India has signed the Multilateral Convention (MLC&), which was formulated by OECD, to implement tax treaty related measures to prevent Base Erosion and Profit Shifting (BEPS). The signing ceremony was held at Paris on June 7, 2017 during which more than 65 countries had signed the MLC, while few countries had expressed their intent to sign.

At the time of signature, the signatories submitted a list of their tax treaties in force which they intend to designate as Covered Tax Agreements ('CTA') i.e. treaties to be modified through the MLC. Along with the list of CTAs, signatories also submitted a preliminary list of their reservations and notifications in respect of various provisions of the MLC.

The MLC will be applicable simultaneously with CTAs, modifying their application in order to implement the BEPS measures.

(Contributed by: Mr. Anuj Mathur/ Ms. Purnima Bajaj)

In order to lay down special provisions (dealing with the computation of total income, treatment of unabsorbed depreciation, set off or carry forward of losses and avoidance of tax) for companies being regarded as Resident in India under the POEM framework, Section 115JH of the Income-tax Act was introduced vide Finance Act, 2016. The said provisions empower the CBDT to lay down exceptions, modifications and adaptations required for computing income chargeable to tax in respect of such foreign companies. The CBDT has now issued a press release and a draft notification providing such exceptions, modifications and adaptations.

The draft notifications clarifies that the rate of tax of applicable for such foreign companies shall continue to apply, despite their residential status. Also, provisions which are specifically applicable to a foreign company shall continue to apply. However, provisions which distinguish between the assessees based on their residential status, provisions applicable for residents shall apply to such companies regarded as ‘Residents’. 

The draft notification also cover following aspects:

• Determination / adoption of opening written down value of depreciable assets;
• Determination / adoption of brought forward losses and unabsorbed depreciation;
• Requirement of preparation of financial statements in a case where the accounting year of such foreign company doesn't end on 31 March;

It may be noteworthy that this is a draft notification and comments and suggestions of stakeholders have been invited thereon. Once finalised the provisions of this notification shall be deemed to have come into force from April 1,  2017.

CBDT vide Notification No. 53/2017 with effect from June 16, 2017, has amended Application Form (Form 3CED) for Advance Pricing Agreement (APA) through the Income-tax (16th Amendment) Rules, 2017.

The amended Form 3CED now requires the applicant to additionally furnish name, address, country of residence and taxpayer identification number of the immediate parent company and the ultimate parent company of the applicant and taxpayer identification number of the Associated Enterprise with whom APA is requested.

(Contributed by: Ms. Shweta Kapoor)

In terms of second proviso to section 92C(2) of the Act, if the variation between the Arms Length Price and the price at which the international / specified domestic transaction has been undertaken falls within the tolerance range (i.e. the variation does not exceed percentage notified by CBDT), the transaction is deemed to be at Arms Lengh Price.

In view of the aforesaid provisions of the Act, CBDT vide notification no. 50/2017 dated June 9, 2017, has notified variance limit of 1% for wholesale trading and 3% for all other transactions for AY 2017-18 and 2018-19. The same variance limit was applicable for the earlier year AYs’, i.e. 2013-14 to 2016-17 as well. The aforesaid notification also lays down the conditions for a transaction to qualify as a wholesale trading.

The Finance Act, 2017 inserted a new Section 92CE, which provides for adjustment in the books of accounts of the assessee (“secondary adjustment”), where as a result of a transfer pricing adjustment (“primary adjustment”), there is an increase in the total income or reduction of loss, as the case may be, of the assessee. The section further requires repatriation of the excess money equal to the difference of Arm’s Length Price (“ALP”) determined in primary adjustment and the price at which international transaction has been actually undertaken by the assessee within the time limit, as may be prescribed by the CBDT. In case of failure to repatriate the excess money within the prescribed time limit, such excess money shall be treated as an advance made by the assessee to such associated enterprise and interest on such advance shall be computed in the manner as the CBDT may prescribe.

In view of the aforesaid provisions, CBDT vide notification 52/2017 dated June 15, 2017, has notified Rule 10CB under the Income-tax Rules, 1962, prescribing the time limit for repatriation of excess money to be ninety days from:-

• The due date of filing return of income under section 139(1) of the Income-tax Act, where the assessee has suo moto made primary adjustment to transfer price in its return of income;
• The date of the order of Assessing Officer or the appellate authority, as the case may be, if the primary adjustments to transfer price as determined in the aforesaid order has been    accepted by the assessee;
• The due date of filing of return under section 139(1) in case the agreement for advance pricing has been entered into by the assessee under section 92CD;
• The due date of filing of return under section 139(1)  in the case of option exercised by the assessee as per the safe harbour rules under section 92CB; or
• The due date of filing of return under section 139(1)  in the case of an agreement made under the mutual agreement procedure under a Double Taxation Avoidance Agreement entered into under section 90 or 90A.

In case the money is not repatriated within the time limit, interest on excess money is to be computed at the following prescribed rate:

• where the international transaction is denominated in Indian rupee, 1 year Marginal Cost of Lending Rate (MCLR) of SBI as on 1st of April of the relevant previous year plus 325 basis points;
• where the international transaction is denominated in foreign currency, 6 month LIBOR as on 30th  September of the relevant previous year plus 300 basis points

The above provision shall be applicable to primary adjustment exceeding one crore rupees made in respect of AY 2017-18 and onwards.

The Central Board of Direct Taxes (“CBDT”), vide notification 46/2017 dated June 7, 2017, notified Income-tax (12th Amendment) Rules, to amend Safe Harbour Rules (“SHR”) for international transactions. The amended SHR will be applicable from Assessment Year (‘AY’) 2017-18 to AY 2019-20. For AY 2017-18, the taxpayer can choose from the existing or amended SHR, whichever are more beneficial.

The amended SHR have:-

• reduced the safe harbour rate in respect of various services,
• added “Low-Value added intra-group services” to the eligible transactions,
• prescribed/ reduced limit of the value of international transaction for applicability of SHR, etc.

The detailed comparison of amended SHR vis-à-vis existing SHR is enclosed as Annexure-1.

With the introduction of Section 194IB by the Finance Act, 2017, the Central Government has widened the scope of Tax Deducted at Source (TDS). It covers Individual and Hindu Undivided Family, other than those to whom the provisions of section 44AB are applicable, to deduct and pay TDS @ 5% on the payment made by way of rent exceeding fifty thousand rupees for a month or part of a month during the financial year. This amendment is applicable from 1 July 2017.

To give effect to the aforesaid amendment, Rule 30, 31 and 31A has been amended.

TDS is required to be deposited within a period of thirty days from the end of the month in which the deduction is made and shall be accompanied by a challan-cum statement in Form 26QC.

Further, TDS certificate in Form no. 16C is required to be issued to the payee within 15 days from the due date for furnishing the challan-cum statement in Form 26QC.

(Contributed by: Ms. Shilpa Sharma)

With the introduction of Section 194IB by the Finance Act, 2017, the Central Government has widened the scope of Tax Deducted at Source ('TDS'). It covers Individual and Hindu Undivided Family, other than those to whom the provisions of section 44AB are applicable, to deduct and pay TDS @ 5% on the payment made by way of rent exceeding fifty thousand rupees for a month or part of a month during the financial year. This amendment is applicable from 1 July 2017.

To give effect to the aforesaid amendment, Rule 30, 31 and 31A has been amended.

TDS is required to be deposited within a period of thirty days from the end of the month in which the deduction is made and shall be accompanied by a challan-cum statement in Form 26QC.

Further, TDS certificate in Form no. 16C is required to be issued to the payee within 15 days from the due date for furnishing the challan-cum statement in Form 26QC.

(Contributed by: Ms. Shilpa Sharma)

Characterization of a particular expenditure as capital or revenue has always been a contentious aspect. In this regard, The Hon'ble Supreme Court, in a recent judgement, while upholding the decision of the Hon'ble Allahabad High Court has held that expenditure incurred under a Technical Collaboration Agreement (TCA) for setting up of a new plant for the first time to manufacture cars is in the nature of the capital expenditure. Under the TCA, the Licensor agreed to provide license and technical knowhow necessary for the establishment of plant, machinery & manufacture of the product with the help of such know how.

 The decision of the Apex court was based on the following aspects:

• The Assessee, being a joint venture company of Honda Motors Company Limited, Japan and M/s Siel Ltd., was incorporated with the objective to manufacture Automobiles and parts in India.
• The terms of the TCA clearly suggested that the existence of the assessee was dependent on the TCA and if the same was to be terminated, joint venture would come to an end itself.

While rendering its decision, the Hon'ble Supreme Court relied upon the principles laid down in its earlier decision in the case of Alembic Chemical Works Co. Ltd. Vs Commissioner of Income Tax, Gujarat, (1989) 43 Taxman 312 (SC). In the said decision, it was held that payment of knowhow fee, whether it is to be considered as revenue or capital expenditure, would depend upon whether technical know how is for setting up a new business, acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, constituting a capital expenditure. On the other hand, if it is not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure.

In view of the aforesaid principle, the Hon’ble Court held that the instant expenditure is of capital nature and therefore not an admissible expenditure.

(Contributed by: Ms. Ritu Gyamlani)

In a recent decision in the case of Principal Commissioner of Income tax v. Meenakshi Overseas (P.) Ltd [2017] 82 taxmann.com 300 (Delhi), the High Court of Delhi has held that reassessment proceedings are invalid where it is based on the information from DIT(Investigation) (“DIT(I)”) and there is no independent application of mind by the tax officer for forming the belief that the income has escaped assessment.

In the instant case, information was received from the DIT (I) that the assessee had received accommodation entries from a beneficiary.

Notice under section 148 was issued for income escaping assessment and the assessment order was passed by the tax officer treating the ‘credit received’ as unexplained income. The appeal of the assessee before the Commissioner (Appeals) was dismissed.

On appeal before the Tribunal, the Tribunal came to the conclusion that the tax officer proceeded to send a notice under Section 147/148 solely on the basis of information received from the DIT(I). On the basis of such information, the tax officer jumped to the conclusion that the assessee has received accommodation entry and no further verification, examination or any other exercise was done.

Following the decision in Pr.CIT v. G & G Pharma [2015] 384 ITR 147, the Tribunal held that the tax officer had not applied his mind at the time of initiating the proceedings of reassessment under Section 147 of the Act. The Tribunal observed that the 'reasons to believe' that the income has escaped assessment, as recorded by the tax officer, are not in fact reasons but only conclusions, one after the other.

On appeal,  the High Court noted that since the original assessment was processed under Section 143 (1) of the Income-tax Act and not Section 143 (3), the proviso to Section 147 will not apply i.e. even though the reopening in the present case was after the expiry of four years from the end of the relevant assessment year, it was not necessary for the tax officer to show that there was any failure by the assessee to disclose fully or truly all material facts necessary for the assessment, while issuing notice for reassessment.

The High Court, perusing the reasons as recorded by the tax officer, observed that reasons as recorded by the tax officer have three parts to it. In the first part, the tax officer has reproduced the precise information he has received from the Investigation Wing of the Revenue. This information is in the form of details of the amount of credit received, the payer, the payee, their respective banks, and the cheque number.  The High Court held that this information by itself cannot be said to be tangible material.

In the second part, the tax officer straightaway recorded the conclusion that the above said instruments are in the nature of accommodation entry which the Assessee had taken after paying unaccounted cash to the accommodation entry given.  The High Court observed that what led him to form the belief that income escaped assessment is absent. The High Court further observed that the third and last part contains the conclusion drawn by the tax officer that in view of these facts, "the alleged transaction is not the bonafide one.

Based on the above, the High Court observed that the source for all these conclusions is the Investigation report of the DIT(I). Nothing from that report is set out to appreciate how the conclusions flow therefrom. The tax officer has made no effort to set out the portion of the investigation report which contains the information specific to the assessee. He also did not examine the return already filed to ascertain if the entry has been disclosed therein. Thus, the crucial link between the information made available to the tax officer and the formation of belief is absent.

The High Court held that while the report of the Investigation Wing might constitute the material on the basis of which tax officer forms the reasons to believe, however, the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The reasons must be self-evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing.

On the present facts, the High Court held that the reasons to believe contain, not the reasons, but the conclusions of the tax officer. There is no independent application of mind by the tax officer to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the tax officer are at best a reproduction of the conclusion in the investigation report, and as such it is a 'borrowed satisfaction'. The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment.

The High Court therefore held that the Tribunal was right in concluding that the initiation of the proceedings under section 147/148 of the Act to open the assessment does not satisfy the requirement of the law and thus held that proceedings were invalid.

(Contributed by: Ms. Manali Gupta)

Service Tax

• CBEC wide Notification No 18/2017-Service Tax, dt. 22-06-2017 has notified August 15, 2017 as the due date to file service tax return for the period April 1, 2017 to June 30, 2017. The same can be revised within 45 days from the date of submission of the return. 

Customs

• DGFT wide Trade Notice No.09/2018, dated 12-06-2017 has made changes in IEC with the introduction of GST. It has been decided that importer/exporter would need to declare only GSTIN at the time of import or export of goods. The PAN level aggregation of data would automatically take place  in the system. Since obtaining GSTIN is not compulsory for all importers/exporters below a threshold limit of turnover, all might not have GSTIN.  As a measure of ease of doing business PAN of an entity will be used for the purpose of IEC as it has been decided to keep the identity of an entity uniform across the Ministries/ Departments.

Goods & Service Tax

• CBEC wide Notification No 05/2017-Central Tax, dated 19-06-2017 has exempted those persons from obtaining registration under GST who are only engaged in making taxable supplies of goods or services or both, the total tax on which is liable to be paid under reverse charge mechanism by the recipient of such goods or services or both.

(Contributed by: Mr.Shashank Goel/ Mr.Karan Chandna)

All the States including Jammu & Kashmir and Union Territories have passed the State Goods and Services Tax Bill, 2017 or UT Goods & Service Tax Bill, 2017 during the special session of the Legislative Assembly.

The government, through a press note has deferred the implementation of TDS and TCS provisions for two categories of deductors - government, including local authorities, and e-commerce companies and their suppliers. This provision has been kept in abeyance.

All the States including Jammu & Kashmir and Union Territories have passed the State Goods and Services Tax Bill, 2017 or UT Goods & Service Tax Bill, 2017 during the special session of the Legislative Assembly.

The government, through a press note has deferred the implementation of TDS and TCS provisions for two categories of deductors - government, including local authorities, and e-commerce companies and their suppliers. This provision has been kept in abeyance.

Much awaited GST legislation has been rolled out in India w.e.f 01st July, 2017. Vide various notifications, Government, on recommendations of the Council, has notified 17 set of GST Rules. List of such rules are as follows:

• Composition Rules
• Registration Rules
• Determination of Value of Supply Rules
• Input Tax Credit Rules
• Tax Invoice, Credit or Debit Note Rules
• Account and Records Rules
• Return Rules
• Payment of Tax Rules
• Refund Rules
• Assessment and Audit Rules
• Advance Ruling Rules
• Appeal and Revision Rules
• Transitional Provisions Rules
• Anti-Profiteering Rules
• Inspection, Search and Seizure Rules
• Demand and Recovery Rules
• Offences and Penalties Rules

Apart from above, Government has notified that till such time as an E-way bill system is developed and approved by the Council, the Government may notify the documents that person in charge shall carry while the goods  are in movement or in transit storage.

The Government, on recommendation of Council, has also notified tax rate for Goods and Services and list of exempted Goods and Services. Further, the list of goods or services on which tax would be payable under Reverse charge mechanism (RCM) has also been notified. 

As per recommendation of GST Council, Government has revised the threshold limit for opting composition levy to Rs. 75 Lakhs from Rs. 50 Lakhs to provide relief to many more small businesses. Further, such increased limit is not applicable on below mentioned states (i.e. limit of composition levy on below mentioned states is still Rs. 50 Lakhs):

• Arunchal Pradesh
• Assam
• Mizoram
• Manipur
• Meghalya
• Nagaland
• Tripura
• Sikkim
• Himachal Pradesh

The Government has also notified that the manufacturers of Ice-cream, Pan Masala and Tobacco are not eligible to opt for composition levy.

The Government has also relaxed GST return filing timelines for the month of July and August by deferring returns filing due date.  GSTR-1 reflecting invoice wise outward supply details for July can be filed in the system by September 5, while that of August can be filed by September 20 . Further, it introduced a single-page summary Form GSTR-3B for said two months which is to be filed on self-declaration basis reflecting supplies and output tax liability for July & August by August 20 & September 20 respectively.
    
For recently implemented GST legislation, new registrations have begun from June 25, 2017.

A start-up company means a private company incorporated under Companies Act, 2013 or Companies Act, 1956 and recognised as start-up in accordance with the notification issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

In the notification no. G.S.R. 5AD3 (E), dated 13th June, 20017 the start-up companies have been provided the following exemptions:

• Preparation of cash flow statement
• Acceptance of deposits from its members within five years from the date of incorporation without fulfilling the prescribed conditions of clause (a) to (e) of Section 73(2) of the Act.
• The annual return filed in e-form MGT-7 needs to be digitally signed either by the company secretary or by any director of the company and the digital signatures of company secretary in practice are not required. 
• Instead of four board meetings in a year, it should hold at least one board meeting in each of the half calendar year and the gap between two meetings is not less than ninety days.

(Contributed by: Ms. Shikha Nagpal)

A start-up company means a private company incorporated under Companies Act, 2013 or Companies Act, 1956 and recognised as start-up in accordance with the notification issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

In the notification no. G.S.R. 5AD3 (E), dated 13th June, 20017 the start-up companies have been provided the following exemptions:

• Preparation of cash flow statement
• Acceptance of deposits from its members within five years from the date of incorporation without fulfilling the prescribed conditions of clause (a) to (e) of Section 73(2) of the Act.
• The annual return filed in e-form MGT-7 needs to be digitally signed either by the company secretary or by any director of the company and the digital signatures of company secretary in practice are not required. 
• Instead of four board meetings in a year, it should hold at least one board meeting in each of the half calendar year and the gap between two meetings is not less than ninety days.

(Contributed by: Ms. Shikha Nagpal)

Earlier the MCA had issued a notification No. G.S.R 464(E) dated 5th June, 2015 (hereinafter referred to as ‘principal notification’) for providing exemptions to private companies from various provisions of the Companies Act. 

Now, MCA vide its Notification No. G.S.R 583(E) [hereinafter referred to as ‘revised notification’] dated 13th June, 2017 has amended the principal notification. 

The significant amendments brought out by the revised notification are as under:

(i) Presently, as per the Companies (Acceptance of Deposits) Rules, 2014, exemption was provided to private companies to accept deposits from its members without fulfilling the prescribed conditions of clause (a) to (e) of Section 73(2) of the Companies Act, provided that the amount of deposits should not exceed 100% of aggregate of paid up share capital, free reserves and securities premium account.

Now the exemption has been broad based and in addition to the above, a private company can accept deposits from its members without any upper limit/cap and without complying with the provisions of clause (a) to (e) of Section 73(2), provided it fulfils all the following conditions:

• it is not an associate or a subsidiary company of any other company;
• the borrowings from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crores rupees, whichever is lower; and
• it has not defaulted in the repayment of such borrowings as subsisting at the time of accepting deposits.

(ii) Under the provisions of Section 92(1)(g) of the Act, pertaining to Annual Return, all companies were required to disclose the remuneration of directors and Key managerial personnel [KMP]. Now, those private companies which are small companies [i.e. turnover does not exceed Rs 2 crores and paid up capital does not exceed Rs 50 lakhs and the company is not a holding or a subsidiary or Section 8 company] are required to disclose the aggregate amount of remuneration drawn by their directors.

(iii) Pursuant to the provisions of Section 143(3)(i) of the Act, for all the companies the auditors were required to report about the adequacy of internal financial controls system. Now, private companies are exempted from this provision, provided that:

• Such private company is a one person company or a small company i.e.; or
• Such private company’s turnover is less than Rs 50 crores as per the latest audited financial statement and aggregate borrowings from banks, financial institutions or any body corporate at any point of time during financial year is less than Rs. 25 crores

(iv) Pursuant to Section 174(3) of the Act, the directors, being not less than two, who are not interested and present at the meeting shall constitute the quorum.

Further, as per Section 184(2) a director who is in any way interested in a contract or arrangement entered / to be entered with a body corporate/firm /any other entity was required to disclose his interest at the board meeting and was not allowed to participate in such meeting. Subsequently, with the principal notification coming into effect, in a private company, under Sec 184(2) an interested director was allowed to participate in the meeting after disclosure of interest. However the principal notification did not alter the position prescribed in Sec 174(3). Accordingly, it was not clear that the interested director will also constitute quorum under Sec 174(3), or can only participate in discussions but will not form quorum. Now, this anomaly has been removed as the revised notification states that in a private company under Sec 174(3) an interested director will also be counted towards quorum, provided he has disclosed his interest.

Although Sec 174(3) and Sec 184(2) have now been reconciled, however Section 188 and the relevant Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 still remains unchanged. As per the said rule, an interested director shall not be present at the meeting during discussions on the matter, with respect to related party transactions specified under Section 188. Therefore, a clarification in this regard should be issued by MCA.

Till now, in accordance with the provisions of Section 139(2) of the Companies Act, 2013 read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014, all private limited companies having paid up share capital of Rs 20 crores or more, or having public borrowings from financial institutions, banks or public deposits of Rs 50 crores or more were required to comply with the provisions relating to rotation of auditors.

In this regard, the Ministry of Corporate Affairs [MCA] vide Notification No. G.S.R. 621(E) dated 22nd June, 2017 has notified Companies (Audit and Auditors) Second Amendment Rules, 2017 [hereinafter referred to as “amendment rules”] in order to amend the Companies (Audit and Auditors) Rules, 2014. The amendment rules have come into force with effect from 22nd June, 2017.

Through the amendment rules, the limit of paid up capital of Rs 20 crores has now been increased to Rs 50 crores. It may be noted that the earlier limit of public borrowings / public deposits of Rs 50 crores remains unchanged.

The Ministry of Corporate Affairs vide notification dated December 07, 2016 had notified the Companies (Transfer of Pending Proceedings) Rules, 2016 and the same was effective from December 15, 2016.

Now, the Ministry of Corporate Affairs vide its notification dated June 29, 2017 has introduced the Companies (Transfer of Pending Proceedings) Second Amendment Rules, 2017 to amend the Companies ((Transfer of Pending Proceedings) Rules, 2016.

The impact of the above mentioned notifications are provided hereunder:

(Contributed by: Ms. Rakhi Chanana/ Ms. Vandana Jaiswal)