or both is not more than 5%, then the difference was supposed to be ignored. The tolerance limit of 5% has been increased to 10% with effect from the A.Y 2021-22 and onwards. Therefore from 1st April 2020 onwards, the stamp duty value(SDV) of the asset being land or building or both will be considered as full value of consideration only if the SDV exceeds 110% of the consideration.

Higher safe harbour limit of 20% for new residential properties transferred by Builders and Developers subject to conditions

The aforesaid tolerance limit of 10% is increased to 20% in case of sale of residential properties by a person engaged in the business of real estate business, if following conditions are satisfied:

• Transfer takes place between 12/11/2020 to 30/06/2021

• Consideration receivable is up to 2 Crores

• Transfer is by way of first time allotment of the independent residential property

Consequential amendment is also made under section 56(2)(x) of the IT Act to provide that if an assessee purchases new residential property from a builder and above mentioned conditions are satisfied then the tolerance limit is increased from 10% to 20%.

• Increase in threshold limit for tax audit u/s 44AB

If a person carrying on business is required to get its books of accounts audited if total sales, turnover or gross receipts from the business during the previous year exceeds ₹ 1 Crores.

In order to encourage digital transactions and reduce compliance burden for small and medium enterprises, the Finance Act, 2020 had increased the threshold limit of turnover from ₹ 1 Crore to ₹ 5 Crores (wef A.Y 2020-21) if the following conditions are satisfied:

• All receipts in cash during the previous year does not exceeds 5% of such receipts.

• All payments in cash during the previous year does not exceeds 5% of such payments.

The threshold limit of ₹ 5 Crores has been further extended to ₹ 10 Crores by Finance Act, 2021 with immediate effect from A.Y 2021-22.

• HUFs and LLPs not eligible for presumptive taxation u/s 44ADA

Section 44ADA provides for computation of profit and gains of profession on a presumptive basis. It applies to an assessee engaged in the specified profession u/s 44AA(1) and resident in India. Under the presumptive taxation scheme, the assessee computes the taxable income on a presumptive basis if gross receipts of the profession do not exceed ₹ 50 lakhs during the year. The presumptive income shall be 50% of total receipts of the year from such a profession.

Till A.Y 2020-21, there was no explicit prohibition on the companies, LLP or HUF to compute their professional income under presumptive scheme under section 44ADA.

However, Finance Act, 2021 has amended the provisions of section 44ADA with effect from A.Y 2021-22, and accordingly LLP, HUFs, Company, AOP, BOI shall not be eligible to claim the benefit under section 44ADA.

• Exemption for Leave Travel Concession Cash Scheme u/s 10(5)

Section 10(5) of the Act provides for exemption in respect of the value of travel concession or assistance received by or due to an employee from his employer for himself and his family, in connection with his proceeding on leave to any place in India. In view of the situation arising out of outbreak of Covid-19 pandemic, Finance Act, 2021 has provided tax exemption to cash allowance in lieu of travel concession.

For A.Y.2021-22, a new proviso in clause 5 of section 10 is inserted so as to provide that, for the assessment year beginning on the 1st day of April, 2021, the value in lieu of any travel concession or assistance received by, or due to, an individual shall also be exempt under this clause subject to fulfilment of the following conditions:

• Employee or a member of family of the employee during the period 12/10/2020 to 31/03/2021 actually spends the allowance received on goods and services which are liable to tax at an aggregate rate of 12% or above under GST laws and the goods are purchased or services are procured from GST registered vendors or service providers.

• The payment to GST registered dealer is made though proper banking channels and tax invoice is obtained from such dealer.

• The amount of exemption shall not exceed 36,000 per person or one-third of the total expenditure, whichever is less.

• Allowance of total interest expense payable to PE of Non Resident bank

As per section 94B of the IT Act, interest expense exceeding ₹ 1 Crore payable to an associated enterprise for a debt by an Indian Company or permanent establishment of foreign company, is allowable to the extent of 30% of Earnings before Interest, Taxes, Depreciation and Amortization.

With effect from A.Y 2021-22, the above provision is not applicable to interest paid/payable to lender which is permanent establishment of non-resident bank in India.

• Re-computation of past year’s book profit pursuant to APA and Secondary adjustment

To provide relief to the taxpayers affected due to the outcome of Advance Pricing Agreement (APA) and Secondary Adjustment, the Finance Act, 2021 has inserted a new sub-section (2D) to Section 115JB. As per this provision, the Assessing Officer, on an application made by the assessee, shall re-compute the book profit of the past years and tax payable thereon if assessee’s current year’s income has increased due to APA or secondary adjustment. The CBDT may notify the manner for re-computing the book profits of past years by the Assessing Officer.

The benefit of re-computation of book profit under section 115(2D) shall be available only if the assessee has not utilised the MAT credit in any subsequent Assessment Year.

It is also provided that the assessee can make an application for re-computation of book profit only for the past years beginning on or before Assessment Year 2020-21.

• No Chapter VI-A deductions other than 80JJAA and 80M available to companies opting for alternate tax regime u/s 115BAA/115BAB

While computing total income of a company opting for taxation under section 115BAA/115BAB for the A.Y 2020-21, Chapter VI-A deduction under the heading C.-Deductions in respect of certain incomes other than provisions of section 80JJAA was not available. From the A.Y 2021-22 and onwards, even the Part B- Deductions in respect of certain payments under Chapter VI-A (which includes section 80C to 80GGC) would not be available while computing total income of the companies opting for section 115BAA/115BAB. However, deduction under section 80JJAA and Section 80M would be available while computing total income of such companies.

Other key changes in the ITR forms

• Effect of marginal relief to be disclosed in the ITR

Marginal relief is allowed when taxable income is beyond the threshold limit after which surcharge is payable, but the net income in excess of threshold limit is less than the amount of surcharge.

Earlier no separate effect of marginal relief was required to be shown in the ITR. Now, the ITR forms for A.Y.2021-22 have been amended which requires the special disclosure of ‘surcharge computed before marginal relief’ and ‘surcharge computed after marginal relief’.

• Disclosure of deferred tax amount pursuant to deferment of tax on ESOPs allotted by eligible start-ups

The Finance Act, 2020 has allowed to defer the payment or deduction of tax on ESOPs allotted by an eligible start-up referred under Section 80-IAC. The tax is required to be paid or deducted in respect of such ESOPs within 14 days from the earliest of the following period:

1. After expiry of 48 months from the end of assessment year relevant to the financial year in which ESOPs are allotted;

2. From the date the assessee ceases to be an employee of the organization; or

3. From the date of sale of shares allotted under ESOP.

Consequently, Rule 12 has been amended to provide that an assessee in whose case payment or deduction of tax in respect of such ESOPs has been deferred shall not be eligible to furnish his return of income in ITR-1 and ITR-4.

If an employee has received ESOPs from the eligible start-up referred to in section 80-IAC in respect of which the tax has been deferred, the Part B of Schedule TTI (Computation of tax liability on total income) seeks the disclosure of the tax amount which has been deferred in this respect.

• No Need to bifurcate carried forward losses into Pass through losses and Normal losses

Losses carried forward by an assessee has same treatment under the Income-tax Act even if they are in nature of pass-through losses. Old ITR forms bifurcated the losses under the head House property and Capital gains in Schedule CFL between pass-through losses and Normal losses. However, ITR forms notified for the assessment year 2021-2022 has removed such detailed bifurcation and hence only consolidated figure of such losses is to be disclosed in the return of income.

• Adjustment of carried forward losses if assessee has opted for section 115BAC or 115BAD

Assessee opting for alternative tax regime of Section 115BAC or Section 115BAD has to forego various exemptions and deductions. Further, carried forward losses attributable to such exemptions and deduction are not allowed to be set off. These losses are deemed to have been given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

ITR Forms notified for Assessment Year 2021-2022 have been amended to require the adjustment of such losses which are not allowed to be carried forward and set off.

• Section 80M for further distribution of dividend to shareholders

Section 80M was introduced by the Finance Act, 2020 to provide a deduction to a domestic company for the amount received as dividend from another domestic company, a foreign company or a business trust. The deduction is allowed when the company further distributes the dividend to the shareholders.

Deduction can be claimed for an amount received by way of dividend to the extent it is further distributed as dividend on or before one month prior to the due date of furnishing the return of income.

ITR forms for the assessment year 2021-22 have been accordingly modified to include Section 80M in Schedule VI-A so as to enable companies to claim the said deduction.

• Cash donation u/s 80GGA above ₹ 2,000/- not allowable

Section 80GGA provides deduction for specific donations made by an assessee who is not deriving income under the head ‘profits and gains of business or profession’. Earlier, no deduction was allowed for the cash donation in excess of ₹ 10,000/-. However, with effect from AY 2021-22, the maximum limit of cash donation is reduced from 10,000/- to ₹ 2,000/-

Schedule 80GGA in the form requires separate disclosure of the donation made in cash and donation made through other modes. The ITR form for the Assessment year 2021-2022 requires additional disclosures of the date on which such cash donation has been made.

• Expanded disclosure for deduction u/s 80P

Schedule 80P of the ITR requires the assessee to furnish various information relating to income and the amount of deduction. ITR form for the assessment year 2021-22 has inserted one more column in the Schedule 80P, which requires the assessee to provide the nature of business code in front of various types of income of such person.

• Deletion of Schedule DI

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, has extended the time-limit to make investments, deposits, payments, etc. for the financial year 2019-20 for claiming deduction under Chapter VI-A, section 10AA and section 54 to 54GB till 30-06-2020. This date was further extended to 31-07-2020 in case of investments or payment eligible for deduction under Chapter VI-A and 30-09-2020 in case of investments eligible for deduction under section 54 to 54GB.

To allow taxpayers to avail the deduction for the investments/deposits made during the extended period, the ITR forms notified for the Assessment Year 2020-2021 inserted a new Schedule DI (Detail of Investments/deposit/payment for the purpose of claiming deduction). Since there is no extension of time limit to make above such investments for the A.Y 2021-22, Schedule DI has been removed. Needless to mention, investment made during such extended period, which has already been claimed as deduction or exemption during the A.Y 2020-21 should not be claimed again in the A.Y 2021-22.

Practical concerns

The department has almost incorporated all the amendments in the ITR forms. However, there are few points which require detailed examination while reporting in the ITR Form:

1) Removal of field – Dividend Income exempt u/s 10(34)

• Even though we have moved to a classical system of taxing dividend in the hands of shareholders, there could be an instance where dividend received to the shareholder in the month of April 2020 may be exempt in the hands of shareholders if Dividend Distribution Tax is paid by the Company in accordance with section 115-O of the IT Act.

• The specific field of exempt income u/s 10(34) has been removed from the ITR forms. Thus, taxpayer may need to check the correct field under which such exempt income needs to be reported.

2) Reporting of change in WDV of block of asset pursuant to goodwill being considered to be non-depreciable asset

• Apparently, despite the amendment in section 43(6)(c) which provides for re-computation of WDV as on 01/04/2020 of the block of assets (which includes goodwill), it seems that the ITR forms do not require any specific reporting for the change in WDV of such block of asset.

• Thus, the taxpayer needs to be cautious while computing the WDV of the particular block of asset.

3) Calculation of Gains from slump sale u/s 50B for the A.Y 2021-22

• The provision of section 50B were amended by the Finance Act, 2021 wef A.Y 2021-22. However, the manner of calculation of gains from slump sale (Rule 11AUE) was notified on 24/05/2021. The ITR forms does not seem to have covered the prescribed manner of computation of Gains from Slump Sale.

• Non-disclosure of prescribed manner of calculation may turn out to be favourable in cases of assessee’s claiming that amended provisions of slump sale are not applicable for the A.Y 2021-22.

4) No schedule for claiming exemption u/s 54F and 54EC against gains arising from transfer of depreciable capital asset

• If a depreciable asset is used for the purpose of business, then irrespective of period of holding, the resultant gains arising on transfer of such asset is deemed to be short term capital gain.

• Deduction or exemption under section 54F/54EC are available for long term capital assets. Gujarat High Court in case of Polestar Industries (Tax Appeal 747 of 2013) has held that provisions of section 54EC do not make any distinction between depreciable assets or non-depreciable assets, the deeming provisions are only for the purpose of computing capital gains. Thus if an asset is classified as a long term capital asset then exemption could be available to gains from transfer of such depreciable assets.

• However, schedule Depreciation in the ITR forms does not have any field for reporting of exemptions under the deemed short term capital gains.

Conclusion

The only constant in taxation is change. Nowadays professionals not only need to have the ability to adapt to the changes but also be mindful as from when is the change applicable. Further, now many types of assessee have an alternate tax regime, which could entail the professionals to analyse the new scheme of taxation in a detailed manner.

Hope, this article will remind the readers about the amendments applicable for the return of income for the A.Y. 2021-22.

1. INTRODUCTION

Chapter XVII is a chapter which is the favourite for all Executives of the CBDT to play with. It gathers revenue based on specific transactions (the list of which is ever increasing), paid to the Government on a month to month basis, reported quarterly and summarised yearly.

While any change in any other Schedule, Chapter or Section can attract attention of the tax payers immediately, and raise a reaction on the increase or decrease in the rate involved, this Chapter is a silent killer. It casts the obligation on the person acting as a tax collector on behalf of the government, not directly on the taxpayer and puts the obligation on the agent to collect the tax and pay it to the government. Thus the reaction is slow to be realised and impact the real taxpayer is felt much later.

The increase in the responsibility on the tax deductor or collector becomes a compliance issue and therefore a compulsion which has to be ensured, else the consequences are extremely harsh and onerous.

The Mandate of the article is “Recent Legal and Practical Issues Pertaining to TDS & TCS”, however unless certain procedural aspects are clarified, the legal implications cannot be brought out, hence the same may please be read in that light.

Non Compliance or misfeasance invites:

A Charging of interest

B Levy of penalty

C Prosecution of Principal Officers

D Disallowance of related expenses

E Qualification in audit report, attracting the attention of people who are otherwise not affected.

2. TAX COLLECTION/ DEDUCTION ON CASH BASIS, ACCRUAL BASIS

2.1 Chapter XVII is known for the concept of Tax Deduction or Collection on the basis of “payment or credit to the account , of the payee, (including “Suspense account), whichever is earlier”. The exception to the use of this phrase is in the case of S. 192 TDS on Salaries and S195 TDS on Payments in respect of Foreign remittances.

2.2 It has been the accounting practice to book expenses which pertain to a particular accounting year, in that particular year only, by debiting the expense head and crediting the same, either to the creditors account, or expense payable account or to the suspense account. One aspect that tends to be overlooked is the concept of “creation or acceptance of a liability to pay to a particular vendor for a particular sum”. While finalising the accounts, the concept of debit is fully complied with but the credit to the vendor, of a particular amount can be subject matter of various criteria and therefore the identity of the vendor or the exact amount payable may not reach finality by the time the books are required to be closed. Thus, practically the PAN number and amount payable to the creditor is subject to the certain constraints. Therefore deducting tax and paying the same to the government is proving to be challenge.

2.3 The plain reading of the sections requires taxes to be deducted and paid to the government, at the time of making the credit to the account of the payee or any other account ( by whatever name called). However, how the credit for such taxes will move to the correct assessee and of the correct amount remains a challenge. Therefore assessee refrain from deducting tax on such year end provisions, but deduct the same at the time of actual payment of the amount, after determining the party and the amount finalised, i.e. WHEN THE LIABILITY TO PAY HAS CRYSTALLISED.

2.4 Various decisions have held either way, and finality will be achieved only when the Supreme Court decides the matter either way.

The latest decision of the Karnataka High Court is in favour of the assessee :

1. Toyota Kirloskar Motor (P) Ltd [TS-249-HC-2021(Kar)]

2. Tata Sky Ltd. MA reversing the decision of (c) below

3. Tata Sky Ltd. 119 taxmann.com422(Mum) – AGAINST

4. Tata Sky Ltd 99 taxmann.com 272 (Mum)

5. Sanghi Infrastructure Ltd 96 taxmann.com 370 (Guj)

6. Mahindra & Mahindra Ltd 117 Taxmann,com 518 (Mum) – pending bills, – Liability not crystallised

2.5 New section for Tax Collection at Source introduced from 1.10.2020 :

Section 206C(1H)

• If the Sales turnover is more than 10 crores in the previous financial year i.e. the year ended 31 March 2020, then this year,

• the seller will have to collect and deposit TCS on the sales receipts from sale of goods

• from such buyers from whom seller received more than Rs. 50 Lakhs as sale consideration during the current Financial year.

• The TCS is payable on the amount of receipt which is greater than 50 Lakhs and received after 1st. Oct. 2020. The rate of TCS is 0.1%

• due to corona Pandemic 25% discount had been given in this tax rate till 31 March 2021 and its effective rate is 0.075%.

By the time the assessees settled their systems with the new provisions of Section 206C(1H), new section introduced with effect from 1.7.2021 viz. Section 194Q:

As per provisions of section 194Q of the Income Tax Act, TDS is deductible if-

• The buyer is responsible for making payment of a sum to the resident seller; and

• Such payment is to be done for the purchase of goods of the value/ aggregate of the value exceeding INR 50 Lakhs.

• the term ‘buyer’ means as under-

• A person having total sales/ gross receipts/ turnover exceeding INR 10 Crores in the immediately preceding Financial Year in which the specified purchase of goods took place;

• Buyer will not include any person notified by the Central Government.

• TDS on purchase of goods is to be deducted by the buyer within earlier of the following dates-

• At the time of credit of the sum into the account of the seller or any other account under the books of accounts of the person liable to make payment of such income. ; or

• At the time of payment of the sum thereof.

• The buyer is liable to deduct TDS at the rate of 0.1% of the purchase value above INR 50 Lakhs; in absence of PAN rate of 5%

• Effective from 1st July 2021.

• section 194Q are not applicable under the following cases-

  • TDS is already deductible under other provisions of the Income Tax Act; or

  • Transactions on which TCS is collectable as per provisions of section 206C [other than a transaction on which TCS is collectable under section 206C(1H)].

• Transactions, wherein, TDS is deductible under both the provisions i.e., section 206C(1H) and section 194Q. Under such cases, TDS would be deductible only under section 194Q.

• not applicable when the seller is a non-resident.

• Failure to comply with the tax deduction entails disallowance u/s 40a(ia), there would be disallowance of expenditure up to 30% of the value of the transaction.

• apply to the purchase of both the types of goods i.e. capital as well as revenue.

The rate of tax for both the above section is so low that the cost of compliance is going to be much more than the taxes involved, which has to be borne by the assessees.

The GST portal and reporting practically have covered most of the transactions that are sought to be covered and reported by the new sections of TCS and TDS are unnecessary duplication on which all assessees have to be compliance officers and data entry officers for the Exchequer.

Any issues of Non compliance and litigation thereof will be Non Productive and the Revenue may end up realising that the cost of administering these sections is more than the revenue collected. Like Wealth Tax and Estate Duty, these sections may end up being abruptly deleted.

2.6 Circular no.720, dated 30-8-1995

“It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, it has been pointed out that the sums paid for carrying out work of advertising are being subjected to deduction of tax at source under section 194C as payment for work contract as also under section 194J as payments of fees for professional services.

2. It is hereby clarified that each section, regarding TDS under Chapter XVII, deals with a particular kind of payment to the exclusion of all other sections is this Chapter. Thus, payment of any sum shall be liable for deduction of tax only under one section. Therefore, a payment is liable for tax deduction only under one section.”

Inspite of the number of sections increasing year after year, this circular still holds good and the CBDT has not withdrawn the same and taxpayers should rely on this with the spirit with which it is on the statute book.

3. “ASSESSEE IN DEFAULT”

3.1 The Hon. Supreme Court, in the case of Hindustan Coca Cola Beverage (P.) Ltd.[2007] 293 ITR 226 (SC) held as under:

“Section 201 of the Income-tax Act, 1961 – Deduction of tax at source – Consequence of failure to deduct or pay – Whether where deductee, recipient of income, has already paid taxes on amount received from deductor, department once again cannot recover tax from deductor on same income by treating deductor to be assessee-in-default for shortfall in its amount of tax deducted at source – Held, yes”

In the judgment reference was made to Circular No. 275/201/95-IT(B), dated 29-1-1997 where the Board has given instruction to the effect:

The Board is of the view that no demand visualised under section 201(1) of the Income-tax Act should be enforced after the tax deductor has satisfied the officer in charge of TDS that taxes have been paid by the deductee-assessee.

3.2 No procedure or machinery was however put in place since 2007 till Finance Act 2012, when a proviso was inserted in Section 201, with effect from 1-7-2012 :

“[Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee—

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed]”

3.3 The prescribed form is Form 26A is the standardised form in which the three aspect mentioned above are incorporated and when prepared and filed on the Traces site, the tax in question is not required to be paid again and only the interest element is paid and the challan details are fed into the Site.

3.4 The demand raised by the Assessing Officer for the interest u/s 201 should be responded with a copy of the form 26A filed to ensure that the Demand is nullified on the portal of the income Tax site.

4. CERTIFICATES OF NON DEDUCTION / LOWER DEDUCTION OF TAX – U/S 197/195(2)/195(3)

4.1 These certificates are now compulsorily to be obtain electronically only. The applications are to be done online only and the certificates obtained are also only through the electronic media – IT SHOULD BEAR THE ALPHANUMERIC CODE, which has to be mentioned in the Statement of TDS to be filed quarterly.

4.2 For Individuals, NIL deduction are not being issued at all. Thus having successfully obtained a certificate of NIL deduction from particularly the International Tax Division should not be considered as a Success – it has to be authenticated from the Tax portal with the Alphanumeric Code.

4.3 Another important aspect with creates Short Deduction demands which call for attention and care are the certificates issued u/s section 195(2)/195(3) . These certificates only mention the rate of tax at which the tax is required to be deducted, and do not mention the surcharge and cess applicable on payments to Non Residents. Various assessees rely on the bare rate mentioned and deduct tax without the surcharge and cess applicable, and the demands are finally payable and not rectifiable or appealable.

5. REPORTING OF DETAILS IN QUARTERLY STATEMENTS AND TAX AUDIT REPORT.

5.1 Reporting of transactions attracting the various provisions which attract TDS has to be done quarterly vide Forms 24Q (Salaries), 26Q (payments under various sections to Resident payees) and 27Q (Payments to Non Resident payees). Each of these forms consists of three parts:

1. Details of Deductor

2. Details of Payment of TAX (Challans details)

3. Details of Deductees

5.2 Though most of the sections specify the rates at which tax is required to be deducted, there are various reasons due to which, tax is either not deducted or deducted at lower rates or higher rates. These are required to be mentioned in the forms of specified codes as mentioned in the respective forms, while filling up the details of the Deductees to whom such rates are applied.

Form 24Q Column no 328 – three codes have been specified for mentioning:

1. Deduction as per certificate u/s 197(lower deduction) issued by the department

2. Deduction as per certificate u/s 197(NIL deduction) issued by the department

3. Deduction at higher rate for not providing PAN number to the deductor.

Form 26Q Column no has similarly 11 categories of deductees who may qualify for deduction at a rate different from the rates specified under different sections, ranging from below exemption limit, submission of for 15G/H, section 197 certificates, 206AA applicability, etc.

Form 27Q Column No 729 – seven codes have been specified which need to be specified.

Many assessees tend to fill the details of deductees, only where TAX is deducted and do not give the details where tax was not required to be deducted.

Why these are important is for the cross tally of the nature of payment and with the appropriate deductions made, as reflected in the Tax Audit Report at Clause 34a, b and c.

5.3 It has been observed that the Statements of TDS / TCS are filed with CPC Traces, Ghaziabad and the returns of Income, where Tax Audit report u/s 44AB, is uploaded is filed with CPC E-Filing Bangaluru. The Tax audit report gives the yearly summary of the section wise TDS / TCS attracted and effected, therefore when the processing of returns is done, if the details filed do not correctly match with the quarterly returns, there may arise uncalled for adjustments or additions to the total income, which can be avoided if the Statements are correctly filed.

5.4 Many Tax Auditors also do not carry out this exercise and fill up the details in the tax audit audit or restrict the exercise to the details filed in the Statement of TDS filed; When these are matched with the Profit and Loss figures, mis matches appear and invite adjustments or additions.

6. ACCURACY OF SYSTEMS, FILING STATEMENTS AND RETURNS NEED TO BE ENSURED

6.1 The above requires updation of computer systems, training of staff and “near perfection” accuracy of Data collection, recording, reporting and maintenance.

These Compliances entails costs for the assessees at large. The cost of non compliance or inaccuracies is large and therefore not affordable.

6.2 Department needs to realise that such costs need to be matched with corresponding revenue for which a system of rebate or commission needs to be put in place so that the hardship faced by the Tax deductor/collector is minimised and compliance is cost effective.

 

1. Introduction

The current international tax regime was designed for a brick and mortar economy i.e. where physical presence is required in the other country to constitute Permanent Establishment and it has failed to address the changing business environment mainly through the digital economy. The Covid-19 pandemic has helped the digital economy business to expand by leaps and bounds. Technological advances and novel business models made it possible for business to operate in other countries without physical presence in that country and the traditional form of brick-and-mortar business model had become redundant. Since the transactions or business through digital economy is increasing and due to absence of permanent establishment of overseas company, the income earned is becoming exempt in the source country. In the digitised transaction, major market is the developing economy and there has always been opposition by these countries that they were not getting due share of their taxes on the business done in their country through digital economy.

Organisation for Economic Co-operation and Development (OECD) in November 2015 had issued 15 Base Erosion and Profit Sharing (BEPS) Action Plan (AP). OECD had recognised the challenges posed by digital economy in AP1 and how the existing framework of international tax regime was unable to address the taxability of the business carried out through digital economy. AP1 on digital economy had analysed various solutions to address the taxability of digital economy namely (i) Equalisation Levy, (ii) withholding tax on certain class of digital transactions and (iii) nexus in the form of Significant Economic Presence.

India introduced Equalisation Levy in 2016 taxing certain categories of income @ 6%. The incomes which were taxed as equalisation levy are exempt under section 10(50) of the Income Tax Act, 1961.

Another concept which is recognised by AP1 is based on economic based nexus i.e. Significant Economic Presence (SEP). India introduced SEP in 2018 by inserting an explanation 2A to section 9(1)(i).

2. Indian Domestic Tax Laws

2.1 India introduced SEP in 2018 by insertion of Explanation 2A to section 9(1)(i) which enlarged the scope of the term “Business Connection” under the Income Tax Act, 1961 to tax income of non-resident having Significant Economic Presence in India on the basis of the nexus theory. As per Memorandum to Finance Bill, 2018, the objective behind the introduction of SEP is enumerated as follows:

“The oranges upon the trees in California are not acquired wealth until they are picked, not even at that stage until they are packed, and not even at that stage until they are transported to the place where demand exists and until they are put where the consumer can use them. These stages, up to the point where wealth reached fruition, may be shared in by different territorial authorities.” (excerpts from a report on double taxation submitted to League of Nations in early 1920s).

Accordingly, both the residence and source countries claim the right to taxation.

Taxation of business profits on the basis of economic allegiance has always been the underlying basis of existing international taxation rules. Economists gave primacy to the economic allegiance rather than physical location and made it clear that physical presence was important only to the extent it represented the economic location.

Ordinarily, as per the allocation of taxing rules under Article 7 of DTAAs, business profit of an enterprise is taxable in the country in which the taxpayer is a resident. If an enterprise carries on its business in another country through a ‘Permanent Establishment’ situated therein, such other country may also tax the business profits attributable to the ‘Permanent Establishment’. For this purpose, ‘Permanent Establishment’ means a ‘fixed place of business’ through which the business of an enterprise is wholly or partly carried out provided that the business activities are not of preparatory or auxiliary in nature and such business activities are not carried out by a dependent agent.

For a long time, nexus based on physical presence was used as a proxy to regular economic allegiance of a non-resident. However, with the advancement in information and communication technology in the last few decades, new business models operating remotely through digital medium have emerged. Under these new business models, the non-resident enterprises interact with customers in another country without having any physical presence in that country resulting in avoidance of taxation in the source country. Therefore, the existing nexus rule based on physical presence do not hold good anymore for taxation of business profits in source country. As a result, the rights of the source country to tax business profits that are derived from its economy is unfairly and unreasonably eroded.

OECD under its BEPS Action Plan 1 addressed the tax challenges in a digital economy wherein it has discussed several options to tackle the direct tax challenges arising in digital businesses. One such option is a new nexus rule based on “significant economic presence”. As per the Action Plan 1 Report, a non-resident enterprise would create a taxable presence in a country if it has a significant economic presence in that country on the basis of factors that have a purposeful and sustained interaction with the economy by the aid of technology and other automated tools. It further recommended that revenue factor may be used in combination with the aforesaid factors to determine ‘significance economic presence’.

The scope of existing provisions of clause (i) of sub-section (1) of section 9 is restrictive as it essentially provides for physical presence-based nexus rule for taxation of business income of the non-resident in India. Explanation 2 to the said section which defines ‘business connection’ is also narrow in its scope since it limits the taxability of certain activities or transactions of non-resident to those carried out through a dependent agent. Therefore, emerging business models such as digitized businesses, which do not require physical presence of itself or any agent in India, is not covered within the scope of clause (i) of sub-section (1) of section 9 of the Act.

In view of the above, it is proposed to amend clause (i) of sub-section (1) of section 9 of the Act to provide that ‘significant economic presence’ in India shall also constitute ‘business connection’.”

2.2 From the extracts of the memorandum above, it is evident that the existing norms for taxing the business income is not sufficient to tax the business through digital economy. The source country has always been asking for their share of taxes on the income earned through their country which they were deprived in absence of Permanent Establishment as business was entirely carried out through digital mode. The source country was always of the view that since the market was in their country and without sale there will be no income, the taxes on the income earned on the business transaction should also be shared with them.

2.3 Finance Bill, 2018 inserted the following explanation to section 9(1)(i) relating to Business Connection:

Explanation 2A.—For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means:

Provided that the transactions or activities shall constitute significant economic presence in India, whether or not, —

(i) the agreement for such transactions or activities is entered in India; or

(ii) the non-resident has a residence or place of business in India; or

(iii) the non-resident renders services in India:

Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.

2.4 Through the above amendment, India implemented one of the measures enumerated by BEPS, Action Plan 1 and tax the income earned through the digital transaction. Although the intention of the above amendment was to tax digital transaction, the wording of the explanation seems to suggest that all the physical transaction will be covered under explanation 2A.

2.5 Explanation 2A states that “transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India……”. The wordings used are transaction in respect of any goods, services or property and it does not restricts itself to digitised transactions. Further the words “including provision of download of data or software in India…..” indicates that even physical transaction will be covered. A clarification by way of circular/ FAQ from CBDT would resolve much of the doubts about the scope of clause (a) of explanation 2A.

2.6 Clause (a) deals with transaction ‘in respect of any goods, services or property’. The words “in respect of” has a wider connotation and as held by the Apex Court in the recent judgement of Engineering Analysis Centre of Excellence Private Limited v. CIT (2021) 125 taxmann.com 42, in respect of means “attributable to”. The term seeks to cover transactions relating to goods, services or property.

2.7 Clause (b) of explanation 2A states that SEP means “systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed …….”.

2.8 Here the amendment seeks to treat the transaction as business connection not on the threshold limit but on the number of users with respect to the systematic and continuous soliciting of business activities or engaging in interaction. It means that if there is one off transaction or not systematic (i.e. planned) and continuous (i.e. recurring) than it will not be treated as business connection. Here there are two activities which are enumerated to be taxed as SEP. One is “soliciting of business activities” and the other is “engaging in interaction”. Here the term “systematic and continuous” will qualify for both to “soliciting of business activities” and to “engaging interaction”. Thus clause (b) can be read as “systematic and continuous soliciting of business activities” or “systematic and continuous engaging in interaction”.

2.9 The term systematic means planned or organised which pre-supposes that there will be continuity and the term continuous means it will be recurring or on regular basis.

2.10 The first limb under clause (a) to Explanation 2A is separated by “or” from clause (b) which means that if the non-resident falls either under clause (a) or clause (b), then the non-resident will be deemed to be having SEP and will come under the purview of Business Connection. Explanatory memorandum also clarifies that both clause (a) and clause (b) are mutually exclusive. Relevant portion of the explanatory memorandum is reproduced hereunder:

“The proposed amendment in the domestic law will enable India to negotiate for inclusion of the new nexus rule in the form of ‘significant economic presence’ in the Double Taxation Avoidance Agreements. It may be clarified that the aforesaid conditions stated above are mutually exclusive.”

2.11 Further explanation 2A says that “it is hereby declared that the significant economic presence of a non-resident in India….” Explanation itself enumerates that SEP will be of a non-resident and not of resident. In a corollary to this, the other party will be resident of India.

2.12 Proviso 1 to explanation 2A provides that the transactions or activities shall constitute SEP in India whether or not:

(i) the agreement for such transactions or activities is entered in India; or

(ii) the non-resident has a residence or place of business in India; or

(iii) the non-resident renders services in India:

The proviso clarifies that it is not important where the agreement has been entered. Even if the agreement is entered outside India and other conditions of SEP are satisfied than also it will be deemed that there will be business connection in India. Under this more importance is placed on the transaction rather than the agreement. The transaction should be with India irrespective of where the transaction is entered.

Further, the proviso also clarifies that it is not relevant whether the non-resident has a residence or place of business in India. Even if the non-resident does not have a residence or place of business in India and if other conditions of SEP are satisfied than it will be deemed that non-resident has a business connection in India. It enumerates the source rule of taxation where the income is taxed where it arises.

Furthermore, the proviso clarifies that it is irrelevant whether non-resident renders services in India. Even if the services are rendered outside India and other conditions of SEP are satisfied, it will be deemed that non-resident has a business connection in India.

2.13 Proviso 2 to explanation 2A of section 9(1)(i) provides that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.

2.14 In explanation (i)(a) of section 9(1) income of the business will be deemed to be only such part as is reasonable attributable to operations carried out in India. Here in this explanation there is a presumption that there will be physical presence in India and the income will be attributable to operations carried out in India, whereas in the digitalised transaction since there will be no physical presence it is provided “that only so much of the income as is attributable to the transaction or activities…..”.

2.15 After introduction of explanation 2A in 2018, threshold limits were not prescribed and the applicability of explanation 2A was deferred to Assessment Year 2022-23 i.e. FY 2021-22.

2.16 Now, since the threshold limit has been prescribed, explanation 2A has been made applicable from Assessment Year 2022-23 i.e. FY 2021-22.

3. Threshold Limit

3.1 CBDT vide Notification No. 41/2021/ F. No. 370142/11/2018-TPL dated May 3, 2021 have inserted new Rule 11UD specifying the threshold for clause (a) and clause (b) of explanation 2A.

3.2 Threshold limit for clause (a) i.e. transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India will be more than ₹ 2 crores for the aggregate of payments arising from such transaction or transactions during the previous year.

3.3 Threshold limit for clause (b) i.e. systematic and continuous soliciting of business activities or engaging in interaction with 3 lakhs users in India.

3.4 The limit prescribed will be effective from AY 2022-23 that is effective from current financial year 2021-22.

3.5 It is not clear how the threshold limit will be computed. Whether only resident users will be considered, or non-resident users will also be considered. Presuming that non-resident users are excluded, where the delivery is in India although user may be non-resident, whether the transaction will be taken for computation of threshold limit. Whether only user using Indian IP will be considered for threshold limit and how it will be tracked. There are various grey areas on the computation of threshold limit which need to be clarified at the earliest.

4. SEP vs DTAA

4.1 India has entered into DTAA with almost 90 countries so the obvious question that arises whether SEP will affect the DTAA already signed by India.

4.2 The memorandum explaining the provisions of Finance Bill 2018 has categorically emphasised that unless corresponding modifications to PE rules are made in the DTAAs, cross border business profits will continue to be taxed as per the existing treaty rules. Relevant para of the explanatory memorandum is reproduced hereunder:

“The proposed amendment in the domestic law will enable India to negotiate for inclusion of the new nexus rule in the form of ‘significant economic presence’ in the Double Taxation Avoidance Agreements. It may be clarified that the aforesaid conditions stated above are mutually exclusive. The threshold of “revenue” and the “users” in India will be decided after consultation with the stakeholders. Further, it is also clarified that unless corresponding modifications to PE rules are made in the DTAAs, the cross-border business profits will continue to be taxed as per the existing treaty rules”.

4.3 Explanatory memorandum itself clarifies that if India has entered into DTAA with any country, then unless the PE rules are changed in DTAA with that country, tax will not be levied in spite of the fact that the non-resident may be having Significant Economic Presence in India according to explanation 2A of section 9(1)(i).

5. SEP vs Equalisation Levy

5.1 There may be activities which are covered both under equalisation levy and SEP. The issue that arises whether the activities will be charged to tax under equalisation levy provision or under SEP provision.

5.2 Section 10(50) of the Income Tax Act, 1961 provides that Income chargeable under Chapter VIII of the Finance Act, 2016 will be exempt if equalisation levy has been paid as per the said Chapter. Since the income which is chargeable under Chapter VIII of Finance Act, 2016 is exempt u/s 10(50), according to my view, application of SEP provision under explanation 2A of section 9(1)(i) does not arise.

6. SEP vs Royalty/ Fees for Technical Service

6.1 Further issue that arises is where the services are rendered outside India are covered both under Section 9(1)(vii) and also under explanation 2A to section 9(1)(i). Similarly, whether download of software would be covered under Section 9(1)(vi) and also under explanation 2A to section 9(1)(i).

6.2 Under section 9(1)(vi) and 9(1)(vii), tax is levied at concessional rate on gross amount whereas tax under section 9(1)(i) will be levied on net basis @ 40%.

6.3 There is no clarity on this and tax can be levied under both the sections. It is better if CBDT clarifies the matter and resolve the issue through circular.

7. Concluding thoughts

SEP provisions will be applicable only to transactions emulating from non-treaty countries or where non-resident is not eligible for taking benefit of treaty, thereby excluding almost 90 to 95 per cent of the transactions. SEP and equalisation levy are temporary measures which will be replaced by tax rules by all the countries according to the consensus approach of the OECD. Until then there are many grey areas which need to be clarified and earlier the issues are better to avoid further round of litigation.

As we are hearing the positive news that daily positive cases are on the decline and the recovery rate is high, I hope you and your family members are safe and healthy. Friends it is important that we get vaccinated and hence I would like to appeal to all movers to get yourselves and your families vaccinated and also don’t let your guard down and always be masked up, this will help us deal with the purported third wave as us being stated by some medical experts.

Friends, we at AIFTP are equally concerned about the health and well being of our members as we have also lost quite a few members to this pandemic, we pray that their souls get eternal peace at the lotus feet if the almighty.

As per my last communication, we have initiated a COVID Relief Fund with an initial contribution of ₹ 20 Lakhs from the Head Office, under the Chairmanship of our Past President Dr. Ashok Saraf to provide relief to needy members, who have suffered on account of hospitalisation on account of COVID and also to the family members of the members who have lost their lives on account of the pandemic. The details of the amended scheme are given on the third Cover Page of this issue.

I am also thankful to the members who have shown their largesse and donated handsomely, and helping us in achieving and crossing target of ₹ 1 Crore, members are also requested to donate generously for the Fund so we can help our AIFTP members in these testing times and also circulate the scheme amongst members so that they can benefit of the Scheme. We are glad to inform that at the time of writing this message we have already started disbursing amounts to the needy members, I would like to thank the COVID Relief Committee and the Office Bearers for coming to action immediately.

All zones are regularly conducting webinars on different topic with versatile speakers. We are organising special webinar jointly with Income Tax Appellate Tribunal Bar Association, Mumbai, GST Practitioners Association, CTC and BCAS Mumbai on 25th June, 2021 on You Tube Channel which will be addressed by Shri Harish Salve, Sr. Advocate on “Constitutionality of Tax Laws”. All are requested to join the same. Link will be shared on all Whatsapp Group and on Mail. I on behalf of the Federation request all Zonal Chairman, Vice Presidents, Jt. Secretaries and all eminent leaders in the Federation are requested to plan physical programmes in their respective areas in grand manner for the benefit of the Tax Fraternity

The Income Tax Department launched new portal on 7th June, 2021 published to be smooth, user-friendly and hassle free, contrary it created lots of problems and the Hon’ble Union Finance Minister invited suggestions from the stake holders to improve it. Our Shri S. R. Wadhwa, Chairman, Direct Tax Representation Committee with the help of Shri Samir Jani made representation highlighting issues faced by members to the Honb’le Finance Minister. We have also invited the officials from CBDT to interact with our members on the issue of the Portal. The date and timing will be announced as and when finalised. I thank Wadhwa Sir and Shri Samir Jani for sparing their valuable time in making representation immediately to the Government.

AIFTP is planning to restart the National Tax Moot Court Competition in memory of Padma Vibhushan Late Dr. N. A. Palkhivala, Senior Advocate in association with Maharashtra National Law University, Mumbai. The same will be on virtual mode. I personally request all my Zonal Chairmen, Vice Presidents, Jt. Secretaries are requested to support and same and we will invite colleges from all over India to participate. In respect of the same under the guidance of Dr. K. Shivaram, Sr. Advocate, Mumbai and Chief Advisor of the Moot Court Committee, with Prof. (Dr.) Dilip Ukey, Vice Chancellor, Maharashtra National Law University, Mumbai and Prof. (Dr.) Anil G. Variath, Registrar, Maharashtra National Law University, Mumbai and principally agreed to hold Virtual National Tax Moot Court Competition. I thank Vice Chancellor and Registrar for agreeing on holding this Virtual National Tax Moot Court Competition.

I would at the end request all of you to Stay Home Stay Safe and always be masked up.

Place: Eluru 
Dated: 18-6-2021 

M. Srinivasa Rao
National President, AIFTP

Disruptive Technology

Technology is becoming increasingly disruptive. Its rapid innovation significantly alters the way in which Consumers, Industries or Businesses conduct themselves, industries, or businesses conduct themselves. Any innovation earns the tag of disruptive technology when it forces the established system and habits to be replaced due to its superior attributes to conduct the same operations more efficiently. The recent examples of disruptive technology are e-commerce, online news portals, share a ride apps, GPS, etc. The policy makers have long since realised that technology plays the fulcrum that will revolutionise governance. Technology then is an important aspect in Policy framing, implementation and ascertaining the impact of the same. Thus, they have made a conscious effort to come out of the dogma alleged by the British scientist CP Snow that Technologists and Policymakers inhibit two separate environments in his essay “The Two Cultures” published in the year 1959. With the passage of time, things have improved. But, the gap remains. In this information age, data is the new oil of international politics. Government agencies place utmost importance on collection and utilisation of data. In their zest to collect data, privacy invasion becomes a collateral damage. However, that topic is for another day. To effectively harness the information wave that is gripping the entire world, Central Government, launched its Digital India Campaign in 2015. While this has been a great stride in bridging the gap between Technology and Policy, several roadblocks are observed. This was observed when Government launched its very ambitious “One Nation – One Tax” as Goods and Services Tax (GST) on 1st July 2017. It was a very courageous and land breaking decision. We professionals and many critics are of the view the staggered implementation of the same would have saved the taxpayers, tax professionals and tax administration several problems which persist even now.

Similarly, on 24th February 2021, a Bug disrupted NSE Trading and the servers were down for almost 4 hours disrupting critical trading activity. On March 8th, 2021, TRAI came up with a regulation for ‘Bulk SMS service provider registration on DLT platform’, implementation of which impacted OTP services, SMS services from banking, e-commerce and other payment platforms adversely. When GST was implemented, though the Act/policy had a beautiful flow of system on paper, the portal and its implementation had a significant headroom for improvement and delayed to deliver on functionality and experience.

The recent endeavour of the Finance Ministry to revamp the Income-tax portal has been a much talked about topic. The idea is to consolidate and facilitate the exchange of taxpayer data which is scattered over various platforms like Stock Markets, NSDL, CDSL, State/Central Registrars, MCA/ROC, GSTN, Banks etc and make it available at a single place. The site also promises ease of use and simplification of filing returns and collation of various data points, pre-filled Income tax forms. However, as is the norm with most government digital platforms, probably due to its sheer size or sub-optimal planning, the portal is now having hiccups and teething troubles with various features not available upon launch. User-Experience is significantly under-delivered.

India is amongst one of the advanced and progressive states when it comes to ideas, policy drafting and legislation. Case in point being Personal Data Protection Bill of 2019, National Strategy for Artificial Intelligence of 2018, Digital Currency Bill of 2021 etc. which are some of the early, innovative and comprehensive frameworks in the world. However, the execution of these policies lacks the quality of seamless implementation, which denotes the quality of advanced technologies. The results are abysmal.

The government has multiple agencies like NITI Ayog, the National Informatics Center (NIC) and various centres of excellence for emerging technologies. It also partners with private Technology players like Infosys and TCS and others. And despite all this, when it comes to delivering a great end to end User experience on any government service platform, there is always a backlash.

Now if one considers the way these emerging technologies change every few months. Add to this, India’s huge population across a vast polity with varied demographics, poor internet penetration, etc. successfully implementing a system over a few cycles of trial and error is also a huge win. Policies are in the right place, Technology is advanced and available, Implementation will catch up!

As Henery Miller in Cosmological Eye says ‘The struggle is to synchronize the potential being with the actual being, to make a fruitful liaison between the process of growth which is painful, but unavoidable. We either grow or we die, and to die while alive is a thousand times worse than to “shuffle off this mortal coil”. The CBDT has come up with a Press Release on 15th June, 2021 inviting all stakeholders including the professionals to participate in an interactive session with the vendor INFOSYS to be held on 22nd June, 2021 to highlight the issues faced by all while using the newly launched portal. Though this effort should have been made at the time of inception of the idea itself, nevertheless it is better late than never.

This issue of the AIFTP Journal carries very important articles on current and important topics. I thank all the esteemed professionals for sharing their valuable time to contribute to the present issue. I thank my colleague and friend Ms Maitri Chheda for helping me with her inputs for the editorial.

K. Gopal,
Editor