Southern India Regional Council of
The Institute of Chartered Accountants Of India
(Setup by an Act of Parliament)

Professional Updates- December 2017


Direct Tax Updates (December, 2017)

CA. V. K. Subramani, Erode,

  • 1. Clarification relating to guidelines for establishing Poem in India: The CBDT in Circular No.25 of 2017 dated 23.10.2017 has clarified that as long as the Regional Headquarter operates for subsidiaries/group companies in a region within the general and objective principles of global policy of the group laid down by the parent entity in the field of Pay roll functions, accounting, HR functions, IT infrastructure, network platforms, supply chain functions, routine banking operational procedures and not being specific to any entity or group of entities per se; it would, in itself, not constitute a case of BoD of companies standing aside and such activities of Regional Headquarter in India alone will not be a basis for establishment of PoEM for such subsidiaries/group companies. It may be mentioned that the provisions of General Anti-Avoidance Rule contained in Chapter X-A of the Income-tax Act, 1961 may get triggered in such cases where the above clarification is found to be used for abusive/aggressive tax planning.
  • 2. Extension of due date for furnishing of report in respect of international group for the financial year 2016-17: The CBDT in Circular No.26 of 2017 dated 25.10.2017 has observed that in keeping with India’s commitment to implement the recommendations of 2015 Final Report on Action 13 titled “Transfer Pricing Documentation and Country by Country Reporting”, identified under OECD Base Erosion and Profit Sharing (BEPS) Project, section 286 was inserted vide Finance Act, 2016. The due date for furnishing the Country by Country Report (CbCR) is the date specified in section 139(1) of the Act which is meant for furnishing the return of income for the relevant assessment year. The rules for furnishing CbCR are still under consideration for the financial year 2016-17. Accordingly, in exercise of its powers conferred under section 119 of the Act, in respect of all assessees covered under section 286(2) the due date prescribed for furnishing the CbCR report is extended up to 31st March, 2018.
  • 3. Exemption for cash payment to cultivator / agriculturist in respect of purchase of agricultural produce under section 269ST: The CBDT in Circular No.27 of 2017 dated 03.11.2017 took note of section 40A(3) when read with rule 6DD which carves out exception which inter alia include payments made for purchase of agricultural produce to the cultivators of such produce. However, section 269 ST provides for levy of penalty on acceptance of Rs.2 lakh or more other wise than by account payee crossed cheque or draft or by use of ECS from a person in a day or in respect of a single transaction or in respect of transactions relating to an event or occasion from a person. Accordingly, cash sale of agricultural produce by a cultivator for Rs.2 lakh or more is hit by section 269ST of the Act. As the provisions relating to quoting of PAN or furnishing of Form No.60 under rule 114B do not apply to the sale transaction of Rs.2 lakhs or less, it clarified that cash sale of agricultural produce by cultivator for an amount Rs.2 lakhs or less will not (i) result in any disallowance under section 40A(3) in the case of trader; (ii) attract prohibition under section 269ST in the case of cultivator; and (iii) require the cultivator to quote his PAN or furnish Form No.60.
  • 4. Clarification on indirect transfer provisions in case of redemption of share or interest outside India: The CBDT in Circular No.28 of 2017 dated 07.11.2017 has addressed the concerns expressed by investment funds including private equity funds and venture capital funds that on account of the extant indirect transfer provisions in the Act, non-resident investment funds investing in India which are set up as multi-tier investments structures, suffer multiple taxation of the same income at the time of subsequent reduction or by way by back. Addressing such concerns in his Budget speech on 1st February, 2017, the Finance Minister had stated that Category I and Category II Foreign Portfolio Investors (FPI) will be exempted from indirect transfer provisions. It was also stated that a clarification will be issued that indirect transfer provisions shall not apply in case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India. Vide Finance Act, 2017, Category I and Category II FPIs have already been exempted from indirect transfer provisions of the Act through insertion of proviso to Explanation 5 to section 9(1)(i) of the Act, with effect from 01.04.2015.
  • There could be situations in multi-tiered investment structures, where interest or share held indirectly by a non-resident in an Investment Fund or a Venture Capital Company or a Venture Capital Fund, is redeemed in an upstream entity outside India in consequence of transfer of shares or securities held in India by the specified funds, the income of which have been subject to tax in India. In such cases, application of indirect transfer provisions on redemption of share or interest in the upstream entity may lead to multiple taxation of the same income. In respect of Category I and Category II FPIs though, such multiple taxation will not take place on account of the insertion of proviso to Explanation 5 to section 9(1)(i) of the Act, vide Finance Act, 2017.

    The matter was examined by the Board and it has been decided that the provisions of section 9(1)(i) of the Act read with Explanation 5 thereof shall not apply in respect of income accruing or arising to a non-resident on account of redemption or buyback of its share or interest held indirectly (i.e. through upstream entities registered or incorporated outside India) in the specified funds if such income accrues or arises from or in consequence of transfer of shares or securities held in India by the specified funds and such income is chargeable to tax in India. However, the above benefit shall be applicable only in those cases where the proceeds of redemption or buyback arising to the non-resident do not exceed the pro-rata share of the non-resident in the total consideration realized by the specified funds from the said transfer of shares or securities in India. It is further clarified that a non-resident investing directly in the specified funds shall continue to be taxed as per the extant provisions of the Act.

Direct Tax Updates (November, 2017)

CA. V. K. Subramani, Erode,

  • 3. Conduct of assessment proceedings electronically in time barring scrutiny cases: The CBDT in Instruction No.8/2017 dated 29.09.2017 gave detailed guidelines for conduct of assessment proceedings electronically. This will apply to cases whose assessment proceedings are pending as on 1st October, 2017 and where hearing has not been completed. The time barring scrutiny cases in 7 metro cities viz. Ahmedabad, Bengaluru, Chennai, Kolkata, Hyderabad, Delhi and Mumbai where assessment proceedings are already underway through the ‘e-mail based communication’ and where assessee is having ‘e-filing’ account, proceeding in such cases shall be migrated to the “e-Proceeding’ module of ITBA. In respect of “Limited scrutiny” cases with Assessing Officers at the place where the Principal CIT(s) are located, option is available to the assessees for conduct of assessment proceedings through “e-Proceeding” facility of ITBA. Once this option is exercised by the assessee, all further proceedings in that case would be carried out through “e-Proceeding”.

    In time barring scrutiny assessment under ‘e-Proceeding’ the concerned assessee can also voluntarily opt out from “e-Proceeding” at a subsequent stage under intimation to the Assessing Officer. In assessments carried out through “e-Proceeding” facility, a particular proceeding may take place manually in the following situations: (i) Where manual books of account or original documents are to be examined; (ii) Where the Assessing Officer invokes section 131 or a notice is issued for carrying out third party enquiries / investigations; (iii) Where examination of witness is required to be made by the concerned assessee or the Department; and (iv) Where a show cause notice contemplating any adverse view is issued by the Assessing Officer and assessee requests for personal hearing to explain the matter.

    Records related to cases where manual proceedings were conducted and e-Proceedings were held have to be kept by the Assessing Officers. Where records of a case under “e-Proceeding” are required to be produced in appellate proceedings, before C & AG audit etc, two possible records i.e. manual – Part A (if available) & Electronic – Part B (printout copies) could be produced.

  • 2. Processing of ITR-1 under section 143(1): In Instruction No.9/2017 dated 11.10.2017 the CBDT has given instructions for processing of ITR-1. As per section 143(1)(a)(vi), while processing the return, the total income or loss shall be computed after making adjustment of addition of income appearing in Form 26AS or Form 16A or Form 16, which were not included in computing the total income in the return. In the returns filed in ITR-1 information about a particular head / item of income is furnished only on net basis and thus complete data / information may not be available therein which may enable comparison with the data / information as contained in the three forms in a meaningful manner.

    Accordingly, the Board directed that the provisions of section 143(1)(a)(vi) would not be invoked to issue intimation proposing adjustment to the income / loss so filed in ITR-1 form in such situations. However, where any head / item of income has been altogether omitted to be included in the return filed in ITR-1 while the three forms contain specific details in this regard pertaining to that item / head of income, section 143(1)(a)(vi) shall continue to apply.

    The pending intimations proposing adjustments prior to the insertion shall be dealt with in accordance with the above direction. However, where the concerned assessee in response to the intimation has filed a revised return, such return shall be treated as valid and handled accordingly.

Direct taxes Circular Updates (September, 2017)

CA. V. K. Subramani, Erode,

  • 1. Increase in payment of disputed demand pending before CIT (A) for grant of stay: The CBDT in Office Memorandum [F.No.404/72/93-ITCC] dated 31.07.2017 reviewed the guidelines issued in OM No.404/72/93-ITCC dated 29.02.2016 and observed that grant of stay till disposal of first appeal on payment of 15% of the disputed demand is on the lower side. Accordingly, it partially modified the guidelines and enhanced the limit for payment @20% of the disputed demand for grant of stay when the appeal is pending before CIT (A).
  • 2. Clarificatory Circular for levy of MAT in the case of Ind AS compliant companies: The CBDT in Circular No.24/2017 dated 25.07.2017 has clarified 14 issues for the purpose of levy of MAT for Ind AS compliant companies. They are listed below:
(i) Marked to Market (MTM) gain /losses on fair value adjustments through profit and loss account (FVTPL) shall not require any adjustment under clause (i) of the Explanation 1 to section 115JB(2). However, provision for diminution / impairment in value of assets other than FVTPL would be liable for the adjustment.

(ii) The starting point for computing book profit for Ind AS compliant companies shall be profit before other comprehensive income (Item number XIII in Part 2 (Statement of Profit and Loss) of Division II of Schedule III to the Companies Act, 2013. It is not total comprehensive income (including other comprehensive income) [Item number XV in Part 2 (Statement of Profit and Loss) of Division II of Schedule III to the Companies Act, 2013].

(iii) For computation of Transition Amount in the first year of adoption of Ind AS, the companies would prepare Ind AS financial statement for reporting year with a comparative financial statement for immediately preceding year. As per Ind AS 101, a company would make all Ind AS adjustments on the opening date of the comparative financial year. For example, if a company adopts Ind AS from 01.04.2016 it is required to prepare financial statements for the year 2016-17 and also a opening balance sheet as on 01.04.2015 to restate the financial statements for the comparative period 2015-16. In such a case, the first time adoption adjustments as of 31st day of March 2016 should be considered [i.e. the start of business on 1st day of April 2016 (or, equivalently, close of business on 31st day of March 2016)] for computation of MAT liability for previous year 2016-17 (Assessment year 2017-18) and thereafter.

(iv) As per Indian GAAP, the proposed dividend would be recognized for the year to which it pertained though it is declared in the subsequent year and section 115JB provides for addback of such proposed dividend. As per Ind AS, proposed dividend would be recognized in the year in which it is declared instead of the year for which it relates to. Accordingly, the proposed dividend of F.Y.2015-16 will be reversed and credited to retained earnings. For computing MAT the adjustment of proposed dividend will not form part of the Transition Amount as it was adjusted already while computing MAT for F.Y. 2015-16.

(v) Though Ind AS could lead to adjustments on the transition date and corresponding impact on deferred taxes, such deferred tax adjustments recorded on the transition date shall be ignored for the purpose of computing Transition Amount.

(vi) The convergence date may include adjustment of the provision for bad and doubtful debts at the time of transition. Except adjustments relating to diminution in the value of assets, other adjustments shall not be considered. Hence, adjustment relating to provision for doubtful debts shall not be considered for the purpose computing the Transition Amount.

(vii) Share application money pending allotment reclassified as ‘other equity’ on the convergence date shall not be considered for the purpose of computing Transition Amount.

(viii) While computing MAT, the profit / Transition Amount shall be increased by dividend / interest on preference shares (including DDT) whether presented as dividend or interest.

(ix) Equity component of financial instruments like Non-Convertible debentures (NCDs), interest free loan etc included in ‘other equity’ as per Ind AS would be included in the Transition Amount.

(x) The book profit of the previous year in which the items of Property, Plant and Equipment (PPE) are retired, disposed, realized or transferred shall be increased or decreased, by the revaluation amount after adjustment of the depreciation on the revaluation amount relatable to such asset.

(xi) Adjustments on account of Service Concession arrangements would be included in the Transition Amount and also on an ongoing basis.

(xii) For the assessment year 2017-18, the deduction of lower of depreciation or losses shall be allowed as on 31st March, 2016. However, for the subsequent periods, the position as per books of account drawn as per Ind AS shall be considered for deducting lower of loss or unabsorbed depreciation.

(xiii) The capital reserves or share premium existing on the convergence date as per the erstwhile Indian GAAP which are reclassified as retained earnings / other reserves under Ind AS, shall not be considered for the purpose of Transition Amount. Further it is clarified that the amount of revaluation reserve even after such reclassifications shall continue to be considered as revaluation reserve for the purposes of computation of book profit and shall also include transfer to any other reserves by whatever name called or captialised.

(xiv) For a company following December ending will be required to prepare, accounts for MAT purposes under Indian GAAP for 9 months up to December 2016 and under Ind AS for 3 months thereafter. The Transition Amount will be calculated with reference to 1st January 2017. This is in view of the second proviso to section 115JB(2) of the Act, as companies will be required to follow Indian GAAP for pre-convergence period and Ind AS for the balance period.

Direct taxes Circular Updates (August, 2017)

CA. V. K. Subramani, Erode,

  • 1. Clarificatory amendment of Circular No.1/2014: The CBDT in Circular No.23/2017 dated 19.07.2017 has clarified its earlier circular as regards deduction of tax at source under section 194J after the introduction of Goods and Services Tax. The Board has clarified that wherever in terms of agreement between the parties, the component of GST on services payable to a resident is indicated separately, tax shall be deducted without including GST on services component. GST for these purposes shall include IGST, CGST, SGST and UTGST. It is applicable from 01.07.2017.
  • 2. Relief from section 269ST for NBFCs and HFCs: The CBDT in Circular No.22/2017 dated 03.07.2017 has clarified that receipt in the nature of repayment of loan by NBFCs and HFCs by way of instalment shall be construed as ‘single transaction’ in respect of each instalment. In other words, all the instalments paid for a loan shall not be aggregated for the purposes of determining the applicability of the provisions of section 269ST.
  • 3. Revision of monetary limit for filing appeal by amending Circular No.21/2015: The CBDT in Letter (F No. 279 / Misc -142/2007/ITJ/PT) dated 14.07.2017 has explained the definition of ‘tax effect’ where the income is computed under the provisions of section 115 JB or section 115 JC. It has specified that where the income is computed under the provisions of section 115JB or section 115JC for the purpose of “tax effect”, the tax on the total income shall be computed as per the formula (A-B) + (C-D). A is the total income as per regular provisions and B is the total income that would have been chargeable as per the regular provisions reduced by the amount of disputed issues under regular provisions. C would mean the total income assessed as per provisions of section 115JB or section 115JC as the case may be and D would mean the total income that would have been chargeable had the total income as per sections 115JB or 115JC has been reduced by the amount of disputed issues under the said provisions.
  • 4. Notified persons eligible for exemption from the provisions of section 269ST: The Central Government in Notification No. SO-2065 (E) dated 03.07.2017 has specified that the provisions of section 269ST shall not apply to the following persons viz. (i) receipt by a business correspondent on behalf of a banking company or co-operative bank; (ii) receipt by a white label automated teller machine operator from retail outlet sources on behalf of a banking company or co-operative bank; (iii) receipt from an agent by an issuer of pre-paid payment instruments, in accordance with the authorization issued by RBI under the Payment and Settlements Systems Act, 2007; (iv) receipt by a company or institution issuing credit cards against bills raised in respect of one or more credit cards; and (v) receipt which is not includible in the total income under section 10(17A) of the Act. The Notification is effective from 01.04.2017.

Professional Updates- July 2017

Direct taxes Circular Updates (July, 2017)

CA. V. K. Subramani, Erode,

  • 1. Clarification on declaration in Form 15G / 15H: The CBDT in Notification No.6 of 2017 dated 30.05.2017 considered the representation as regards whether a depositor should submit one declaration in respect of income each year before each person responsible for making payment or has to submit the declaration at each and every time the payment is due to be received by him. It clarified that the amended new Forms 15G and 15H are required to be submitted furnishing details of all investments up to that date including the current fixed deposit for which the Form 15G / 15H is being given to enable the deductor / payer to ascertain, whether Form No.15G / 15H can be accepted. In other words, whenever a fresh deposit is made, Form 15G / 15H as the case may be, is to be furnished by including the previous deposits and the fresh deposit.
  • 2. Trade advance and commercial transactions out of deemed dividend provisions: The CBDT in Circular No. 19/2017 dated 12.06.2017 has clarified the trade advances which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in section 2(22)(e) of the Act. It illustrated some instances such as (i) advances paid to sister concern to be adjusted against the dues for job work done by the sister concern; (ii) advance paid to shareholder to install plant and machinery at the shareholder’s premises to enable him to do job work for the company so that the company could fulfill an export order being in the nature of business expediency; and (iii) floating security deposit given to sister concern against the use of electricity generators owned by the sister concern.
  • 3. CBDT clarification on Explanation 2 to section 132B for adjustment of seized cash against advance tax liability: The CBDT in Circular No.20/2017 dated 12.06.2017 took note of the Explanation 2 to section 132B inserted by Finance Act, 2013 w.e.f. 01.06.2013. The amendment is to clarify that the “existing liability” would not include advance tax payable in accordance with the provisions of Part C of Chapter XVII of the Act. The CBDT in the Circular has clarified that the Explanation is prospective in nature and the Department shall not file appeal on this issue for the cases prior to 01.06.2013 and those already filed may be withdrawn / not pressed upon.
  • 4. Clarification on non-applicability of the provisions of section 194-I on remittance of Passengers Service Fees (PSF) by an airline to an airport operator: The CBDT in Circular No.21/2017 dated 12.06.2017 took note of the Bombay High Court decision in CIT v. Jet Airways (India) Ltd (ITA No.1181 of 2014 dated 04.01.2017) and accepted the view of the Court. Thus payment made by airlines by way of passenger service fees to airport operator would not fall within the meaning of the word ‘rent’. Notwithstanding that the word ‘rent’ stood expanded because of the decision of the Supreme Court in Singapore Airlines and Japan Airlines (2015) 60 71 (SC) the primary requirement is that the payment must be for the use of land and building. Mere incidental / minor / insignificant use of the same while providing other facilities and service would not make it a payment for use of land and buildings so as to attract section 194-I of the Act. It advised that the Department shall not file appeal because of the settled legal position and those already filed may be withdrawn / not pressed upon.
  • 5. Cost inflation index notified: The Central Government in exercise of powers conferred by clause (v) of the Explanation to section 48 has notified cost inflation index by taking the base year as financial year 2001-02. The cost inflation index for the financial year 2017-18 is 272 and for the base year i.e. financial year 2001-02 it is 100.

  • Professional Updates- April 2017

    Direct Taxes

      • Procedure of TAN application through simplified proforma while incorporating a company electronically: The CBDT in Notification No.3 of 2017 dated 21.03.2017 in exercise of powers vested in it by the proviso to rule 114A(1) has laid down the classes of persons, forms and formats along with procedure for obtaining tax deduction and collection account number. It took note of the common application form (Form No.INC-32) notified by the Ministry of Corporate Affairs (MCA) vide Notification GSR No.70(E) dated 25.01.2017 and prescribed that the newly incorporated companies can make application for allotment of tax deduction and collection account number as part of filing the Form No.INC-32 using digital signature. After generation of Corporate Identity Number (CIN), the MCA will forward the data in Form 49B to prescribed income-tax authority through digital signature for allotment of TAN.
      • Processing of returns filed in financial year 2015-16 through TMS: In Instruction No.143 dated 17.03.2017 the CBDT has given instruction to facilitate processing of returns which are otherwise not possible of processing in AST due to various technical and non-technical reasons. It has categorized the returns into 2 categories viz. (i) where PAN is genuine and the returns are not processed in the CPC / AST due to technical hindrances such as PAN under migration, PAN deleted in de-duplication process and PAN under de-duplication or restoration; and (ii) either the PANs are invalid or the returns cannot be processed in the given PAN due to mention of invalid PAN in the return or PAN is not available or name in PAN database does not match with return name or return with one PAN issued to two different entities etc.

        The CBDT to facilitate the processing of cases falling in above categories has approved processing in Online TMS. The cases mentioned above are different in nature having different system related challenges. Therefore, two separate functionalities “Online TMS” (category 1) and “Online TMS” (category 2) have been developed. This functionality will be available till 31.03.2017 for processing time barring returns only.
      • Issue of notice under section 133(6) for verification of cash deposits under operation clean money: In Instruction No.4 of 2017 dated 03.03.2017, the CBDT has issued a Standard Operating Procedure to be followed by the Assessing Officer for Online Verification of Cash Transactions pertaining to demonetisation period. Notice under section 133(6) is to be issued after obtaining the prior approval of Pr.CIT /CIT /Pr.DIT/DIT in cases where the “person under verification” fails to file Online response in a timely manner in spite of the issue of reminder by the Assessing Officer. The notice shall be generated through the ITD system only. Hence no hand written / typed notice could be issued in an individual case. Response to the notice must be given only through Online mode. In case no response is furnished, the Assessing Officer may form a view that “person under verification” has no plausible explanation to offer regarding the cash deposit in his bank account and the case may be escalated as “Not Acceptable” for further action.

    Professional Updates- March 2017

    Direct taxes Circular Updates

    Guiding principles for determination of Place of Effective management (PoEM): The CBDT in Circular No.6 /2017 has explained the principles for PoEM. It has prescribed that a company shall be said to be engaged in "active business outside India" if the passive income is not more than 50% of its total income; and (i) less than 50% of its total assets are situated in India; and (ii) less than 50% of total number of employees are situated in India or are resident in India; and (iii) the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

    Any determination of the PoEM will depend upon the facts and circumstances of a given case. The PoEM concept is one of substance over form. It may be noted that an entity may have more than one place of management, but it can have only one place of effective management at any point of time.

    Since "residence" is to be determined for each year, PoEM will also be required to be determined on year to year basis. The process of determination of PoEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India.

    The place of effective management in case of a company engaged in ‘active business outside India’ shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India. For the purpose of determining whether the company is engaged in active business outside India, the average of the data of the previous year and two years prior to that shall be taken into account. In case the company has been in existence for a shorter period, then data of such period shall be considered. Where the accounting year for tax purposes, in accordance with laws of country of incorporation of the company, is different from the previous year, then, data of the accounting year that ends during the relevant previous year and two accounting years preceding it shall be considered.

    Some of the guiding principles which may be taken into account for determining the PoEM are as follows: (a) The location where a company's Board regularly meets and makes decisions may be the company's place of effective management provided, the Board - (i) retains and exercises its authority to govern the company; and (ii) does, in substance, make the key management and commercial decisions necessary for the conduct of the company's business as a whole. The CBDT has clarified in Circular No 8 /2017 dated 23.02.2017 that PoEM guidelines will not apply to a company whose turnover or gross receipt is Rs. 50 crore or less in a financial year.

    Standard operating procedure for verification of cash transactions relating to demonetization: In Instruction No.3 / 2017 dated 21.02.2017 the CBDT has given Standard Operating procedure viz. (i) Cases meeting the low risk criteria will be closed centrally. Cases which are not closed automatically will be pushed in batches to the AO for verification; (ii) the AO will be able to view each information record, information as submitted by the person under verification for each record and also capture the verification result. In case additional information is required, the AO will be able to send a request for additional information electronically. The person concerned will also be automatically informed about the request for additional information by e-mail and SMS. The information request will be visible to the person under verification with a hyperlink for uploading information. All the additional documents (including supporting evidence) are required to be submitted online; and (iii) the response filed by person under verification will be appraised against available information. The uploaded information can be downloaded by the Assessing Officer. In case explanation of source of cash is found justified, the verification will be closed by the AO electronically without any physical interface with the person concerned.