The Central Board of Direct Taxes recently issued final rules on transfer pricing The Central Board of Direct Taxes recently issued final rules on transfer pricing ‘safe harbours’. These are optional for a taxpayer and contain conditions and circumstances under which the transfer price adopted by the taxpayer would be accepted by the tax authority. The CBDT had earlier released draft safe harbour rules for public comments. The final rules were issued after considering stakeholder comments and addressing some of the concerns raised. The transfer price contained in the safe harbour rules will apply for five years from financial year 2012-13 and taxpayers may elect to be governed by the rules for all or any of the five years. Taxpayers would need to evaluate the impact of these rules on their inter-company pricing arrangements and consider options for transfer pricing risk management. ‘Subvention’ payments are not taxable In the case of the Handicrafts and Handlooms Export Corporation of India Ltd, the Delhi High Court ruled that “subvention” payments received from its holding company were not taxable. The court held that the amount received was meant to recoup losses and not supplement its trading receipts. Accordingly, relying on the “purpose” test espoused by the Supreme Court in earlier rulings to determine whether a receipt is on capital or revenue account, the court held that the receipt was capital in nature and not taxable. This decision reiterates that sums received voluntarily, enabling the ailing subsidiary to restore its net worth, recoup losses or protect the parent’s investments in the subsidiary may be capital in nature and, accordingly, may not be taxable. However, taxpayers would need to separately evaluate the impact of such payments in computing book profits for Minimum Alternate Tax. India-Australia tax treaty recast The Government recently issued a notification bringing into force the protocol to amend the tax treaty between India and Australia, which was signed in December 2011. While the protocol comes into force from April 2, 2013, the notification mentions various dates on which specific articles of the protocol would be effective in India. The protocol brings significant changes to the Australia DTAA (double taxation avoidance agreement), including an expanded definition of permanent establishment to cover furnishing of services, provisions related to exchange of information and assistance in collection of taxes. The protocol also introduces an article on non-discrimination in the tax treaty to prevent discrimination in tax treatment on a reciprocal basis under circumstances described. The protocol is significant, given the large volume of trade between the two countries. Is it royalty? The Mumbai Income Tax Appellate Tribunal recently ruled on whether consideration for software payments was taxable as royalty. It held that payment for software licence under a standalone agreement, which was not integral to equipment purchase, would constitute transfer/ use of copyright and consequently taxable as royalty. While the tribunal agreed with the principles of earlier court rulings that payment for software embedded in equipment/ hardware may not be taxable as royalty, it distinguished these rulings on facts. Characterisation of software payments as royalty or business profits assumes significance as royalty is subject to withholding tax, whereas business profits are typically not taxable in the absence of a business presence/ permanent establishment of the foreign enterprise in India. The contentious “software issue” is currently pending before the Supreme Court. Service tax exemption for SEZs The Government recently issued a new notification prescribing the conditions and procedures under which a Special Economic Zone (SEZ) unit/ developer can claim exemption/ seek refund/ claim credit of service tax paid on specified services received for their authorised operations. Earlier, the concept of “wholly consumed” services under the Place of Provision of Service Rules 2012 was prescribed for claiming service tax exemption. It was incumbent on the SEZ unit/ developer to demonstrate that the services were wholly consumed within the SEZ. However, now the exemption is provided to specified services used “exclusively” for authorised operations of the SEZ. While the term ‘exclusively’ is still open to interpretation and remains untested, the substantive conditions for claiming the exemption appear to have been simplified. The onus of claiming exemption continues to be on the SEZ unit/ developer.
Posted on: Wed, 09 Oct 2013 07:21:00 +0000
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