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Partner, Direct Tax
In the era of globalisation, India cannot remain aloof from developments across the globe. Globalisation has led to faster integration of global markets and economies, impacting countries’ income tax regimes. In the same light, international tax laws have become key pillars in supporting the growth of global economy, as well as in protecting local economy.
In this month’s Taxation Times, we cover:
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
A Very Happy New Year 2023-2024 for Finance Enthusiasts!
Happy Reading!
Best Regards,
UJA Tax Team
The debt and equity have been the fundamental sources of raising funds in any business. Although it is ideal for any business entity to find the right financing mix between debt and equity, but due to certain circumstances, a company may end up being highly leveraged and with a thin capital structure.
This situation in which an entity is financed through a relatively high level of debt compared to equity is referred as ‘thin capitalisation’. It refers to a situation where an entity has a high proportion of debt as compared to equity.
As a result of such high debt, the taxpayer can claim excessive deduction of interest payment on such debt from their taxable income. This is more tax friendly compared to paying a dividend on the equity, which cannot be claimed as a tax-deductible expense. For this reason, debt is often considered to be a more tax efficient method of financing vis-a-vis equity, and often leads to thin capitalization.
The amount to be disallowed while calculating the taxable income of ABC Ltd. will be
| Particulars | Amount (Rs. In Crores) |
| Total Interest (AE and Non AE) | 5 |
| (-) 30% of EBIDTA (30% of 12 cr) | (3.6) |
| 1.4 | |
| OR | |
| Total interest payable to AE | 1.6 |
| Whichever is lower needs to disallowed | 1.4 |
1. The threshold limit for the non-deductibility of interest expense may affect the private equity funds and angel investments in India where the investors have to be re-assured to invest in Indian entities considering the disallowance of interest payments, criteria in carrying forward and setting off against future profits.
2. As a result of section 94B, the foreign investors who were earlier making huge investments in Indian companies including startups in the form of debt will have to re-think their strategies and re-design investment strategies in such a manner that disallowance of excess interest under section 94B is not attracted. Further, it is to be noted that only Indian companies or PE of a foreign company in India is covered under ‘thin capitalization’ provisions. Presently, Indian partnership firms and LLPs are not covered by section 94B (unless these are PE of a foreign company) so we might see alteration in organizational structure of Indian companies to LLPs to save from the heat of the provisions of section 94B.
Facts: The assessee is a public charitable trust registered with the charity commissioner as well as income tax authorities. For the relevant year the assessee trust obtained audit report from a chartered accountant but made an inadvertent mistake of not filing the audit report along with the return of income.
In absence of any audit report the Central Processing Centre (CPC) had not granted exemption under section 11 of the Act which otherwise was available to it since many years and raised demand. The assessee trust filed a rectification application under section 154 of the Income Tax Act, 1961 against CPC but the same was rejected.
The assessee trust filed an application before Central Board of Direct Taxes (CBDT) to condone the delay in filing the audit report in Form 10B but the application was rejected by the CBDT.
Aggrieved by the order passed by the CBDT the assessee trust filed an appeal before Hon. High Court.
Held: Hon. High Court held that, Section 12A, read with section 119, of the Income-tax Act, 1961 – Charitable trust – Registration Procedure (Condonation of delay in filing Form 10B). Assessee a Public Charitable Trust had been filing returns of income in time along with audit report under section 12A(1)(B). For relevant assessment year, assessee obtained audit report from Chartered Accountant well before time, however, same could not be uploaded along with return of income inadvertently – In absence of any audit report, Central Processing Centre had not granted exemption under section 11 which otherwise was available to it since many years and resultantly demand was raised – Assessee therefore filed a rectification application under section 154, seeking to place on record audit report to Central Processing Centre but same was rejected on ground that Form No. 10B audit report, was not filed in time – Assessee filed an application before CBDT to condone delay in filing Form No. 10B audit report, however same was rejected – Whether since assessee was a public charitable trust for past 30 years and substantially satisfied conditions for availing exemption under section 11 it should not be denied exemption merely on bar of limitation especially when legislature had conferred wide discretionary powers to condone such delay – Held, yes – Whether thus, impugned order of rectification under section 154 was quashed and set aside and application for condonation of delay filed by assessee before respondent was allowed
In Favour of: The Assessee.
Facts: The assessee is a private limited company engaged in the business of providing graphic design solutions for advertising and marketing communications. On verification of Form 15CA data, it was observed that the assessee remitted huge amounts to its parent company in USA and TDS was not deducted on the same. During the assessment proceedings the Ld. Assessing Officer passed an order holding that the payments made by the assessee for marketing services to USA company is taxable in India as Fees for Technical Services (FTS)
Aggrieved by the assessment order passed by the Ld. Assessing Officer the assessee an appeal before Commissioner of Income Tax (Appeals) which granted the partial relief to the assesee.
The assessee filed an appeal before Income Tax Appellate Tribunal (ITAT) which passed an order favouring the assessee. The Income department chalanged the order of ITAT before Hon. High Court.
Held: Where assessee made payments to US Company for marketing services and scope of work was to generate customer leads using/subscribing customer data base, market research, analysis, and online research data and that service provider had not made available any technical knowledge, experience, knowhow, process or develop and transfer technical plan or technical design, in view of admitted fact that services were utilized in USA, payments so made could not be considered as royalty or FTS and hence, no TDS was required to be deducted.
In Favour of: The Assessee
Facts: The assessee is a company incorporated in Switzerland and is a tax resident of Switzerland. The Singapore branch office of the assessee, i.e. Credit Suisse Singapore Branch (“CSSB”) is registered with the Securities and Exchange Board of India (“SEBI”) as a Foreign Institutional Investor (“FII”) and conducts portfolio investments in Indian securities in its capacity as a SEBI registered FII. The assessee has a bank branch office in Mumbai, i.e. Credit Suisse Mumbai Branch (“CSMB”), which is registered with the Reserve Bank of India and undertaking Banking Operations in India. Since the assessee is a tax resident of Switzerland, the assessee had opted for benefit of the India-Swiss Confederation Double Taxation Avoidance Agreement (“Indo-Swiss DTAA”) in respect of income earned by CSSB and CSMB. The Indian branch office, i.e., CSMB, constitutes a fixed place Permanent Establishment (“PE”) of the assessee in India as per Article 5 and it has offered its income under Article 7 of the Indo-Swiss DTAA.
The Ld. Assessing Officer passed an assessment order by disallowing the interest paid by the PE to the head office and other branches etc. is an interest sourced in India and is liable to be taxed under source rule in India.
Aggrieved by the assessment order the assessee filed an appeal before CIT(A), which in turn upheld the order of the Ld. Assessing Officer.
Aggrieved by the order passed by CIT(A) the assessee filed an appeal before the Hon. Tribunal.
Held: Section 9 of the Income-tax Act, 1961, read with articles 7 and 11 of the DTAA between India and Switzerland – Income – Deemed to accrue or arise in India (Interest – Interest paid by branch to head office). Assessee had a bank branch office in India which constituted its PE – Indian AE procured loans from Singapore branch and London branch of assessee – In relevant assessment year, Indian PE paid interest to both branches – Assessee filed return and claimed said interest paid as deduction while computing business profits on Indian PE – Assessing Officer denied said claim on ground that income attributable to head office/overseas branches could not be considered as expense as there was no concept of income from self and thus, was to be taxed in hands of assessee – Whether fiction of hypothetical independence of PE and head office/overseas branch was to be restricted only for computation of profit attributable to PE – Whether thus, interest paid by Indian branch to head office/overseas branch would not be taxable in India and independent fiction approach could not be used for purpose of determining total profits of enterprise as a whole
In Favour of: The Assessee
CBDT notifies powers, functions and jurisdiction of income-tax authorities to facilitate conduct of E-Appeal proceedings
