Taxation Times

August 2023

UJA | Taxation Times August-2023
1 Introduction
2 Article : Withholding Tax on Purchase of Immovable Property
3 Case Laws 
4 Circulars and Notifications: August 2023
5 Tax Compliance September 2023
6 Tax News from around the World
Picture of by Neha Raheja
by Neha Raheja

Senior Advisor - Direct & International Tax

TDS being tedious, attracts the purchase of immovable property exceeding INR 50 lakhs. The provisions of Section 194IA of the Income Tax Act, 1961, add more compliance burdens on the buyer of the immovable property.

In this month’s Taxation Times, we cover:

  1. An article encompassing the provisions related to TDS on immovable property
  2. Case Laws from various courts and jurisdictions
  3. Tax Compliance Calendar: September 2023
  4. Circulars and Notifications – August 2023
  5. Tax news from around the world

We hope that you find this month’s edition of the Taxation Times useful. In case you have any feedback or need us to include any information to make this issue more informative, please feel free to write to us at info@uja.in.

Happy Reading!
Best Regards,
UJA Tax Team

Withholding Tax on Purchase of Immovable Property

Background and Legislative Intent

s. 194-IA of the Income Tax Act 1961 (the ITA’) was introduced by the Finance Act 2013. By virtue of this section, every transferee of an immovable property, at the time of making payment or crediting any sum as consideration for the transfer of immovable property (other than agricultural land) to a resident transferor, shall deduct tax at the rate of 1% of such sum. The provisions of this section would be applicable only to those cases where the total amount of consideration for the property exceeds INR 50 lakh. 

The Memorandum to the Finance Bill 2013 stated that the object behind the introduction of this section was to have a reporting mechanism for transactions in the real estate sector and also to collect tax at the earliest possible point in time.

Accordingly, s. 194-IA was made applicable effective June 1, 2013.

Summary & Procedural Aspects

A. Provisions of Section 194-IA
  1. Applicable when a resident transferor transfers any immovable property other than agricultural land and the immovable property is not being compulsorily acquired under any law by the government.
  2. Applicable when the total value of consideration for the immovable property exceeds INR 50 lakhs.
  3. The transferee is required to deduct TDS at the time of credit to the account of the transferor or at the time of payment of such sum, whichever is earlier, at the rate of 1% if the seller has a PAN. If the seller does not have a PAN, TDS shall be deducted at the rate of 20%.
  4. 194-IA states that TDS shall be deducted on consideration for the transfer of immovable property. Consideration for the transfer of immovable property equals all charges in the nature of club membership, car parking fees, electricity or water facility fees, maintenance fees, advance fees, or any other charges of similar nature that are incidental to the transfer of immovable property.
B. When to deduct TDS and how to pay it?

The buyer of the property has to deduct TDS at the time of credit to the account of the seller or at the time of payment of such sum, whichever is earlier. The buyer shall deposit the TDS so deducted within 30 days from the end of the month in which the TDS is deducted. The buyer has to pay the TDS and furnish particulars in Form cum Challan (26QB). 

The payment of TDS on immovable property does not require the buyer to have a TAN (tax deduction account number). The buyer is required to furnish the following information:

  1. Name and address of the buyer and seller
  2. Email ID and phone number of the buyer and seller
  3. PAN of the buyer and seller
  4. Complete address of the property
  5. Date of agreement
  6. Total consideration for the transfer of immovable property
  7. Date of payment

The buyer shall fill out Form 26QB using his PAN. It is mandatory for the seller to have a PAN too.

The buyer can choose to deposit the TDS online or offline. After the payment of TDS, the buyer shall issue the seller Form 16B within 15 days.

The buyer of the property is required to register and login on the TRACES using PAN (https://contents.tdscpc.gov.in/) to download Form 16B.

C. Consequences of Non – Deduction of TDS

In case the buyer fails to deduct TDS or late deposits, the TDS fee under s. 234E of the ITA becomes applicable.

Penalties applicable:

Penalty/InterestCalculation
Non-deduction of TDS1% per month from the date on which TDS is deductible to the date on which TDS is actually deducted
Late deposit of TDS1.5% per month from the date of deduction to the date of payment
Late filing fees under s. 234EIn case of non-filing or late filing of Form 26QB, a late filing fee of INR 200 is liable to be paid for every day such failure continues
The provisions of s. 194-IA apply to every buyer (resident or non-resident) when an immovable property is purchased from a resident seller. If the buyer is purchasing an immovable property from a non-resident seller, the provisions of s. 195 are applicable. It is advisable that a buyer adhere to the conditions as prescribed by s. 194-IA and timely deduct the TDS and also make payment of the same. Further, the provisions of s. 194-IA are quite clear, but there are certain instances that may require the assistance of an expert and need interpretation in the light of various case laws. In such cases, it is always advisable to seek guidance to ensure adequate compliance.

Case Laws

Edenred SE v/s Deputy Commissioner of Income Tax [2023] 153 taxmann.com 161 (Mumbai-Trib.)
Reference: Section 9 of the Income Tax Act, 1961, read with Article 13 of the DTAA between India and France

Facts:
The assessee is a company formed and incorporated in France and belongs to the Edenred group of companies, which operate worldwide. Edenred Group, which invented ticket restaurants and meal vouchers, is a world leader in prepaid corporate services and designs and delivers solutions that make employees’ lives easier and improve the efficiency of the organisation. Edenred operates in 40 countries with around 6,000 employees, nearly 610,000 companies and public sector clients, 1.3 million affiliated merchants, and 38 beneficiaries. The assessee is offering a range of services, from pure consulting to all aspects of communication development and implementation, including the sourcing of loyalty rewards. The assessee is also engaged in providing agreed services to its group companies, viz., Edenred (India) Private Limited, Royal Image Direct Marketing Private Limited, and SurfGold.com (India) Private Ltd. The assessee filed the return of income for A.Y. 2019-20 on November 29, 2019, declaring total income of Rs. 1,67,80,082/-. The case was selected for scrutiny under CASS, and the statutory notices were duly served on the assessee. 

The assessee, while filing the return of income, offered the income from the licence fee and guarantee fee. With regard to the management service fees and TSIS service fees, the assessee did not offer the same to be taxed for the reason that the same is not liable to be taxed as per Article 13 read with the protocol of the India-France DTAA along with Article 12 of the India-Finland DTAA/India-USA DTAA. The Assessing Officer taxed the management fees and TSIS service fees as royalty or Fee for Technical Service (FTS) and levied tax at 10% under the beneficial rate as per the DTAA.

Before the DRP, the assessee made a claim that the guarantee fee was also not liable to be taxed in India. The DRP confirmed the addition made towards management fees and TSIS services by relying on its own order for AY 2015-16. With regard to the fresh claim made by the assessee towards the guarantee fee, the DRP did not admit the claim of the assessee.

Held: 
Assessee, a French company, entered into a management agreement with its Indian group companies in order to provide management services in connection with the business and operations of said companies. Services broadly include consultancy services to support sales activities, technical services, technical control, legal and financial advisory assistance, computer services, human resources, communication, etc. 

The Assessing Officer treated management service fees as ‘fee for technical services (FTS) under Section 9(1)(vii) and considered them taxable in India since services were used within India. Assessee submitted that since the make available clause was not satisfied in this case, as elaborated in the memorandum to the India-US Treaty, such services could not be taken as FTS either as per the India-Finland Treaty or the India-US Treaty as per the most favoured nation (MFN) clause. Thus, the assessee submitted that the amount was not taxable in India. 

DRP upheld the addition made by the assessing officer. It was noticed that the co-ordinate bench in the assessee’s own case for assessment years 2017-18 and 2018-19 considered similar issues and held that since there was no use or right to use any copyright, patent, trademark, design, etc. and further, there was no sharing of any confidential information by  the assessee with Indian group companies, management service fee received by the assessee would not be in the nature of royalty.

Whether the facts and nature of services rendered by the assessee being identical for year under consideration, management fees received by the assessee from Indian group companies should not be treated as FTS and accordingly, not be taxable in India. 
In Favour of: The Assessee

Automation Anywhere Inc. v/s Deputy Commissioner of Income Tax [2023] 153 taxmann.com 629 (Delhi-Trib.)
Reference: Section 9 of the Income Tax Act, 1961, read with Article 5 of the DTAA between India and the USA

Facts

The assessee, a US resident, was developing an RPA software platform using AI technology and providing associated services. The assessee earned revenue from two streams in India, i.e., fees from software licences and fees from rendering services. A fee from the rendering of services was offered to be taxed in India by the assessee by treating it as a fee for technical services (FTS) or a fee for included services (FIS). Whereas, the receipt from the sale of a software licence was treated as business income and not offered to be taxed in India in the absence of PE in terms of Article 7 of the India-USA Double Taxation Avoidance Agreement (DTAA).

In the course of assessment proceedings, the Assessing Officer called upon the assessee to furnish the details of all associated enterprises (AEs) in India and the international transactions entered into with them in the relevant assessment years. He also called upon the assessee to furnish a copy of the audit report in Form 3CEB as well as the agreements entered with the AEs in India. He also called upon the assessee to furnish details of employees visiting India to provide services in the relevant assessment years. The assessing officer concluded that the assessee has fixed PE in India and passed a draft assessment order by attributing 25% of revenue earned from the sale of software licences.

Against the draft assessment orders so framed, the assessee raised objections before learning DRP. However, the objections were rejected.

Against the objections of DRP, the assessee filed an appeal before ITAT.

Held:
Assessee, a US resident, was developing an RPA software platform using AI technology, along with providing associated services. Assessee contended that receipts from licence sales, supplied from and received outside India, were not taxable in India. Assessing Officer claimed that a number of employees of the assessee had visited India for a long duration and performed core business activities of the assessee from the premises of the Indian AE, AASPL. Thus, in sum and substance, Assessing Officer alleged that the premises of AASPL constituted the fixed place PE of the assessee in India. However, from the details of employees visiting India, duration of stay, and purpose for which they visited, it is observed that none of the employees came for the purpose of either the development or sale of or any activity related to the development and sale of the RPA software platform. 

From the materials on record, it did not appear that any of the employees visiting India were carrying on any activity with regard to the sale of licences. Thus, there was nothing to demonstrate that assessee had carried out any activity, either wholly or partly, in relation to the sale of software licences through an alleged PE in India so as to satisfy the conditions of Article 5(1) read with Article 5(2). Therefore, revenue having failed to establish on record through credible evidence that assessee had a fixed-placed PE in India through which it had earned income relating to the sale of software licences, no part of such income could be attributed to PE. 

In Favour of: The Assessee

Cummins India Ltd. v/s Assistant Commissioner of Income Tax [2023] 153 taxmann.com 223 (Bombay)
Reference: Section 92C of the Income Tax Act, 1961

Facts:
Assessee is engaged in the business of manufacture and sale of internal combustion engines, spares, components (including bought-outs) thereof, and generating sets; service of engines and gensets; generating sets; and allied equipment, etc. Assessee also has a 100% export-oriented unit at Pirangut, which is engaged in the manufacture and export of internal combustion engines and their accessories, as well as generator sets and accessories. The returns filed by the assessee were selected for scrutiny assessment by issuing statutory notices under sections 143(2) and 142(1) of the Act. During the years under consideration, the assessee entered into various international transactions with its associated enterprise(s) in the course of its business. The assessee had paid a royalty to its associated enterprise, i.e., Cummins Inc., for providing technical know-how and technical knowledge for the manufacturing of engines to be sold to customers.

During the transfer pricing proceedings, the assessee explained to the TPO that for benchmarking royalty transactions, it has aggregated the royalty paid with other transactions relating to the manufacturing of IC engines as these transactions are closely linked. The TPO rejected the contention of the assessee and held that for royalty, the CUP method is the most appropriate method and not TNMM. Afterwards, the assessing officer passed a draft assessment order incorporating an upward adjustment.

Aggrieved by the draft assessment order, the assessee filed its objections before Hon. DRP, who also rejected the contention of the assessee and directed the assessing officer to pass the final assessment order.

The assessee filed an appeal before the Hon. ITAT against the final assessment order, but the Hon. ITAT upheld the order passed by the assessing officer.

Finally, the assessee filed an appeal before the Hon. High Court.

Held
Assessee-company made payment of royalty for use of technology to its foreign-based AE. The assessee benchmarked this transaction along with other international transactions involving export sales under the overall ‘manufacturing segment. The assessee used TNMM to benchmark all its international transactions. – TPO segregated international transactions of payment of royalty from other international transactions of the assessee and used the CUP method to benchmark said transactions. – Whether transactions of payment of royalty for use of technology were inextricably linked with manufacturing activity and should be aggregated with other international transactions in the manufacturing segment for purposes of benchmarking the same. Whether having accepted TNMM as the most appropriate method, it was not open to TPO to subject only one element, i.e., payment of the technical assistance fee, to an entirely different (CUP) method, as this would lead to chaos and be detrimental to the interests of both the assessee and revenue.

In Favour of: The Assessee

Circulars and Notifications August 2023

Notifications

CBDT notifies Rule 11UACA for the computation of income chargeable to tax under clause (xiii) of sub-section (2) of Section 56

CBDT notifies a revision in the valuation of rent-free accommodation under the Income Tax Act, 1961

CBDT notifies Rules 13 and 13A to implement FA 2023 amendments related to search and seizure

Circulars

Guidelines under clause (10D) of Section 10 of the Income Tax Act, 1961

Press Release:

Direct Tax Collections for F.Y. 2023-24 up to 10.08.2023

New record of over 6.77 crore income tax returns (ITRs) filed till July 31, 2023; record growth of 16.1% YOY

CBDT launches the revamped national website of the Income Tax Department

Operationalization of the Board for
Advance Rulings

Tax Compliance: September 2023

07 September 2023

  • Due date for deposit of tax deducted or collected for the month of August, 2023. However, all sums deducted or collected by an office of the government shall be paid to the credit of the Central Government on the same day that tax is paid without the production of an income-tax challan.

14 September 2023

  • Due date for issue of TDS Certificate for tax deducted under Section 194-IA/194-IB/194M/194S in the month of July, 2023.

15 September 2023

  • Second installment of advance tax for the assessment year 2024–25.

30 September 2023

  • Due date for furnishing of challan-cum statement in respect of tax deducted under Section 194-IA, Section 194-IB, and Section 194M in the month of  August, 2023.

Due date for filing of an audit report under Section 44AB for the assessment year 2023–24 in the case of a corporate assessee or non-corporate assessee (who is required to submit his or her return of income on October 31, 2023).

Quarterly statement of TCS deposited for the quarter ending June 30, 2023.

Note: The due date for furnishing the TCS statement has been extended from June 30, 2023, to September 30, 2023, vide Circular no. 9/2023, dated June 28, 2023.

Quarterly statement of TDS deposited for the quarter ending June 30, 2023.

Note: The due date for furnishing the TDS statement has been extended from June 30, 2023, to September 30, 2023, vide Circular No. 9/2023, dated June 28, 2023.

Tax News from Around the World

New Zealand plans digital services tax for multinationals from 2025
Biden administration unveils new crypto tax reporting rules
Italy PM Meloni takes ‘full responsibility’ for bank tax

China extends tax breaks for foreign workers until 2027

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