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ICAI Submits Post Budget Memorandum 2013 - Direct Taxes
April, 04th 2013
POST-BUDGET MEMORANDUM - 2013




        DIRECT TAXES




THE INSTITUTE OF CHARTERED
  ACCOUNTANTS OF INDIA
         NEW DELHI
         POST-BUDGET MEMORANDUM - 2013

       INTRODUCTION

1.0    The Council of the Institute of Chartered Accountants of
       India considers it a privilege to submit this Post-Budget
       Memorandum to the Government.

1.1    In this memorandum, we have suggested certain amendments
       to the proposals contained in the Finance Bill, 2013 which
       would help the Government to achieve the desired objectives.




1.2    We have noted with great satisfaction that the suggestions
       given by the Committee in the past have been considered very
       positively. Certain representations made in the post-budget
       memorandum of earlier years have formed the basis of
       amendments proposed in the current Finance Bill. In
       formulating our suggestions in regard to the Finance Bill
       2013, the Direct Taxes Committee of the ICAI has considered
       in a balanced way, the objectives and rationale of the
       Government and the practical difficulties/hardships faced by
       taxpayers and professionals in application of the Income-tax
       Act, 1961. We are confident that the suggestions of the
       Direct Taxes Committee of ICAI given in this Memorandum
       shall receive positive consideration. The representations made
       by the Direct Taxes Committee of the ICAI in the last few
       years which have resulted in legislative changes are given
       below to illustrate the positive outcome of such suggestions ­
  Sl.     In                 Relevant Issues ­
  No. relation to           Suggestions of ICAI         Action taken
          Finance
            Bill
  I.    2008        1.    Computation of Book Considered       in
                          Profit u/s 115JB ­ Finance Act, 2008
                          exclusion of deferred tax
                          assets if credited to the
                          Profit & Loss Account


                                  2
Sl.     In                Relevant Issues ­
No. relation to          Suggestions of ICAI        Action taken
       Finance
         Bill
                  2.   Liability of AOPs and Considered        in
                       BOIs for TDS u/s 194C Finance Act, 2008
                       ­ only if the concerned
                       AOPS are liable to Tax
                       Audit u/s 44AB
                  3.   Notice deemed to be Considered              in
                       valid just because of the Finance Act, 2008
                       assessee's appearance or
                       co-operation u/s 292BB
                       ­ if the assessee objects
                       as regards validity of the
                       Notice during the course
                       of            assessment
                       proceedings, this section
                       should not be applied.
II.   No.2 of     1.   Treatment of Advance Through Notification
      2009             FBT paid during the this      has   been
                       Financial Year 2009-10 implemented
                       in view of abolition of
                       FBT ­ Advance FBT
                       should be treated as
                       Advance      income-tax
                       paid .
                  2.   Conversion of LLPs ­      Considered       in
                       should not be considered Finance Act, 2010
                       as "transfer" for capital
                       gains by inclusion in
                       section 47.
                  3.   Computation            of Considered       in
                       deductible profit of SEZ Finance Act, 2010
                       unit u/s 10AA ­
                       amendment to be made

                           3
Sl.     In                Relevant Issues ­
No. relation to          Suggestions of ICAI         Action taken
      Finance
        Bill
                       retrospective.
                  4.   Capital        expenditure Considered in the
                       incurred in the years Finance (No.2) Act,
                       prior to the year in which 2009
                       specific business has
                       been          commenced
                       u/s 35AD ­ capital
                       expenditure incurred in
                       earlier years should be
                       considered for deduction
                       in     the      year    of
                       commencement            of
                       specific business
                  5.   Deemed income u/s          Considered in the
                       56(2)(vii) ­ this should   Finance (No.2) Act,
                       be included in the         2009
                       definition of income u/s
                       2(24)
                  6.   Value considered for Considered in the
                       deemed income u/s Finance (No.2) Act,
                       56(2)(vii) ­ such deemed 2009
                       value      should      be
                       considered as "cost of
                       acquisition" u/s 49 for
                       subsequently computing
                       capital     gains   from
                       transfer thereof
                  7.   Valuation as regards Considered            in
                       deemed income        u/s Finance Act, 2010
                       56(2) ­ if assessee
                       disputes the value the
                       Assessing Officer should


                            4
Sl.     In                 Relevant Issues ­
No. relation to           Suggestions of ICAI         Action taken
      Finance
        Bill
                        be    able  to   make
                        reference to Valuation
                        Officer
                  8.    Deemed income u/s          Considered          in
                        56(2)(vii) ­ trading       Finance Act, 2010
                        assets    should  be       for exclusion of the
                        excluded                   property     of    the
                                                   nature of trading
                                                   assets of the receiver
                  9.    Interest              on Considered in the
                        Compensation         u/s Finance (No.2) Act,
                        56(2)(viii) ­ wrong 2009
                        reference to section
                        145A(2)     should    be
                        rectified   to   section
                        145A(b)
                  10.   Exclusion of anonymous     By     Finance(No.2)
                        donation from taxability   Act, 2009, it has
                        u/s 115BBC ­ instead of    been made 5% of
                        5% of total income the     total donations
                        relaxation should be of
                        5% of gross receipts
III. 2010         1     Exemption of capital Considered in the
                        gains in the hands of Finance Act, 2010
                        shareholders consequent
                        to conversion of a
                        company into a LLP -
                        Amendment in section
                        47(xiiib).
IV   2012         1.    Provision              for Considered in the
                        rectification u/s 154 and Finance Bill, 2012


                            5
Sl.     In                Relevant Issues ­
No. relation to          Suggestions of ICAI       Action taken
      Finance
        Bill
                       appeal u/s 246A in
                       respect of an intimation
                       under section 200A.
                  2.   Extension of benefit of Considered in the
                       weighted      deduction Finance Bill, 2012
                       under section 35(2AB)
                       for a further period of
                       five years.
                  3.   "Book profit" under Considered in the
                       section 115JB to be Finance Bill, 2012
                       computed based on the
                       net profit as per the
                       accounts prepared under
                       the relevant statute for
                       banking,      insurance,
                       electricity  companies
                       etc.
                  4.   Reference to Part III of Considered in the
                       Schedule VI to be Finance Bill, 2012
                       omitted in section 115JB
                       since Revised Schedule
                       VI does not contain Part
                       III
                  5.   Removal of cascading Considered in the
                       effect     of    dividend Finance Bill, 2012
                       distribution tax in multi-
                       tier corporate structure
                       also.
                  6.   Extension of due date of Considered in the
                       filing of return of Finance Bill, 2012
                       income       to     30th


                           6
Sl.     In                 Relevant Issues ­
No. relation to           Suggestions of ICAI         Action taken
      Finance
        Bill
                        November        of      the
                        assessment year for all
                        assessees      who      are
                        required to file a transfer
                        pricing report.
                  7.    Alignment of "specified Proposal considered
                        date" in the Explanation in the Finance Bill,
                        to section 44AB with the 2012
                        "due date" of filing
                        return of income under
                        Explanation 2 to section
                        139(1).
                  8.    Age of 60 years for Considered in the
                        additional benefit to a Finance Bill, 2012
                        senior citizen, to be
                        made           applicable
                        uniformly in the Act.
                  9.    Deduction            of Considered in the
                        expenditure incurred by Finance Bill, 2012
                        way of investment in by way of provision
                        agricultural            of           weighted
                        infrastructure.         deduction in respect
                                                of            notified
                                                agricultural
                                                extension projects.
                  10.   Consequential              Considered in the
                        amendment in proviso to Finance Bill, 2012
                        section 111A(1) on
                        account on increase in
                        rate of short-term capital
                        gains from 10% to 15%
                        w.e.f. 1.4.2009.


                             7
Sl.     In                Relevant Issues ­
No. relation to          Suggestions of ICAI           Action taken
      Finance
        Bill
V    2013         1.   Adoption of stamp duty       Considered in the
                       value as on the date of      Finance Bill, 2013 in
                       agreement, where the         proposed     sections
                       date of agreement is         43CA & 56(2)(vii).
                       different from the date of
                       registration.
                  2.   Scope      of    Annual Confirmed by the
                       Information Return to be Finance Minister in
                       increased.               his Budget Speech of
                                                Union Budget 2013-
                                                14. Amendment to
                                                be given effect to in
                                                the      Income-tax
                                                Rules, 1962.
                  3.   Levy of TCS@1% on This suggestion has
                       transfer of immovable been      considered,
                       property.             though tax is now
                                             proposed      to    be
                                             deducted@1%
                                             instead of being
                                             collected at source.
                  4.   Suggestions made to These suggestions
                       Shome Committee on have                 been
                       GAAR ­                     considered in the
                       (i) GAAR to be invoked New Chapter X-A of
                           only if the main the Finance Bill,
                           purpose is to obtain a 2012.
                            tax benefit.
                       (ii) GAAR to be binding
                            both on the taxpayer
                            as well as the
                            department.


                            8
      Sl.     In                Relevant Issues ­
      No. relation to          Suggestions of ICAI           Action taken
             Finance
               Bill
                             (iii) Constitution      of
                                   Approving Panel to
                                   include independent
                                   professionals/
                                   businessmen/experts
                        5.   Threshold      limit  for    The Finance Bill,
                             deduction under section      2012 has amended
                             80GGB & 80GGC in             these sections to
                             respect of cash donations    provide that no
                             to political parties and     deduction would be
                             electoral trusts.            allowed in respect
                                                          such     of   cash
                                                          donations.

1.3   The suggestions have been categorized into two parts :
      a) Suggestions relating to Domestic taxation
      b) Suggestions relating to International Taxation

1.4   In this memorandum, firstly an executive summary of our
      suggestions on the specific clauses of the Finance Bill, 2013
      relating to income-tax have been given. The detailed
      suggestions are given thereafter.

1.5   In case any further clarifications or data is considered
      necessary, we shall be pleased to furnish the same.
      The contact details are:

          Name and                      Contact Details
          Designation            Mobile          Email Id
      CA. Manoj Fadnis,      9302217716       manojfadnis@icai.org
      Chairman, Direct Taxes
      Committee




                                  9
     Name and                    Contact Details
     Designation          Mobile          Email Id
CA. Dhinal A. Shah,     09825029950   Dhinal.Shah@in.ey.com
Chairman, Committee on
International Taxation
CA. Mukta K. Verma,     09350572177   dtc@icai.in
Secretary, Direct Taxes
Committee
CA. Ashish Bhansali,    09310532063   citax@icai.in
Secretary, Committee on
International Taxation




                          10
                       EXECUTIVE SUMMARY

                        DOEMSTIC TAXATION

1.     Clause 3 - Section 2(1A) and section 2(14)(iii) ­Scope of
       agricultural land forming part of the definition of ,,capital
       assets"

(i)    It is suggested that the requirement to measure distance
       aerially should be dispensed with especially since there is no
       standard basis of measuring which can lead to inconsistency
       and consequent dispute and litigation. Further, in cases of
       places which are not approachable since no approach roads
       connecting to such places, measurement of distance "aerially"
       will certainly not reflect the extent of urbanization. Instead,
       the measurement of distance through approach road should
       be considered, since the same would take into account the
       extent of urbanization.

(ii)   The proviso (ii)(A) to section 2(1A), section 2(14)(iii) of the
       Income-tax Act, 1961 and Clause (b)(i) of Explanation 1 to
       section 2(ea) of the Wealth-tax Act, 1957 may be suitably
       amended to incorporate the constitutional amendment, by re-
       designating the terms "notified area committee" and "town
       area committee".

2.     Clause 4 - Section 10(10D)-Amendment in definition of
       "Keyman Insurance Policy"

(i)    It is suggested that in cases where keyman insurance policy is
       assigned to the employee, the employer should not be made
       liable to deduct tax at source. The insurance company may be
       vested with the obligation to deduct tax at source in respect of
       such payments.

(ii) It is suggested that section 17(3)(ii) may be appropriately
      amended to provide that tax would be levied only to the extent
      of such difference, or in the alternative, deduction for
      surrender value may be provided for under section 16. In such
      a case, the employer can deduct tax at source on the
      differential amount treated as "profit in lieu of salary" at the
      time of assignment.


                                   11
      Further, in any case, the maturity proceeds received on death
      of the assignee should be kept out of the tax net. This benefit
      is similar to the exemption given in respect of life insurance
      policies, where the annual premium paid exceeds 10% of
      minimum sum assured.

(iii) Appropriate clarification may be issued with regard to the tax
      treatment of keyman insurance policies assigned prior to
      1.4.2013
3.    Clause 4 - Section 10(23DA) ­ Income-tax exemption for
      securitization trusts, levy of distribution tax on income
      distributed by such trusts
      Instead of distribution tax model, a complete pass through
      model identical to existing regime applicable to Venture
      Capital Funds/Venture Capital Companies under section
      10(23FB) read with section 115U, since the participation in
      PTCs is largely restricted to well regulated financial
      institutions.
4.    Clause 4 ­ Section 10(23FB) - Tax exemption for
      Alternative Investment Funds ­ Venture Capital Funds
(i)   The pass-through status may be extended atleast, to cover all
      sub-categories of Category I AIFs (i.e. not only to venture
      capital funds but also to SME Funds, social venture funds,
      infrastructure funds), in line with the assurance held out
      explicitly by AIF Regulations.
(ii) From a long-term perspective, it is best to maintain an
     alignment of the tax laws and the AIF Regulations to mitigate
     the need to constantly update the tax law for changes in
     Regulations so as to not artificially stifle the AIFs.
      In fact, last year, the Finance Act, 2012 had removed the
      sectoral restrictions imposed on VCUs by the Income-tax Act,
      1961 on the ground that since SEBI regulates the working of
      VCF, VCC & VCU, there is no necessity of having separate
      conditions under the Income-tax Act, 1961 imposing sectoral
      restrictions on the VCUs.
      Therefore, multiplicity of conditions in different regulations in
      respect of the same entities should be avoided. Hence,
      additional conditions should not be imposed under the
      Income-tax Act, 1961 to qualify for tax benefit.


                                   12
(iii) As regards condition of disqualification on account of
      investment in associate VCU, it is suggested that
      disqualification from pass through status may be restricted to
      income arising from associate VCU only. Further, to remove
      any ambiguity, it may also be clarified that if breach of any
      condition is subsequently rectified, the pass through status
      may be restored.
5.   Clause 5- Section 32AC- Additional allowance of 15% in
     respect of investment in new asset
     It is suggested:

a.   The threshold limit may be fixed at a moderate level of say,
     Rs.10 crore, so as to attract investment in plant and
     machinery by small and medium enterprises, which are the
     "drivers" or economic growth.

     Also, the permissible period of investment may be increased to
     atleast 5 years for proper planning and execution of medium
     and large sized projects.

b.   Further, for the purpose of encouraging investment in Plant
     and Machinery, the benefit of deduction may be extended to
     assessees other than companies as well.

c.   On the lines of section 32(1)(iia), the benefit of investment
     allowance under section 32AC may be extended to an assessee
     engaged in the business of generation or generation and
     distribution of power.

d.   Clause (v) of proposed section 32AC(4) may be deleted so that
     eligibility for 100% depreciation would not be a disqualification
     for claiming investment allowance.

e.   A suitable provision be incorporated enabling carry forward of
     investment allowance for set-off against business income of
     the succeeding years. In line with the provision for carry
     forward of business loss, investment allowance may be allowed
     to be carry forward for eight assessment years.

6.   Clause 7 ­ Section 40(a)(iib) - Disallowance of certain
     payments made by State Government Undertaking (SGU)
     In order to provide level playing field to different business
     units in matter of computation of business income, the


                                  13
     proposals may be re-considered. The payments made by SGU
     to the Government are likely to be subject to transfer pricing
     regulation under section 92BA read with section 40A(2).

     In fact, the provisions of section 40A(2) may be suitably
     amended to ensure that the impugned expenditure is
     subjected to transfer pricing scrutiny, rather than disallowing
     the expenditure which may result in inequity between
     undertakings which have more than 50% State Government
     holding and those having less than 50% State Government
     holding.

7.   Clause 8- Section 43CA - Special provision for full value of
     consideration for transfer of assets other than capital
     assets in certain cases.

a)   The proposal in its present form may not be desirable and may
     lead to structuring of transactions. Thus, the validity of this
     proposal needs to be reconsidered.

b)   Suitable provisions may be incorporated in the statute so that
     the same income is not subject to tax twice.

c)   It may be clarified as to whether the term "otherwise than by
     way of cash" would include transfer by book entries, transfer
     by Hundi, promissory notes etc. and transfer by exchange
     agreement.

d)   It may be clarified as to whether the tax liability would arise
     in the year of agreement or year of registration or the year in
     which possession is obtained.

e)   It is suggested that agricultural land be specifically excluded
     from the ambit of this provision.

f)   It is suggested that the term "transfer" be specifically defined
     for the purposes of section 43CA.

g)   A specific clause may be included in Form No. 3CD in respect
     of such transactions.

h)   A similar provision for adopting stamp duty value on the date
     of agreement for transfer instead of the date of registration be
     inserted in section 50C also.


                                 14
8.     Clauses 9­ Section 56(2)(vii) ­Immovable property received
       for inadequate consideration
       It is suggested that immovable property transferred for
       inadequate consideration be kept outside the scope of section
       56(2)(vii).

9.     Clause 11 ­ Section 80CCG- Rajiv Gandhi Equity Linked
       Savings Scheme
i)     It is suggested that the language of the section may be
       suitably modified to reflect the correct intent of law.

ii)    Considering that this amendment, may create inequity
       between the persons who had made investment prior to
       1.4.2013 and those who had made investment on or after that
       date under the same scheme, it is suggested that the
       amendment may be given effect to from A.Y.2013-14.

iii)   Appropriate amendments may be made to clarify the real
       intent of the proposed amendment i.e. whether Long term
       capital gains taxable under section 112 and Short term capital
       gains taxable under section 111A needs to be excluded for
       determining the limit of Rs.12 Lakhs.

10. Clause 13 ­ Section 80EE - Deduction in respect of
    interest on loan taken for residential house property
    Ideally, the proposed benefit may be extended to interest on
    the loan taken for the first house property acquired or
    constructed, irrespective of the whether the housing loan is
    sanctioned before or after 1.4.2013.        In any case, the
    deduction of Rs.1,50,000 in respect of self-occupied property
    was introduced fifteen years back and keeping in mind the
    inflationary    conditions,  the  additional    deduction    of
    Rs.1,00,000 should be extended in respect of all loans, albeit
    for the first house property. Further, instead of providing the
    same as a deduction under Chapter VIA only for A.Y.2014-15
    and A.Y.2015-16, the same may be provided by way of
    insertion of another proviso to section 24(b) for the sake of
    consistency.

11. Clause 17 ­ Extension of sunset clause under section 80-
    IA
    In order to ensure clarity and certainty as regards the period
    within which the undertaking should be set-up or within


                                  15
      which it should start transmission etc. the terminal date may
      be extended till such time the country has acquired self-
      sufficiency in the supply of power i.e. the terminal date may be
      kept open-ended.

12. Clause 18- Section 80JJAA ­ Deduction in respect of
    employment of new workmen
i)  It is suggested that the existing provisions be continued so
    that the benefit is available for blue collared employees in the
    manufacturing sector.

ii)   Further, it is suggested that a suitable clause be added in
      Form 3CD requiring the tax auditor to certify the particulars of
      new regular workmen employed and the additional wages paid
      to them to ensure the correctness of claim under section
      80JJAA.

13. Clause 33 ­ Amendment of section 142(2A)
    It is suggested that no change is required in the existing
    section, since it adequately takes care of all cases of
    complexities, including doubts about the correctness of
    accounts and multiplicity of transactions.

14. Clauses 42 ­ Insertion of new section 194-IA
    It is suggested that a simple challan for one-time remittance of
    tax by the transferee/payee be prescribed and such remittance
    may be made within a prescribed time after payment of the
    last installment. Such a remiitance may be made a pre-
    condition for registration of property in the name of the
    transferee. This would dispense with the need for obtaining
    TAN and at the same time, ensure garnering of revenue at an
    early point of time. The PAN of the transferor and transferee
    should be required to be quoted on the challan so that the
    transferor can take credit of tax deducted and remitted.

      In order to overcome the difficulties in cases where remittance
      and taxability arises in different years, a system of pass book
      be introduced in Form No.26AS wherein the balance of
      unutilized credit be allowed to be carried forward.

15. Chapter VII ­ Commodities Transaction Tax (CTT)
    Appropriate amendments may be made in section 43(5) to
    exclude an eligible transaction in respect of commodity
    derivatives from the definition of "speculative transaction".


                                  16
16. First Schedule ­ Surcharge
    There should be a parity in the rates of individual and
    corporate surcharge as well the threshold above which they
    are attracted. The rates of surcharge may be accordingly
    modified to maintain parity.

17. Amendment by the Finance Act, 2012 in Section 40 and
    Section 201
    The provisions of section 40(a)(ia) and section 201(1) may be
    amended retrospectively with effect from 1.4.2005 in order to
    clarify the real intent of law and to remove hardship, thereby
    reducing further litigations.

    The later part of the second proviso may be suitably amended
    to provide that it shall be deemed that the assessee has
    deducted tax in the relevant previous year and paid the tax on
    such sum on or before the due date of furnishing the return of
    income.

18. Section 43A - Exchange fluctuation loss due to sharp fall
    in Rupee value
    It is suggested that Section 43A be amended to allow
    Capitalization of such foreign exchange loss even for
    domestically acquired asset.


               INTERNATIONAL TAXATION

19. Section 9(1)(i) -Indirect transfer of assets
    It is suggested that the Government may consider
    incorporating the recommendations of Shome Committee at
    the stage of enactment without conceding to retrospective
    effect or without committing itself to aspects which need
    deeper examination.

20. Clause 25 ­Amendment in section 115A -Tax Rate of 25%:
    Tax on Royalty and FTS
(i) Considering the broad coverage under FTS and Royalty
    definitions in Indian law ­ in particular, the definition of FTS,
    it is recommended that the existing tax rate of 10% be further
    reduced (say to 5% as in case of Sri Lanka for management
    services) or at least be retained at the present levels.


                                 17
       Enhancing the current rate to the proposed 25% would
       adversely impact wide range of cross border transactions
       transacting with India as already pointed out above. Further a
       lower rate would also align with the approach which India has
       adopted so far, will match with India treaties and will also
       match with rate of taxes applicable in other jurisdictions.

(ii)   The prohibitory rate of 25% may be restricted in its application
       only to transactions with persons located in notified
       jurisdiction area [as per Section 94A of the Act] similar to the
       treatment considered by some countries like Brazil.

(iii) Additionally, an option should be provided to a Non Resident
      taxpayer to enable it to offer to tax its income on a net basis of
      taxation (i.e. income less expenses being permitted to be taxed
      at the normal corporate tax rate , example 40 percent plus
      surcharge and cess in case of foreign companies).

(iv) Concurrently, the definition of "FTS" may be modified and may
     be brought in line with predominant International practice.

(v)    The least, the amendment may be made prospective to be
       applied to agreements which are entered into on or after 31st
       May 2013 so as to grandfather and protect those cases ­
       including cases of net of tax contracts, which may have been
       negotiated by parties in good faith based on the applicable rate
       of tax being 10%.

21. Clause 24 - Chapter X-A-General Anti-Avoidance Rules
(i) Grandfathering of investments

(ii)   Need for statutory recognition         of   decisions    already
       announced by the Government

(iii) Need for Positive announcement on some recommendations of
      Shome Committee where Government is silent

(iv) GAAR v SAAR

(v)    Onus of proof


22. Clause 22- Section 90(5)-Tax Residency Certificate (TRC)
We recommend that the clarification issued by way of Press release
dated 1-03-2013 may, in fact, be part of the statute. The
Explanation may state that TRC will be regarded as necessary and


                                   18
sufficient evidence for the purpose of evidencing residency and
beneficial ownership.

Alternatively, with regard to test of beneficial ownership,
reasonable inquiry, if considered necessary, in the facts of the case,
may be permitted. Further, in such cases, to ensure that roving
inquiries are best avoided, reasonable objective tests for
determination of beneficial ownership may be evolved for guidance
of officers.

It is possible that the TRC issued also indicates beneficial
ownership (example, Italy). Where a TRC incorporates this
requirement, TRC should be considered as sufficient for the
purpose of meeting the test of beneficial ownership as well.

In order to boost the confidence of the investors and to augment
the investment climate of the country, the following may be
clarified to allay doubts and apprehensions:

         It is not necessary to furnish TRC for each and every
         remittance. A single TRC which is valid for a specified
         period should be sufficient enough for all reliefs, etc as
         are claimed under a tax treaty.

         Even if the recipient of income does not possess a TRC at
         the time of remittance, the same should not result in
         denial of treaty residence provided he obtains TRC within
         a reasonable period of time (say, by the end of accounting
         year or before the due date of filing return of income).

         If the taxpayer, despite his best efforts, is not able to
         obtain a TRC from the Government of his home country in
         prescribed form, then, by itself this should not be a
         ground to deny treaty relief claimed by him and a fair
         opportunity of being heard must be given.

         Merely because some of the columns of TRC are left blank
         by the Government of foreign country, the same by itself
         should not be a ground to deny treaty benefits.

23. Clause 28 ­ Chapter XII-DA- Section 115QA and Section
    10(34A) - Buyback of unlisted shares by a domestic
    company
(a) There is a need for serious reconsideration of the proposal.
    The proposal may be perceived as India attempt to override



                                 19
      certain tax treaties unilaterally. It is inconsistent with the tax
      norms which India has adopted so far in the formulation of its
      domestic law of treating buy back to be a transaction which
      has capital gains implications.

(b)   Considering that the intent is to curb tax avoidance the
      provision may be worded in such a way that it captures only
      transactions which are entered into with an intent to avoid tax
      and should not be made applicable to all transactions of buy
      back of unlisted shares.

(c)   The proposal is very unfriendly to those companies which do
      undertake buy back driven purely by commercial reasons.
      Proposal is Investor unfriendly for those where the
      Shareholders are, in an indirect manner, denied the benefit of
      lower capital gains tax levy related provisions in the domestic
      law as also the benefit of lower dividend tax provisions in tax
      treaties. In case of partial buy back, the cost of tax liability of
      the company will be borne by shareholders other than those
      who may have exited. While, there is no reason for such
      across the board provision, still, if for any reason, it is
      proposed to retain any such provision, a more logical
      alternative is to legislate it in form of SAAR (Specific Anti
      Avoidance Rule) as part of section 2(22) of the Act which will
      be applied in certain abusive conditions to be restricted to
      payments to non-residents. It should involve tax in the form of
      lower WHT of 10% and the quantum of chargeable amount
      should be limited to accumulated profits of the company.

(d)   Even internationally, as would be clear from the following
      table, in cases of dividend repatriation, the rate of WHT on
      dividend repatriation in majority of the treaties is 10%. Even in
      case where rate is marginally higher at 15%, the lower rate of
      10% applies if holding of capital exceeds 10% or 25%. The
      proposed rate should not be allowed to exceed such rate. The
      next best alternative may be to consider buy back at par with
      a transaction of capital reduction to be subjected to tax as
      dividend as part of section 2(22) of the Act.

(e)   Instead of a levy on the company, the tax if at all, should be
      levied as a withholding tax on dividends. This would enable
      Non Resident shareholders to apply treaty rates and claim
      credit in its home jurisdiction. One may like to follow the
      South African experience where an erstwhile STC (comparable


                                   20
       to our DDT) has now been replaced with a withholding tax
       regime on dividends at 10%.

(f)    Adequate safeguards may be incorporated to provide for cost
       step up in case of shares purchased from secondary market.
       Further   the    provisions    should    provide   for proper
       computational mechanism in cases where there is conversion
       of debentures into equity, issue of bonus shares etc

24. Clause 27- Section 115-O r.w Section 115BBD- Removal of
    cascading effect of DDT on dividend from foreign
    subsidiary
(i) If it is the desire that the Indian companies are effectively
    persuaded to bring in the accumulated surplus from overseas
    companies during Financial Year 2013-14, the condition that
    foreign dividend should be distributed in the same year to
    avail DDT relief may be liberalized. It is possible that an Indian
    company which is keen to avail DDT relief may still find it
    commercially unwise to distribute the funds to the
    shareholders. The company is likely to be keen to retain the
    funds for its own internal growth. Also, if dividends are
    received in the month of March 2014, the Indian company will
    not be able to redistribute them in March itself.

(ii)   To make the relief more meaningful, a longer period of time ­
       say 3 years should be provided for distribution to
       shareholders. The condition that the same amount of dividend
       shall not be taken into account for reduction more than once
       will ensure that there is no abuse of elongated time period.

(iii) Further, to ensure that concession provided by Section
      115BBD is not diluted by MAT provisions, it should be
      provided that the dividends on which tax is payable under
      section 115BBD will be excluded from book profit.

25. Clause 43 ­ Section 194LC-Concessional rate of tax on
    interest payable to non-residents
(a) While extension of the provision to rupee denominated IB is
    certainly beneficial to taxpayers and the provision is a healthy
    and welcome provision, it would be better that deeming fiction
    is further supplemented by clarifying and presuming that the
    borrowing will be deemed not only to be a borrowing in foreign
    currency, but, also a borrowing from a source outside India,
    there could be scope for litigation. To remove any ambiguity in



                                  21
      this regard, it should be provided that subscription made from
      designated bank account will be deemed to be from a source
      outside India.

(b)   Also, the designated bank account requirement should be
      made applicable to the Indian borrower and not the Non
      Residentlender.

(c)   In addition to IB, the provision should also be expanded to
      rupee denominated loans which are permitted to be borrowed
      under FEMA regulations.

(d)   Payment of interest under section 194LC should be excluded
      from the scope of Section 206AA and Non Residentlenders
      should not be required to obtain PAN in India to avail lower
      rate of tax under section 194LC. Alternatively or concurrently,
      in case of foreign intermediary appointed for servicing IBs, it
      should be clarified that PAN of such intermediary shall suffice
      for Section 206AA purposes.



                               X-O-X-O-X




                                  22
            POST BUDGET MEMORANDA-2013

                    DOMESTIC TAXATION
                     Detailed Suggestions

1.   Clause 3 - Section 2(1A) and section 2(14)(iii) ­Scope of
     agricultural land forming part of the definition of ,,capital
     assets"

     The definition of agricultural income excludes income derived
     from land situated within specified urban limits. These
     specified urban limits are proposed to be re-defined, and for
     this purpose the area within the distance is required to be
     measured aerially.

     (i)   The requirement of measuring distances aerially would
           have the effect of ignoring the aspect of urbanization,
           especially in cases where such distances are to be
           measured in a hilly area. This amendment may have
           the effect of bringing all the plantations in the hilly
           areas within the scope of "urban land". Therefore,
           income derived from such plantations may go outside
           the scope of "agricultural income".

           In CIT v. Satinder Pal Singh (2010) 33 DTR 281, it was
           observed that if principle of measurement of distance
           is considered as per crow's flight then it would have no
           relationship with the statutory requirement of keeping
           in view the extent of urbanization. Such a course
           would be illusory. It is in pursuance of the aforesaid
           provision that Notification No. 9447 dt. 6th Jan., 1994
           had been issued by the Central Government. In respect
           of the State of Punjab, at item No. 18 the sub-division
           Khanna has been listed at serial No. 19. It has inter
           alia been specified that area upto 2 kms. from the
           municipal limits in all directions has to be regarded
           other than agricultural land. Once the statutory
           guidance of taking into account the extent and scope
           of urbanization of the area has to be reckoned while
           issuing any such notification then it would be
           incongruous to the argument of the Revenue that the


                               23
       distance of land should be measured by the method of
       straight line on horizontal plane or as per crow's flight
       because any measurement by crow's flight is bound
       to ignore the urbanization which has taken place.

       Suggestion

       It is, therefore, suggested that the requirement to
       measure distance aerially should be dispensed
       with especially since there is no standard basis of
       measuring which can lead to inconsistency and
       consequent dispute and litigation. Further, in
       cases of places which are not approachable since
       no approach roads connecting to such places,
       measurement of distance "aerially" will certainly
       not reflect the extent of urbanization. Instead, the
       measurement of distance through approach road
       should be considered, since the same would take
       into account the extent of urbanization.

(ii)   The proviso (ii)(A) to section 2(1A)(c) defining
       "agricultural income" excludes income from land not
       situated in any area which is comprised within the
       jurisdiction of a municipality (whether known
       municipality, municipal corporation, notified area
       committee, town area committee, town committee
       or by any other name) and which has population not
       less than ten thousand.

       As per the 74th Amendment to the Constitution of
       India, in the year 1992, the areas which were classified
       as notified area committees and town area committees
       were re-designated as municipalities or nagar
       panchayats.
       Suggestion

       The proviso (ii)(A) to section 2(1A), section 2(14)(iii)
       of the Income-tax Act, 1961 and Clause (b)(i) of
       Explanation 1 to section 2(ea) of the Wealth-tax
       Act, 1957 may be suitably amended to incorporate
       the constitutional amendment, by re-designating
       the terms "notified area committee" and "town
       area committee".


                            24
2.    Clause 4 - Section 10(10D)-Amendment in definition of
      "Keyman Insurance Policy"
      Any sum received under a Keyman insurance policy is not
      exempt under section 10(10D). The meaning of "Keyman
      Insurance Policy" given in Explanation 1 to section 10(10D)
      is proposed to be amended to include such policy which has
      been assigned to a person at any time during the term of the
      policy, with or without consideration". This amendment is
      proposed to be made effective w.e.f. 1.4.2014 (i.e. A.Y.2014-
      15).
      The effect of this proposed amendment is to deny the benefit
      of exemption in respect of maturity proceeds of keyman
      insurance policy which has been assigned to a person during
      the term of the policy, whether with or without consideration,
      by including the assigned policy within the definition of
      "Keyman insurance policy".
      The issues under consideration and suggestions thereof in
      this regard are as follows ­
(i)   Consequent to this amendment in the definition of "Keyman
      insurance policy", the maturity proceeds received by the
      person to whom the policy is assigned would become taxable
      as "Profits in lieu of salary" under section 17(3)(ii). Since any
      salary due from an employer or a former employer to an
      assessee in the previous year, is chargeable under section 15
      and the definition of salary under section 17(1) includes
      "profits in lieu of salary", it appears that the employer or the
      former employer, as the case may be, would be required to
      deduct to tax at source under section 192 at the time of
      payment.
      It would be practically difficult for the employer or former
      employer to deduct tax at source on payment received by the
      employee directly from the insurance company.


      Suggestions

      It is, therefore, suggested that in cases where keyman
      insurance policy is assigned to the employee, the
      employer should not be made liable to deduct tax at
      source. The insurance company may be vested with the




                                 25
        obligation to deduct tax at source in respect of such
        payments.
(ii)    Further, as per the said amendment, the entire proceeds
        would be subject to tax under section 17(3)(ii) in the hands
        of the person to whom the policy is assigned, whereas only
        the premium paid by the employer on which deduction has
        been claimed less the surrender value paid by the employee
        to the employer at the time of assignment should be subject
        to tax, since the same represents the actual benefit availed
        by the assignee.
        Suggestion:

        It is, therefore, suggested that section 17(3)(ii) may be
        appropriately amended to provide that tax would be
        levied only to the extent of such difference, or in the
        alternative, deduction for surrender value may be
        provided for under section 16. In such a case, the
        employer can deduct tax at source on the differential
        amount treated as "profit in lieu of salary" at the time
        of assignment.

        Further, in any case, the maturity proceeds received on
        death of the assignee should be kept out of the tax net.
        This benefit is similar to the exemption given in respect
        of life insurance policies, where the annual premium
        paid exceeds 10% of minimum sum assured.


(iii)   Since the amendment is proposed to be made effective from
        A.Y.2014-15, the tax treatment in respect of keyman
        insurance policies which are assigned prior to 1.4.2013 may
        be clarified.
        Suggestion:
        Appropriate clarification may be issued with regard to
        the tax treatment of keyman insurance policies
        assigned prior to 1.4.2013
3.      Clause 4 - Section 10(23DA) ­ Income-tax exemption for
        securitisation trusts, levy of distribution tax on income
        distributed by such trusts
        The securitization trust has so far been treated as a pass
        through vehicle for tax purposes i.e. all the income of the


                                 26
securitization trust has been offered to tax by its investors
(unless the investor is tax exempt viz., a mutual fund). This
is consistent with the tax rules that apply to trusts under the
tax law which prescribes a single level tax on a trusts
income (i.e. tax is levied either on the trustee or on the
beneficiaries). The interest income arising to such trusts
from securitized debts is taxed directly in the hands of the
contributories.
The tax implications may be summarized as follows:-
      If contributory is a Mutual Fund, it will be entitled to
      exemption under s. 10(23D).
      Any other contributory can claim deduction for
      corresponding expenses against such income (eg.
      interest and overheads)
      Contributories can claim credit of TDS, if any, made by
      the borrower
However due to disputes regarding the person on whom tax
incidence lies, tax demands were raised on the securitization
trusts rather than the investors, by treating such trusts as
AOPs. In order to set at rest such controversies, the Finance
Bill 2013 proposes to:
      Exempt the securitization trust from tax on income
      earned.
      Impose a distribution tax on income distributions by
      the securitization trust @ 25% in case of distributions
      to individuals and HUFs and @ 30% in other cases.
      Distribution tax will not be payable on income
      distributed by the securitization trust to a person in
      whose case income, irrespective of its nature and
      source, is not chargeable to tax under the Act (viz.
      mutual funds).
      Exempt the investors in the securitization trust from
      taxation on income distributions received.
The proposed provisions may, however, create certain
problems or securitized structures in vogue on account of the
following reasons:
(a) The exemption to the investors in the securitization trust
    will mean that investors (other than exempt investors
    such as mutual funds) in pass through certificates (PTCs)


                           27
                will now earn exempt income instead of taxable income as
                was the case hitherto. This implies that the investors
                would not be able to set-off expenditure/ losses against
                income earned from PTCs in view of provisions of section
                14A which prohibits deduction of any expenditure
                incurred in relation to exempt income. This may result in
                the entire transaction becoming unviable for investors,
                which is illustrated below.
                If the investor is a bank investing Rs.100 crores in a
                Securitized debt yielding interest @ 10% p.a. Assuming,
                that the banks own cost of borrowing is say 8% p.a., its
                tax liability on interest income from securitized debt pre
                and post amendment and profit after tax will be as follows
                :-

Particulars                                                 Pre         Post
                                                            amendment   amendment

Interest income @ 10% (A)                                   10.00 Cr    10.00 Cr
on     Rs.    100   Cr
distributed         by
Securitised Trust

Less: Distribution tax                                      N.A.        3.00 cr
paid by the trust@30%
on gross income

Net income distributed                                      10.00 Cr    7.00 Cr

Less     :-   Interest (B)                                  8.00 Cr     8.00 Cr
expenditure @ 8% on
Rs. 100 Cr



Net income                              C= (A-B)            2.00 Cr     (1.00) Cr

Tax payable

By Investor @ 30%1 on (D)                                   0.60 Cr2    -
net income


1
    Surcharge and cess ignored for the sake of simplicity
2
    30% of Rs. 2.00 Cr


                                                  28
Particulars                            Pre            Post
                                       amendment      amendment

Profit/(Loss) after tax   (C-D)        1.40 Cr        (1.00) Cr
                                                      Not allowed
                                                      to be set-off
                                                      on account of
                                                      section 14A.

The above illustration highlights that a structure which was
commercially viable prior to amendment may have the effect of
becoming unviable solely due to change in the basis of incidence of
taxation.
It may be noted that the financial sector works on spread between
yield from investments and own cost of borrowing. Tax on gross
income at a rate ordinarily applicable to net income may severely
impact the spread and make securitization structures
commercially unviable defeating the object of SEBI and RBI
guidelines for orderly development of securitization market.
      (a) The trading of PTCs (most PTCs are tradable instruments)
          may also create dual points of taxation (i.e. at the time of
          distribution of income by the securitization trusts and at
          the time of realization of gain when the PTC itself is sold
          for a profit) which seems to be unintended.

      (b) Ambiguity may also arise for the borrower while
          evaluating withholding obligation at the time of payment
          of interest. Since the securitization trust will be
          assessable as a separate tax entity and not a mutual fund
          or bank exempt from withholding, the borrower will be
          required to withhold tax unless the trust provides NIL
          withholding certificates. The securitization trust will be
          required to file return to claim refund of such TDS. The
          securitization trust will not be able to set off TDS credit
          against distribution tax payable by it.

      (c) There is no grandfathering provided for existing
          securitized trusts. Hence, any income distributed by
          existing securitized trusts on or after 1 June 2013 will
          also be subject to the new tax regime.




                                  29
Suggestions
   Instead of distribution tax model, a complete pass through
   model identical to existing regime be made applicable to
   Venture Capital Funds/Venture Capital Companies under
   section 10(23FB) read with section 115U, since the
   participation in PTCs is largely restricted to well regulated
   financial institutions.
4.    Clause 4 ­ Section 10(23FB) - Tax exemption for
Alternative Investment Funds ­ Venture Capital Funds
The Finance Act 2012 provided an exemption to venture capital
funds (VCFs) with a corresponding direct tax charge on the
investors on the income earned by the fund from its investments.
The VCF Regulations were repealed on 21 May 2012 with the
simultaneous introduction of the SEBI (Alternative Investment
Funds) Regulations 2012 (AIF Regulations). Funds raised under
the VCF Regulations were resultantly grandfathered.
AIF Regulations now regulate all privately pooled investment
vehicles which collect funds from investors for investments in
accordance with a predefined investment policy for the benefit of its
investors. AIF Regulations cover a much broader ambit of funds
and categorize them into broadly three categories:
Category I AIF ­ these are funds which invest in start-up or early
stage ventures or social ventures or SMEs or infrastructure or
other sectors or areas which the government or regulators consider
as socially or economically desirable.
Category I AIF presently has 4 sub-categories, namely, venture
capital funds, SME Funds, social venture funds and infrastructure
funds. Investment norms have been prescribed for each of the sub-
categories to ensure that the fund allocates substantial majority of
its capital to the target focus. The stated intent of Category I AIF is
to cover AIFs that are generally perceived to have positive spillover
effects on economy and for which the SEBI/ Government/ other
regulators might consider providing incentives or concessions. The
Explanation to Regulation 3(4)(a) of AIF Regulations which clarified
this aspect also clarified that such funds which are formed as
trusts or companies shall be construed as VCF/VCC as specified
under section 10(23FB) of the Act. The said Explanation is
reproduced below :
"Explanation. For the purpose of this clause, Alternative Investment
Funds which are generally perceived to have positive spillover


                                  30
effects on economy and for which the Board or Government of India
or other regulators in India might consider providing incentives or
concessions shall be included and such funds which are formed as
trusts or companies shall be construed as venture capital company
or venture capital fund as specified under sub-section (23FB) of
Section 10 of the Income-tax Act, 1961"
Category II AIF is a residual category and covers AIFs for which
no specific incentives or concessions are given by the Government/
other regulators. Category II AIF will cover classic private equity
funds and debt funds.
Category III AIFs are AIFs which employ diverse or complex
trading strategies and may employ leverage including through
investment in listed or unlisted derivatives. Category III AIF will
cover hedge funds or funds which trade with a view to make short
term returns. Similar to Category II AIF, no specific incentives or
concessions are given by the Government/ other regulators.
The AIF Regulations provide that Category I AIF which are formed
as trust/ company shall be construed as venture capital company/
venture capital fund under s. 10(23FB) of the Act (and will hence
be eligible for the basis of taxation described above ie direct tax
charge on the investors).
The Finance Bill, 2013 proposes to grant tax exemption and
corresponding direct tax charge on the investors to only the
Venture Capital Fund sub-category of Category I AIFs. Further,
there are three conditions being imposed on AIFs in order to be
covered within the ambit of section 10(23FB), namely:
   1. The units/shares of the AIF should not be listed on a
      recognised stock exchange.
   2. The AIF should not have invested in associated companies as
      defined.
   3. The AIF should have invested not less than 2/3rd of its
      investible funds in unlisted equity shares/equity linked
      instruments of domestic unlisted companies.
The first two of the above conditions are imposed only in the tax
law (listing of AIFs is permitted under the AIF Regulations after the
final close of the fund subject to conditions and investment in
associated companies is permitted subject to obtaining a majority
investor consent).




                                 31
The tax implications on account of the proposed amendments are
as follows -
  (a) VCCs/VCFs registered prior to 21st May 2012 under VCF
      regulations will not be impacted by the proposed
      amendment. They will continue to be eligible for pass
      through taxation under section 115U.
  (b) The impact on AIFs registered on or after 21st May 2012
      under AIF Regulations may be summarized as follows :-

     Category Sub-categories which Tax status in an event
              qualify   for    pass AIF is registered on or
              through status today  after 21 May 2012

     I          VCF being     trust   or Will     qualify     as
                company                  VCC/VCF          under
                                         s.10(23FB) but, subject
                                         to compliance of 3
                                         additional   conditions
                                         viz.,
                                            1. VCC/VCF should
                                               remain unlisted
                                            2. Should invest >
                                               2/3rd   investible
                                               funds in unlisted
                                               equity
                                               shares/equity
                                               linked
                                               instruments     of
                                               VCUs
                                            3. Should not invest
                                               in associate VCU

     I               SME Fund                  Will not qualify as
                     Social    Venture         (and, will cease to
                     Fund                      be)      VCC/VCF
                                               under s.10(23FB)
                     Infrastructure            and consequently
                     Fund                      will not be eligible
                                               for pass through
                                               taxation    despite
                                               being identified as



                              32
   Category Sub-categories which Tax status in an event
            qualify   for    pass AIF is registered on or
            through status today  after 21 May 2012
                                              socially desirable
                                              having    positive
                                              spillover  effects
                                              on the economy
                                              and eligible for
                                              other concessions
                                              from
                                              Government/SEB
                                              I
                                              Will be governed
                                              by normal rules of
                                              taxation        as
                                              applicable      to
                                              relevant nature of
                                              entity

   II         Generally       includes        Will not   qualify
              Private equity and debt         as      VCC/VCF
              funds                           under s.10(23FB)

   III        Generally      includes
              hedge funds



(c) Even for new VCCs/VCFs which are registered under AIF
    Regulations, compliance with three additional tax conditions
    referred earlier is necessary to be eligible for pass through
    taxation. In case of breach of any of the conditions,
    VCC/VCF will be governed normal rules of taxation as
    applicable for ordinary company or trust. A clarification is
    required as to whether tax status of VCC/VCF will be
    restored if the breach is subsequently rectified.
(d) Another concern on account of the proposed provisions is
    that if a VCC/VCF makes an investment in one associate
    VCU, would it lose its pass-through status despite the fact
    that all other VCUs in which it has invested are not its
    associates.




                             33
     (e) When normal rules of taxation are applied as a consequence
         of disqualification from pass through taxation, issues such
         as double taxation and/or levy of DDT and/or applicability of
         withholding may arise due to interposition of VCC/VCF
         between VCU and investor.
        Suggestions
      i. The pass-through status may be extended atleast, to
         cover all sub-categories of Category I AIFs (i.e. not only
         to venture capital funds but also to SME Funds, social
         venture funds, infrastructure funds), in line with the
         assurance held out explicitly by AIF Regulations.
     ii. From a long-term perspective, it is best to maintain an
         alignment of the tax laws and the AIF Regulations to
         mitigate the need to constantly update the tax law for
         changes in Regulations so as to not artificially stifle
         the AIFs.
         In fact, last year, the Finance Act, 2012 had removed
         the sectoral restrictions imposed on VCUs by the
         Income-tax Act, 1961 on the ground that since SEBI
         regulates the working of VCF, VCC & VCU, there is no
         necessity of having separate conditions under the
         Income-tax Act, 1961 imposing sectoral restrictions on
         the VCUs.
         Therefore, multiplicity of conditions in different
         regulations in respect of the same entities should be
         avoided. Hence, additional conditions should not be
         imposed under the Income-tax Act, 1961 to qualify for
         tax benefit.
     iii. As regards condition of disqualification on account of
          investment in associate VCU, it is suggested that
          disqualification from pass through status may be
          restricted to income arising from associate VCU only.
          Further, to remove any ambiguity, it may also be
          clarified that if breach of any condition is
          subsequently rectified, the pass through status may be
          restored.
5.      Clause 5- Section 32AC- Additional allowance of 15% in
        respect of investment in new asset
        In order to attract substantial investment in plant and
        machinery, an investment allowance of 15% is proposed to


                                  34
be allowed to an assessee, being a       company engaged in
manufacture of an article or thing, if   it acquires or installs
new plant and machinery during            the period between
1.4.2013 to 31.3.2015, by investing      a sum of more than
Rs.100 crore.
The issues arising out the said proposal and our suggestions
regarding the same are briefed hereunder -
(a)   Since there are a large number of small and medium
      enterprises in India, the requirement of minimum
      investment of Rs.100 crore and the time limit of 2
      years to make such investment to claim the benefit of
      investment allowance appears to be very stringent.
(b)   Further, non-extension of the benefit of this clause to
      non corporate assessees seems to be unjustifiable.
(c)    It may be noted that last year, vide the Finance Act,
      2012, the benefit of additional depreciation under
      section 32(1)(iia) was extended to an assessee engaged
      in the business of generation or generation and
      distribution of power. However, section 32AC does not
      extend the benefit of investment allowance to this
      sector.
(d)   It is proposed to deny the benefit of investment
      allowance in case the asset qualifies for 100%
      depreciation in any previous year. However, investment
      allowance is intended to be an additional benefit and
      therefore eligibility for 100% depreciation should not
      be a factor to deny the proposed additional benefit of
      investment allowance. Further, by doing so, assets
      eligible for 60% depreciation would stand on a better
      footing than assets eligible for 100% depreciation. Not
      only would 80% cost of assets be allowed by way of
      depreciation (60%) and additional depreciation (20%),
      but such assets would be entitled to an investment
      allowance (15%) as well, leading to writing off 95% of
      the total cost in the first year itself. Also, such assets
      would also be eligible for further depreciation@60% in
      the succeeding years on the written down value.
(e)   Further, no provision for carry forward and set-off of
      investment allowance has been provided in the
      Finance Bill, 2013. In case the assessee does not have



                           35
        sufficient profits to set-off investment allowance, it
        cannot avail the benefit of investment allowance
        inspite of having made the required investment in new
        plant and machinery. Therefore, a provision should be
        incorporated permitting carry forward of investment
        allowance. It may be noted that the erstwhile section
        32A contained a provision for carry forward and set-off
        of investment allowance.
  Suggestions:

  It is suggested:

a. The threshold limit may be fixed at a moderate level of
   say, Rs.10 crore, so as to attract investment in plant
   and machinery by small and medium enterprises, which
   are the "drivers" or economic growth.

  Also, the permissible period of investment may be
  increased to atleast 5 years for proper planning and
  execution of medium and large sized projects.

b. Further, for the purpose of encouraging investment in
   Plant and Machinery, the benefit of deduction may be
   extended to assessees other than companies as well.

c. On the lines of section 32(1)(iia), the benefit of
   investment allowance under section 32AC may be
   extended to an assessee engaged in the business of
   generation or generation and distribution of power.

d. Clause (v) of proposed section 32AC(4) may be deleted so
   that eligibility for 100% depreciation would not be a
   disqualification for claiming investment allowance.

e. A suitable provision be incorporated enabling carry
   forward of investment allowance for set-off against
   business income of the succeeding years. In line with
   the provision for carry forward of business loss,
   investment allowance may be allowed to be carry
   forward for eight assessment years.




                            36
6.   Clause 7 ­ Section 40(a)(iib) - Disallowance of certain
     payments made by State Government Undertaking (SGU)

     Section 40(a)(iib) has been inserted to provide that SGU will
     not be entitled to deduction of certain payments in the
     nature of royalty, licence fee, service fee, privilege fee, service
     charge or any other fee or charge made to State Government
     in computing income from business or profession.

     Section 40(a)(iib) also defines the class of entities that will be
     considered as SGU. One of the classes covered within the
     definition of SGU is a company in which State Government
     holds more than 50% equity.

     Denial of deduction to such SGU, which has private
     participation, may create discriminatory treatment between
     two enterprises ­ one of which has 49% as compared to 51%
     private participation. While disallowance will be made only in
     the case of the SGU, though both the entities may make
     identical pay-outs to the State Government.

     Suggestions

     In order to provide level playing field to different
     business units in matter of computation of business
     income, the proposals may be re-considered.        The
     payments made by SGU to the Government are likely to
     be subject to transfer pricing regulation under section
     92BA read with section 40A(2).

     In fact, the provisions of section 40A(2) may be suitably
     amended to ensure that the impugned expenditure is
     subjected to transfer pricing scrutiny, rather than
     disallowing the expenditure which may result in
     inequity between undertakings which have more than
     50% State Government holding and those having less
     than 50% State Government holding.

7.   Clause 8- Section 43CA - Special provision for full value
     of consideration for transfer of assets other than capital
     assets in certain cases.

     This section is proposed to be inserted to provide for
     adoption of stamp duty value in case of transfer of land or
     building or both held as stock-in-trade. Several issues that


                                  37
     may crop up due to implementation of this section in its
     present form and suggestions thereof are as under:

a)   This proposal may encourage structuring of real estate
     transactions in such a manner to circumvent increased tax
     liability arising on account of adoption of stamp duty value.
     For example- Having agreed to sell the property at Rs. 80
     Lakhs, as against the value of Rs. 100 Lakhs considered for
     stamp duty purposes, the transaction may be structured
     to record the transaction value at Rs.100 Lakhs with a
     rebate of Rs. 20 Lakhs.

     Suggestion

     The proposal in its present form may not be desirable
     and may lead to structuring of transactions. Thus, the
     validity of the proposal needs to be reconsidered.

b)   This provision would result in double taxation of income
     since, the difference between the stamp duty value and
     actual consideration would be taxable in the hands of the
     seller. However, the buyer can claim only the actual cost as
     deduction while computing his business income or capital
     gains arising at a later point of time when he sells the asset.

     Suggestion

     Suitable provisions may be incorporated in the statute
     so that the same income is not subject to tax twice.

c)   This section provides for adoption of stamp duty value on the
     date of agreement, where the date of agreement is different
     from the date of registration, provided at least a part of the
     consideration has been received on or before the date of
     agreement by any mode otherwise than by way of cash. In
     this context, it may be clarified whether "otherwise than by
     way of cash" would include transfer by book entries, transfer
     by Hundi, promissory notes etc. and transfer by exchange
     agreement.

     Suggestion
     It may be clarified as to whether the term "otherwise
     than by way of cash" would include transfer by book


                                38
     entries, transfer by Hundi, promissory notes etc. and
     transfer by exchange agreement.

d)   Further, in a case where the year of agreement and the year
     of registration are different, a clarification is required as to
     whether the tax liability would arise in the year of agreement
     or year of registration or the year in which possession is
     obtained.

     Suggestion

     It may be clarified as to whether the tax liability would
     arise in the year of agreement or year of registration or
     the year in which possession is obtained.

e)   Since only capital assets are excluded from the applicability
     of this section, agricultural land which is not included in the
     definition of capital asset, may fall within the scope of this
     section. Therefore, specific exclusion of agricultural land
     from the ambit of this provision may be provided for.

     Suggestion

     It is suggested that agricultural land be specifically
     excluded from the ambit of this provision.

f)   This section provides for adoption of stamp duty value in
     case of "transfer" of land or building or both held as stock-in-
     trade. It may be noted that the definition of term "transfer"
     in section 2(47) is in relation to a capital asset only. The
     intended scope of coverage of the term "transfer" for the
     purpose of section 43CA needs to be defined.

     Suggestion

     It is suggested that the term "transfer" be specifically
     defined for the purposes of section 43CA.

g)   Para 12A of the Form No.3CD i.e. Statement of particulars
     required to be furnished under section 44AB of the Income-
     tax Act, 1961 requires reporting of particulars of capital
     assets converted into stock-in-trade. A similar clause to
     report the particulars of transfer of land or building or both


                                39
     held as stock-in-trade for a consideration less than the
     stamp value may also be included in Form No.3CD.

     Suggestion

     A specific clause may be included in Form No. 3CD in
     respect of such transactions.

h)   It is further proposed to provide that the stamp duty value
     may be taken as on the date of the agreement for transfer
     instead of the date of registration, provided at least a part of
     the consideration for transfer has been received by any mode
     other than cash on or before the date of agreement.

     Suggestion

     A similar provision for adopting stamp duty value on
     the date of agreement for transfer instead of the date of
     registration be inserted in section 50C also.

8.   Clauses 9 ­ Section 56(2)(vii) ­Immovable property
     received for inadequate consideration

     This section is proposed to be amended to bring within its
     scope immovable property received for inadequate
     consideration, where the difference between the stamp duty
     value of land or building or both and the actual
     consideration exceeds Rs.50,000.

     This proposal would lead to double taxation of the
     differential amount i.e. the difference between the stamp
     duty value and the actual consideration would be taxable in
     the hands of the buyer as "Income from other sources"
     under section 56(2)(vii) and "Capital Gains" in the hands of
     the seller on account of adoption of stamp duty value as full
     value of consideration for transfer of property as per section
     50C.

     Suggestion:

     It is, therefore, suggested that immovable property
     transferred for inadequate consideration be kept
     outside the scope of section 56(2)(vii).


                                40
9.     Clause 11 ­ Section 80CCG- Rajiv Gandhi Equity Linked
       Savings Scheme

       The deduction available in the first year for investment by a
       new equity investor, having gross total income of up to Rs.10
       lakh, in listed equity shares under the Rajiv Gandhi Equity
       Scheme, is now proposed to be extended to a new retail
       investor having gross total income of up to Rs.12 lakh, for a
       period of three consecutive assessment years beginning with
       the assessment year relevant to the previous year in which
       the listed equity shares or listed units of equity oriented fund
       were first acquired

       Certain issues arising from the proposed amendments are
       given below:

     i.   The proposed amendment does not clearly bring out that
          fresh investment of an amount of up to Rs.50,000 has to
          be made in each of the years to claim the maximum
          deduction of Rs.25,000 each year.

          Accordingly, it needs to be clarified that it is not possible
          to claim deduction of Rs.25,000 in each of the three years
          on the basis of initial investment of Rs.50,000 in the first
          year alone. Further, it also does not imply that the
          maximum aggregate deduction for all three years is only
          Rs.25,000, which can be claimed over three years by
          investing the amount of Rs.50,000 over a period of three
          years.

          Also, it may be clarified as to whether the gross total
          income cap of Rs.12 lakh is only for the first year or for
          each of the three consecutive years. In such a case, if the
          gross total income for the second year exceeds Rs.12 lakh,
          the assessee would be able to avail the benefit only for
          one year, even if his gross total income for the third
          year does not exceed Rs.12 lakh.

          Suggestion




                                  41
       It is, therefore, suggested that the language of the
       section may be suitably modified to reflect the
       correct intent of law.

ii.    Since this amendment is proposed to be made effective
       only from 1.4.2014 i.e. A.Y.2014-15, the new retail
       investors who had availed the benefit under section
       80CCG for one year by making the investment in
       P.Y.2012-13 are not eligible to avail the benefit of
       deduction in the next two years.      This amendment,
       therefore, may create inequity between the persons who
       had made investment prior to 1.4.2013 and those who
       had made investment on or after that date under the
       same scheme.

       Suggestion

       Considering that this amendment, may create
       inequity between the persons who had made
       investment prior to 1.4.2013 and those who had
       made investment on or after that date under the
       same scheme, it is suggested that the amendment
       may be given effect to from A.Y.2013-14.

iii.   Further, as per section 112(2), where the gross total
       income of       an assessee includes any income arising
       from the transfer of a long-term capital asset, the gross
       total income shall be      reduced by the amount of such
       income and the deduction under Chapter VI-A shall be
       allowed as if the gross total income    as   so   reduced
       were the gross total income of the assessee. Similar
       provision is contained in section 111A as well.

       According to these provisions, the "gross total income" as
       reduced by such capital gains would be the "gross total
       income" for the purpose of all deductions under Chapter
       VIA. Since deduction under section 80CCG falls under
       Chapter VIA, this provision would also imply that for
       determining the threshold limit of Rs.12 lakh for availing
       the benefit under this section, the capital gains taxable
       under section 112 & 111A are to be excluded.

       Suggestion


                              42
        Appropriate amendments may be made to clarify the
        real intent of the proposed amendment i.e. whether
        Long term capital gains taxable under section 112
        and Short term capital gains taxable under section
        111A needs to be excluded for determining the limit
        of Rs.12 Lakhs.

10.   Clause 13 ­ Section 80EE - Deduction in respect of
      interest on loan taken for residential house property

      A new section 80EE is proposed to be inserted to provide for
      additional deduction of up to Rs. 1 lakh under Chapter VIA
      in respect of interest on housing loan sanctioned by a bank
      or housing finance company during the period between
      1.4.2013 and 31.3.2014 for acquisition of residential house
      property.

      The issues emerging from the proposed provision are as
      follows-
           It may be clarified that interest on loan taken for
            construction of residential house property also
            qualifies for the additional deduction i.e. the term
            "acquisition" includes "construction" as well.

          As per sub-section (2) of proposed section 80EE, in
          case interest payable for the P.Y.2013-14 is less than
          one lakh rupees, the balance amount shall be allowed
          in A.Y.2015-16.




           It may be noted that deduction under section 80EE is
           an additional deduction, over and above the deduction
           allowable under section 24. Therefore, only if the total
           interest exceeds Rs.1,50,000, the benefit under section
           80EE itself would be available. If the interest payable
           is less than Rs.1,00,000, as required in this sub-
           section, no benefit under section 80EE would be
           available even during the P.Y.2013-14.       Since the
           entire interest would be deductible under section 24
           itself.

           Therefore, sub-section (2) of section 80EE may be
           reworded to provide that in case "the deduction


                               43
  allowable under this section" for the P.Y.2013-14 is
  less than one lakh rupees, the balance amount
  shall be allowed in the A.Y.2014-15.

 Further, in case of extension of benefit to interest on
 loan taken for construction, whether interest on a
 new loan sanctioned during the said period to repay
 an earlier loan in respect of a house property under
 construction would be eligible for deduction is another
 issue requiring clarification.

 The proposal, in its present form, does not extend the
 benefit to interest on housing loans taken from
 employer, unless the employer happens to be a bank
 or financial institution.

 The restriction of eligibility for deduction under this
 section to housing loans sanctioned on or after
 1.4.2013 may result in inequity vis-à-vis persons
 whose home loans were sanctioned before 1.4.2013 in
 respect of the first house property. It is possible that
 in many cases where loan is sanctioned prior to
 1.4.2013 in respect of the first house property, the
 amount is yet to be disbursed or even if the amount is
 disbursed, the person is yet to receive possession of
 the property.

 Considering the high cost of acquisition of house
 properties in metro cities, the threshold limit of Rs.40
 lakhs and Rs.25 lakhs, respectively, for the cost of
 property and loan sanctioned, for availing the benefit
 of section 80EE may be impracticable and non-
 workable. Further, since the banks generally give loan
 upto 85%-90% of the cost of property, the threshold
 for loan should be appropriately increased to at least
 Rs. 35 Lakhs.

 Further, the threshold limit of Rs.25 lakhs is in
 relation to loan sanctioned. Loan disbursed would be
 a more realistic criterion for fixing a threshold, since
 the entire loan sanctioned may not be disbursed in all
 cases.




                      44
      Suggestions

      Therefore, ideally, the proposed benefit may be
      extended to interest on the loan taken for the first
      house property acquired or constructed, irrespective of
      the whether the housing loan is sanctioned before or
      after 1.4.2013. In any case, the deduction of
      Rs.1,50,000 in respect of self-occupied property was
      introduced fifteen years back and keeping in mind the
      inflationary conditions, the additional deduction of
      Rs.1,00,000 should be extended in respect of all loans,
      albeit for the first house property. Further, instead of
      providing the same as a deduction under Chapter VIA
      only for A.Y.2014-15 and A.Y.2015-16, the same may be
      provided by way of insertion of another proviso to
      section 24(b) for the sake of consistency.

11.   Clause 17 ­ Extension of sunset clause under section 80-
      IA

      The terminal date for power sector undertakings to set up,
      start transmission or distribution or undertake substantial
      renovation is proposed to be extended by one year i.e. from
      31.3.2013 to 31.3.2014. In fact, the terminal date has been
      extended several times in the last few years.

      Suggestion

      In order to ensure clarity and certainty as regards the
      period within which the undertaking should be set-up or
      within which it should start transmission etc. the
      terminal date may be extended till such time the
      country has acquired self-sufficiency in the supply of
      power i.e. the terminal date may be kept open-ended.

12.   Clause 18- Section 80JJAA ­ Deduction in respect of
      employment of new workmen

      Section 80JJAA presently grants deduction of an amount
      equal to 30% of wages paid to new regular workmen
      employed in industrial undertaking which is engaged in
      "manufacture or production of article or thing".



                               45
      As per the Explanatory Memorandum, the existing provision
      of section 80JJAA was intended for employment of blue
      collared employees in the manufacturing sector whereas in
      practice, it is being claimed for employees employed in other
      sectors as well. The Finance Bill 2013, thus, proposes to
      amend section 80JJAA by providing that deduction shall be
      allowed to an Indian company which is engaged in
      "manufacture of goods in a factory" and where new regular
      workmen are employed by the taxpayer in such factory.

      Consequent to the proposed amendment, the blue collared
      employees who support the organization while being outside
      the factory premises may not be considered as "employed in
      such factory". The taxpayers who are not registered under
      the Factories Act, 1948 may also not be eligible for
      deduction. It may be noted that inspite of the amendment
      imposing further restrictions, it is still possible that the
      benefit of deduction may continue to be misused.

      Suggestions

            It is suggested that the existing provisions be
            continued so that the benefit is available for blue
            collared employees in the manufacturing sector.

            Further, it is suggested that a suitable clause be
            added in Form 3CD requiring the tax auditor to
            certify the particulars of new regular workmen
            employed and the additional wages paid to them
            to ensure the correctness of claim under section
            80JJAA.

13.   Clause 33 ­ Amendment of section 142(2A)

      Section 142(2A) has been amended apparently to amplify the
      scope of special audit i.e. the Assessing Officer would now
      have the power to direct a special audit, having regard to
      volume of transactions, doubts about the correctness of the
      accounts, multiplicity of transactions in the accounts or
      specialized nature of business activity of the assessee. So
      far, the "nature and complexity of the accounts" was the
      necessary and sufficient criterion for directing special audit.

      The proposed amendment appears to have the effect of
      enlarging the scope of special audit considerably. The scope


                                 46
of reasons for invoking the powers under section 142(2A) to
direct the assessee to get the accounts audited by an
accountant have been substantially increased.

Empowering the Assessing Officer to invoke tax audit under
section 142(2A) merely due to the "volume of accounts" or
"multiplicity of transactions" may have the effect of bringing
each and every case within the ambit of special audit. Each
and every gas station, share broker, retailer, agency business
and the like may fall within the purview of this section solely
on account of the "volume of accounts" or "multiplicity of
transactions".      Also, as these expressions are highly
subjective, they are prone to adoption of very low threshold
to trigger the application of this provision. This may cause
undue hardship to even those assessees who genuinely
ensure compliance with the provisions of law. Further, the
specialized nature of business activity of the assessee, like
say electricity or insurance business, in our opinion, cannot
be a standalone reason for directing special audit.

Special audit, as the name suggests, should be invoked only
in exceptional circumstances, which is the reason why the
existing section aptly confines that it is the nature and
complexity of accounts which has to be considered while
directing such audit. There should be a distinction between
regular audit and special audit. The scope of special audit
cannot be increased to such an extent that majority of the
assessees, whose accounts have already been audited, are
once again subject to a special audit merely due to, say,
volume of accounts being more in case of large enterprises.
The special audit is more in the nature of investigation or
due diligence, and therefore, needs to be directed only in
exceptional cases having regard to the nature and complexity
of accounts.

Further, this may increase the possibility of some Assessing
Officers resorting to special audit since it gives them an
extended time for completing their assessment.

Suggestion

It is suggested that no change is required in the existing
section, since it adequately takes care of all cases of


                           47
      complexities, including doubts about the correctness of
      accounts and multiplicity of transactions.

14.   Clauses 42 ­ Insertion of new section 194-IA

      Tax is to be deducted@1% on consideration for transfer of
      immovable property, other than agricultural land. However,
      no tax is to be deducted if the consideration for transfer of
      immovable property is less than Rs.50 lakhs.

      The issues emerging from the proposed amendment are as
      under:

  a) In a large number of cases, loan is taken by the transferee
     from a bank or financial institution, employer etc. for
     purchase of immovable property.           In such cases, the
     payment is not made directly by the transferee to the
     transferor, except for the down payment. The major part of
     the consideration is paid by the bank, financial institution
     etc. to the transferor, either in instalments or lump sum.

      Suggestion

      Therefore, the section may be appropriately modified to
      require the transferee or the payee, as the case may be,
      to deduct tax at source from the consideration paid or
      credited to the transferor.

  b) Further, the proposed provisions for tax deduction may
     cause hardship to those sellers who claim full capital gains
     exemption by investing the capital gains or the net
     consideration, as the case may be, in the manner provided in
     section 54, 54F, 54EC etc., since in such cases, there would
     be no tax liability on account of capital gains. Further, for
     the purposes of section 54F and 54GB, the entire net
     consideration is required to be invested, which would pose a
     difficulty, since tax would already have been deducted from
     the net consideration.

      Suggestion

      It is, therefore, suggested that section 197 may be
      amended to permit the assessee to make an application


                                48
   to the Assessing Officer for issuing a certificate for no
   deduction of tax or deduction of tax at a lower rate. In
   the alternative, the seller may be permitted to give a
   declaration to the Assessing Officer and furnish a copy
   of the same to the buyer

c) Since this provision requires deduction of tax by the
   transferee, it presupposes that the transferee should have a
   TAN. This may cause genuine hardship to those transferees
   who do not possess a TAN. Further, it would be an additional
   burden to require such persons to apply for and obtain TAN
   for a single transaction.

d) Also, the assessees may face practical hardship in applying
   the proposed TDS provision, in case where the consideration
   is in kind (which is common practice in real-estate sector).
   For e.g., a land-owner transfers development rights to a
   developer for agreed built-up area in consideration.

e) Dual TDS implications on the same transaction in such
   cases may lead to practical difficulties as in the said case,
   both the land-owner as well as the developer would be liable
   for TDS on the same transaction.

f) Hardship is also likely to be faced in cases where the
   property is purchased jointly, as it is not clear whether the
   threshold limit of Rs. 50 lakhs is to be applied to each owner
   or to the total consideration for the property.

g) If the payment is being made in installments, like in the case
   of construction linked payments, then the point of time when
   tax deduction and tax remittance should be made requires
   clarification. In such cases, there may be several installment
   payments based on the stage of completion. Consequently, if
   tax is required to be deducted in respect of each payment,
   whether a single remittance can be made at the stage of tax
   deduction in respect of the last payment or multiple
   remittances are required at each stage is an issue which
   needs to be addressed. Multiple remittances may pose a
   problem, especially in a case, where the deductor does not
   possess a TAN.




                             49
  h) In case of non-compliance due to non-furnishing of PAN, the
     provisions of section 206AA would be attracted. At present,
     credit for tax deducted under section 206AA is not being
     reflected in Form No. 26AS, even if deductee submits his PAN
     subsequently. This issue needs to be addressed so that credit
     of tax deducted and remitted is not denied to genuine
     assessees.

  i) The tax department may face the difficulty of relating
     different challans to the year of reporting of income by the
     transferor. For instance, the capital gains may be chargeable
     to tax in the year of transfer whereas deduction of tax at
     source may have taken place in a different year.

      Suggestion

      It is, therefore, suggested that a simple challan for one-
      time remittance of tax by the transferee/payee be
      prescribed and such remittance may be made within a
      prescribed time after payment of the last installment.
      Such a remiitance may be made a pre-condition for
      registration of property in the name of the transferee.
      This would dispense with the need for obtaining TAN
      and at the same time, ensure garnering of revenue at an
      early point of time. The PAN of the transferor and
      transferee should be required to be quoted on the
      challan so that the transferor can take credit of tax
      deducted and remitted.

      In order to overcome the difficulties in cases where
      remittance and taxability arises in different years, a
      system of pass book be introduced in Form No.26AS
      wherein the balance of unutilized credit be allowed to
      be carried forward.

15.   Chapter VII ­ Commodities Transaction Tax (CTT)

      The CTT is proposed to be introduced in a limited way by
      insertion of Chapter VII in the Finance Bill, 2013. The
      Finance Minister, in his budget speech, has clarified that
      trading in commodity derivatives will not be considered as a
      speculative transaction. However, no amendment has been



                                50
      proposed to this effect in section 43(5) defining a speculative
      transaction.

      Consequently, in the absence of specific exclusion provision
      in section 43(5), characterisation of commodity derivative
      transactions (including those which are subject to CTT)
      would be governed by the existing provisions and they run
      the risk of being treated as speculative transactions, unless
      established by the taxpayer to be for hedging purpose.

      Suggestion

      Appropriate    amendments may be made in section 43(5)
      to exclude      an eligible transaction in respect of
      commodity       derivatives  from  the   definition of
      "speculative   transaction".

16.   First Schedule ­ Surcharge

      A surcharge@10% to be attracted in the hands of an
      individual with total income exceeding Rs.1 crore whereas for
      corporate (domestic companies), surcharge@10% is attracted
      only if, the total income exceeds Rs.10 crores. For the total
      income level between Rs.1 crore to Rs.10 crore, the corporate
      surcharge is only 5%.

      Suggestion

      There should be a parity in the rates of individual and
      corporate surcharge as well the threshold above which
      they are attracted. The rates of surcharge may be
      accordingly modified to maintain parity.

17.   Amendment by the Finance Act, 2012 in Section 40 and
      Section 201

      The Finance Act, 2012 had amended section 40(a)(ia) to
      provide that disallowance under that section would not be
      attracted where the tax deductible at source has been paid
      by the resident payee and he has furnished his return of
      income disclosing such payment within the prescribed time.
      This amendment is proposed to be made effective only from
      A.Y.2013-14.


                                 51
     Section 201 was amended with effect from 1st July, 2012 to
     provide that in such a case, the payer would not be treated
     as an assessee-in-default.

     It is suggested that since this a genuine difficulty being faced
     by the payer since the introduction of section 40(a)(ia) w.e.f.
     1.4.2005, therefore, this provision should be given effect to
     retrospectively with effect from that date of introduction of
     the provision, so that in cases where the tax was paid
     directly by the payee, there should be no disallowance of the
     expenditure in the hands of the payer. Further, above all,
     since the amendment clarifies the real intent of law, it should
     be given effect to retrospectively.

     Also, since disallowance under section 40(a)(ia) would be
     attracted when tax is not deducted at source during the
     relevant previous year, therefore, a provision needs to be
     incorporated to provide that in such cases where tax is paid
     by the resident payee, the payer is deemed to have deducted
     at source at the time when it was so deductible.

     Suggestion:

     The provisions of section 40(a)(ia) and section 201(1)
     may be amended retrospectively with effect from
     1.4.2005 in order to clarify the real intent of law and to
     remove hardship, thereby reducing further litigations.

     The later part of the second proviso may be suitably
     amended to provide that it shall be deemed that the
     assessee has deducted tax in the relevant previous year
     and paid the tax on such sum on or before the due date
     of furnishing the return of income.

18. Section 43A - Exchange fluctuation loss due to sharp fall
    in Rupee value

    Section 43A was inserted in the Income-tax Act, 1961 by
    Finance Act of 1967, which permitted Capitalization of Foreign
    Exchange Fluctuation Loss in the borrowing used for
    acquisition of assets outside India.




                                52
The exchange fluctuation loss on borrowings used for
domestically acquired assets is not permitted to be capitalized
for tax purposes.

The current financial year saw Rupee depreciate significantly
against the US $ severely impacting the industry particularly
those who have exposure to External Commercial Borrowings
(ECBs) and Foreign Currency Convertible Bonds (FCCBs).

The provisions of Section 43A are similar to the provision
contained in Schedule VI to the Companies Act, 1956. As per
,,instructions in accordance with assets should be made out as
contained in Schedule VI, vide notification No. GSR 129 dated
3-1-1968, the following instructions were inserted:-

 "Where the original cost aforesaid and additions and
 deductions thereto, relate to any fixed asset which has been
 acquired from a country outside India, and in consequence of
 a change in the rate of exchange at any time after the
 acquisition of such asset, there has been an increase or
 reduction in the liability of the company, as expressed in
 Indian currency, for making payment towards the whole or a
 part of the cost of the asset or for repayment of the whole or a
 part of moneys borrowed by the company from any person,
 directly or indirectly in any foreign currency specifically for the
 purpose of acquiring the asset (being in either case the liability
 existing immediately before the date on which the change in
 the rate of exchange takes effect), the amount by which the
 liability is so increased or reduced during the year, shall be
 added to, or, as the case may be deducted from the cost, and
 the amount arrived at after such addition or deduction shall be
 taken to be the cost of the fixed asset."

The above provisions were deleted vide notification no. GSR
226(E), dated 31-03-2009 w.e.f. 31-03-2009.

The Schedule VI has been amended vide Notification No. SO
447(E) dt. 28-2-2011 w.e.f. 1-4-2011. In the revised Schedule
VI, under the heading "General Instruction" Sr. No. 1 it is
stated as under:

       "Where compliance with the requirements of the Act
       including Accounting Standards as applicable to the
       companies require any change in treatment or



                              53
       disclosure including addition, amendment, substitution
       or deletion in the head/sub-head or any changes inter
       se, in the financial statements or statements forming
       part thereof, the same shall be made and the
       requirements of the Schedule VI shall stand modified
       accordingly."

The Accounting Standards have been notified vide notification
GSR 739(E) dt. 7-12-2006. For the above purpose the relevant
Accounting Standard is AS-11 ,,The Effects of Changes in
Foreign Exchange Rates

Para 46 and Para 46A of AS-11 were inserted vide notification
no G.S.R. 225(E) dated 31st March, 2009 and G.S.R. 914(E)
dated 29th December, 2011 respectively. The effect of these
notifications is that foreign exchange difference on foreign
loans can be capitalized to the cost of the depreciable assets
even if the assets are acquired in India. No distinction is made
whether the assets are imported or are purchased within
India.

Suggestion

It is suggested that Section 43A be amended to allow
Capitalization of such foreign exchange loss even for
domestically acquired asset.




                            54
                  INTERNATIONAL TAXATION

19.   Section 9(1)(i) -Indirect transfer of assets

      Certain unintended hardships and consequences of
      provisions relating to Indirect transfer of Shares introduced
      by the Finance Act, 2012 are as under:

            Vide Finance Act 2012, a number of         amendments
            dealing with Indirect transfer of shares   of a Foreign
            company, resulting in change in the        control over
            Indian business, were introduced with      retrospective
            effect.     These amendments have            substantial
            implication for Non Resident.

            We appreciate that the Government is not yet decided
            on     withdrawing   retrospective    impact    of  the
            amendments introduced last year and that the matter
            is under consideration.       We appreciate that the
            decision on some sensitive aspects of the scope and
            width of amendments may need deeper examination.
            There are, certain impacts or effects of the amendment
            which, we believe, are clearly unintended, but, they do
            still work as impediment to decision making in capital
            investment proposals or, create uncertainties in the
            minds of Investors.

            Shome       Committee      has    already    provided
            recommendations on some of the clauses which create
            uncertainty or unintended hardship. The Government
            may consider incorporating those recommendations at
            the stage of enactment without conceding to
            retrospective effect or without committing itself to
            aspects which need deeper examination. For example,
            acceptance of the following recommendations of Shome
            Committee may go a long way in reassuring certainty
            and fairness to Investors and may restore wave of
            confidence:

                  Provisions relating to indirect transfer may be
                  invoked only when India assets constitute 50%
                  or more of the value of transaction
                  Taxability may be limited to the gains which
                  relate to India assets


                                55
                  The application may be limited to cases where
                  there is change in stipulated         threshold of
                  interest or equity interest in the Indian assets or
                  Indian business
                  Transactions such as transactions on the Stock
                  Exchange, Intra-group Reorganizations, Mergers,
                  Demergers, Portfolio / Institutional investments
                  etc may be exempted
                  It needs to be clarified that dividend distributed
                  by one foreign company to an upper tier
                  company is not chargeable to tax in India merely
                  because underlying income may have been
                  sourced in India.

20.   Clause 25 ­Amendment in section 115A -Tax Rate of
      25%: Tax on Royalty and FTS

      Section 15A of the Act provides for special rate of tax in case
      of Non Resident taxpayer where the total income includes
      any income by way of Royalty and Fees for technical services
      (FTS) received from Government or an Indian concern under
      an agreement entered into after 31 March 1976 and which
      are not effectively connected with permanent establishment,
      if any, of the Non Resident in India.

      The tax is payable on the gross amount of income at the rate
      of:

            30% if income is received pursuant to agreement
            before 1st June 1997

            20% if income is received pursuant to agreement
            before 1st June 2005

            10% if income is received pursuant to agreement after
            31st May 2005

      The Finance Bill, 2013 has, by amending section115A,
      proposed that a rate of 25% plus surcharge and cess on
      gross basis shall be applicable to any income in the nature of
      royalty and FTS received by a Non Resident, under an
      agreement entered after 31 March 1976, which is taxable
      under section115A.




                                 56
The intention for increase in the tax rate is stated to be
twofold. Honble Finance Minister observed that the majority
of tax treaties allow India to levy tax on gross amount of
royalty at rates ranging from 10% to 25%, whereas the tax
rate as per section 115A is 10% and in some cases, has
resulted in taxation at a lower rate of 10% even if the treaty
allows the income to be taxed at a higher rate. Honble
Finance Minister also observed that the lower rate of 10% is
being abused for distribution of profit by subsidiary to a
foreign parent company in the form of Royalty. This
amendment is effective from AY 2014-15.

Presently, the profit element pre-supposed in the transaction
is approximately 25% resulting in a prescribed tax rate of
10% on gross basis, given that a foreign company pays tax @
40% + surcharge and cess. Recovering tax of 25% +
surcharge and cess on gross amount increases the
supposedly profit element contained in the transaction to
approximately 63%. This does not appear to be a fair rate,
but rather a prohibitory one which perhaps may be a reality
in cases of exception in commercial life ­ in particular, in
relation to FTS. .

In a case where tax is required to be borne by Indian
company, the effective rate of tax will be close to 33% on the
shoulder of the Indian company. The tax rates under the Act
were originally as high as 30% and were gradually reduced to
10% taking cognizance of the fact that higher tax rates are a
hindrance to the inflow of technology into India. This
underlying rationale appears to have been entirely
overlooked while proposing the higher tax rate of 25% on the
gross amount of royalty / FTS income of a Non Resident in
cases where such income is not effectively connected to a
Permanent Establishment in India.

If the proposed hike in tax rate is enacted, in due course
Indian companies may find it difficult to implement new
technology, avail technical expertise, etc. owing to the
associated tax burden (if the tax liability is to be borne by
them) or reluctance on the part of multinational companies
that are discouraged to deal with a complicated and
uncertain tax scenario in India.




                          57
The following taxpayers would be impacted adversely due to
increase in rate:

      A resident of non treaty jurisdiction

      A taxpayer who has been denied treaty benefits.

      A taxpayer who negotiated his pricing in a net of tax
      contract in anticipation of expected tax rate of 10%

      A resident of a treaty jurisdiction, which provides for a
      rate higher when compared to the existing rate of tax
      under the Act, i.e., 10%

The Honble Finance Minister in his budget speech stated as
below:

      "Another case is the distribution of profits by a
      subsidiary to a foreign parent company in the form of
      royalty. Besides, the rate of tax on royalty in the
      Income-tax Act is lower than the rates provided in a
      number of Double Tax Avoidance Agreements. This is an
      anomaly that must be corrected. Hence, I propose to
      increase the rate of tax on payments by way of royalty
      and fees for technical services to non-residents from 10
      percent to 25 percent. However, the applicable rate will
      be the rate of tax stipulated in the DTAA."
The reasons provided by the Honble Finance Minister for
increasing the tax rate are:

      In a number of tax treaties with India have a high rate
      of taxation

      Low rate of 10% is being misused by companies to
      repatriate dividend in the form of royalty or FTS

One may note that the reasoning provided for increase in tax
rate cannot be stated to be correct due to the following
reasons:

      With introduction of transfer pricing regime, it may   be
      not correct to assume that dividend is repatriated     in
      the form of royalty or FTS; any such attempt will      be
      captured in TP disallowance in the assessment          of
      Indian company.




                           58
     Without prejudice, in commercial world, the statement
     may be true only in relation payment by a wholly
     owned subsidiary to its 100% parent company ­ at
     best, Intra group transactions. That still cannot
     explain the amendment which applies to dealings
     between unrelated parties. The amendment may,
     therefore, discourage spread of technology beyond
     group companies.

     On a broad analysis of various tax treaties which India
     has entered into it is pertinent to note that around
     60% to 70% of them have the rate of 10%, the rate
     matches with the proposed rate of 25% very sparingly.
     The Treaties are obviously negotiated based on fair
     estimates of profit comprised in the transaction.

     Ironically, the tax payers who lose treaty shelter due to
     inability to procure TRC despite best efforts will not
     only be subjected to high tax withholding obligations,
     but, will also have the difficulty of expense being
     disallowed. These could be cases of substantial or
     terminal blow to certain Industries.

International experience with regard to taxation of
Royalty:

     On an illustrative analysis of domestic law provisions
     with regard to taxation of royalty it is noticed that:

           Where the domestic law definition of royalty is
           very broad, typically a lower withholding tax rate
           applies (example, China, South Africa, Brazil,
           Malaysia). The WHT is generally lower in the
           range of 10 to 12%.

            It is only where the royalty definition is
           restricted to IP use rights (very narrow), a higher
           withholding tax rate applies (eg. Canada, UK,
           Indonesia). Typically a rate of 20% applies.

           In some cases, a separate and much higher rate
           (a prohibitory rate) is prescribed on payments to
           tax havens/non-cooperative jurisdictions (eg,
           Brazil where a 25% rate applies)




                          59
     Since the definition of royalty in the Indian Act is very
     broad, it is logical that India should go for a lower rate
     or maintain status quo with a 10% withholding tax
     rate. Where this suggestion is not accepted, India
     should reduce the scope of royalty payment under the
     Act to restrict it to only Intellectual Property (IP) use
     rights.

International experience with regard to taxation of Fees
for Technical Services (FTS) :

On an illustrative analysis of domestic law provisions with
regard to taxation of FTS it is noticed that:

           Many countries do not have any WHT
           requirement with regard to payments for cross
           border services. In many jurisdictions, levy of
           tax is restricted to services which are performed
           within the territory.

           In some instances the concept of services is
           linked to the definition of royalties.      Tax
           withholding is restricted to IP related services
           (i.e. services rendered in relation to services
           making available the technology) The tax rate
           on such IP related services is the same as the
           rate for royalty and ranges around 15% to 25%
           (example, Germany, Canada)

           Where the definition of services is a little
           broader, one notices a drop in the WHT to 10%
           (China, Sri Lanka).       Further, the scope of
           obligation is restricted to technical services,
           significantly, the definition of services do not
           include managerial services. They are only
           restricted to technical services. Sri Lanka has a
           separate rate for management fees where is a
           much lower rate of 5%.

           In some cases, a separate and higher rate is
           prescribed on payments to tax havens/non-
           cooperative jurisdictions (eg, Brazil where a 25%
           rate applies in such specific cases ­ though, the
           general rate is still 15%)



                          60
             It is possible that these countries may allow a
             deduction of expenses in performing the service,
             in which case the effective tax rate would work
             out much lower.

       The rate of 25% provided is far in excess of the penal
       rate provided under section206AA for withholding in
       case PAN is not been furnished by the payee.

       In the Indian context, difficulty may be more
       pronounced considering that FTS (that includes
       managerial services) and Royalty is very widely defined
       (example, payment for shrink wrapped software, use of
       equipment, transmission by cable, optic fibre etc is
       also considered as a royalty payment). A number of
       commercial services which are in the competitive
       segment and where the spread of margin is known to
       be very small may also be captured by the amendment.
       There also is ambiguity on interpretation of taxability
       of certain services. There is greater likelihood of
       bonafide cases being captured as default cases.

Suggestions

(i)    Considering the broad coverage under FTS and
       Royalty definitions in Indian law ­ in particular,
       the definition of FTS, it is recommended that the
       existing tax rate of 10% be further reduced (say to
       5% as in case of Sri Lanka for management
       services) or at least be retained at the present
       levels. Enhancing the current rate to the proposed
       25% would adversely impact wide range of cross
       border transactions transacting with India as
       already pointed out above. Further a lower rate
       would also align with the approach which India
       has adopted so far, will match with India treaties
       and will also match with rate of taxes applicable
       in other jurisdictions.

(ii)   The prohibitory rate of 25% may be restricted in
       its application only to transactions with persons
       located in notified jurisdiction area [as per
       Section 94A of the Act] similar to the treatment
       considered by some countries like Brazil.



                           61
      (iii) Additionally, an option should be provided to a
            Non Resident taxpayer to enable it to offer to tax
            its income on a net basis of taxation (i.e. income
            less expenses being permitted to be taxed at the
            normal corporate tax rate , example 40 percent
            plus surcharge and cess in case of foreign
            companies).

      (iv)   Concurrently, the definition of "FTS" may be
             modified and may be brought in line with
             predominant International practice.

      (v)    The least, the amendment may be made
             prospective to be applied to agreements which are
             entered into on or after 31st May 2013 so as to
             grandfather and protect those cases ­ including
             cases of net of tax contracts, which may have been
             negotiated by parties in good faith based on the
             applicable rate of tax being 10%.

21.   Clause 24 - Chapter X-A-General Anti-Avoidance Rules

      Finance Act 2012 included a proposal to fast forward GAAR
      from Direct Taxes Code through which there was proposal to
      introduce GAAR.       During DTC regime itself, CBDT
      constituted a Committee (Shome Committee) to provide
      recommendations for formulating guidelines to implement
      the provisions. Based on the representations received from
      the stakeholders, Shome Committee submitted its final
      report to the Government.

      There has also been a Press Release containing a statement
      from the Honble Finance Minister on decisions taken by the
      Government so far, after considering recommendations of
      Shome Committee. However, there are a number of
      recommendations in the report of Shome Committee where
      the Honble Finance Minister has not yet offered any
      clarification even in the Finance Bill, 2013.

      GAAR provisions are introduced in the Act to act as a
      deterrent against aggressive tax planning. GAAR provisions
      will undoubtedly have far reaching implications and to
      ensure that, the extra ordinary powers are not exercised by
      revenue officers arbitrarily or de hors the key objects behind



                                62
introduction of GAAR, it is very important that the
apprehensions of the taxpayers are addressed at the earliest.

Understandably, this will need further deliberation and
consultations before the law/ Guidelines are enacted;
however, keeping the above limitations in mind, certain
recommendations which have immediate relevance have
been made.

Suggestions

(i)   Grandfathering of investments:

      There has already been a salutary announcement from
      the Honble Finance Minister that investments made
      up to 30th August 2010 (being the date of introduction
      of DTC) are proposed to be grandfathered. However,
      omission of that proposal in Finance Bill, 2013 has
      raised some uncertainty

      We submit that there is a case for grandfathering all
      investments upto 31st March 2012 (or, February 2012)
      considering the following:

            The validity and legality of a prior arrangement
            ought to be tested with reference to the norms of
            jurisprudence and norms of tax avoidance as
            prevalent as on the date of arrangement.

            Evaluating validity of a prior structure based on
            a norm of tax avoidance which was not then in
            existence is nothing but retroactive application
            of the Chapter.

            Retroactive application to past transactions will
            impact credibility of the Government and could
            also be alleged to be back door treaty override on
            unilateral basis

      As per recommendation of Shome Committee, all
      Investments made upto the date of introduction of
      GAAR may be grandfathered.          As per this
      recommendation, all investments upto 31st March
      2015 would have been grandfathered.




                          63
      The Standing Committee Recommendation was to
      apply GAAR provision prospectively so as not to make
      applicable to existing arrangements/transactions. The
      alternative Recommendation was to protect the interest
      of    the   taxpayers     who   have   entered    into
      structures/arrangements under the existing laws.

      An investment which was then law compliant may not
      treated as impermissible merely because there is
      change in thinking at a later date ­ considering that,
      for the investor, it became an irreversible step.

(ii) Need for statutory recognition of decisions already
announced by the Government:

We humbly recommend that there is a need for statutory
recognition of decisions which are already announced by the
Honble Finance Minister vide press release dated 14
January 2013. The same are illustratively listed as under:

            GAAR will not apply to FII which does not avail
            treaty benefit

            GAAR will not apply to Non Resident investors
            in FIIs

            There will be monetary threshold of Rs 3 crore of
            tax benefit in a year for invocation of GAAR

            GAAR to be restricted to only that "part" of
            arrangement which is impermissible and not to
            the whole arrangement

Statutory recognition of these decisions either in the statute
itself or by way of a Circular will go a long way in restoring
investor confidence.

(iii) Need for Positive announcement on                some
recommendations      of Shome Committee                where
Government is silent:

We wish to submit that the following clarifications /
conclusions provided in the Shome Committee report are
truly salutary and exemplary:




                          64
           As an overarching principle, GAAR to apply to
           abusive or highly aggressive / contrived
           arrangements

           GAAR provisions codify the substance over form
           doctrine.

           Tax mitigation by taking advantage of a fiscal
           incentive and after complying with conditions of
           the section is not covered by GAAR.

           Onus of proving each of the requirements of
           declaring the arrangement to be impermissible is
           on the tax authority.

           These have been illustrated through different
           examples.

     We humbly submit that adoption of these principles
     will provide substantial fairness in law and will
     substantially reduce unwanted litigation and hardship.
     Announcement to the effect that the Government is
     agreeable, in principle, to these suggestions will allay
     the   apprehensions      of   the   investors  without
     compromising the spirit behind the GAAR provisions.

(iv) GAAR v SAAR:

     It was the recommendation of Shome Committee that
     under normal circumstances, where specific SAAR is
     applicable, GAAR will not be invoked. It has also
     recommended that GAAR will not apply to a treaty
     which has a specific Limitation of Benefit clause

     It has been stated by the Honble Finance Minister that
     in a case where GAAR and SAAR are both in force, only
     one of them will apply to a given case and guidelines
     will be made regarding the applicability of one or the
     other.

     We submit that there is a need for re-consideration of
     the above statement of Honble Finance Minister.
     GAAR should be considered as a last resort. It should
     not be invoked in a case where there is compliance
     with SAAR and the subject matter is dealt with a



                         65
                    SAAR. It is only in cases of exceptionally abusive
                    behavior that GAAR can be invoked in such a case.

           (v)      Onus of proof

                    Shome Committee, in its report, favored discharge of
                    onus by tax authority

                    As per Finance Bill, 2012, the onus was cast on
                    taxpayer3. As a consequence, at the stage of
                    enactment, Section 96(2) as proposed was dropped. In
                    Parliamentary debate, Honble Finance Minister
                    explained the change as having been made pursuant
                    to recommendation of Standing Committee so as "to
                    remove the onus of proof entirely from the taxpayer to
                    the revenue department before initiating any action".
                    Thus, Section 96(3) as proposed in Finance Bill, 2012
                    was enacted as Section 96(2) of Finance Act 2012.

                    However, vide Finance Bill, 2013 the words "unless it
                    is proved to the contrary by the assessee" are proposed
                    to be inserted in Section 96(2) as enacted by Finance
                    Act 2012.

                    Section 96(2) stops at rebuttable presumption that an
                    arrangement shall be presumed (unless proved to
                    contrary by the taxpayer) to have been entered into, or
                    carried out, for the main purpose of obtaining a tax
                    benefit, if the main purpose of a step in, or a part of,
                    the arrangement is to obtain a tax benefit.

                    In light of the above and to remove any avoidable
                    uncertainty, we recommend that an express
                    clarification should be made in simple and lucid
                    language that onus of establishing satisfaction
                    with ingredient of main purpose as also the onus
                    of establishing compliance with additional
                    ingredients will be on the tax department.

22.        Clause 22- Section 90(5)-Tax Residency Certificate (TRC)

           Section 90A(4) provides that treaty benefit will not be
           available to any Non Resident unless he furnishes TRC from



3
    Refer S.96(2) and S.96(3) as they formed part of Finance Bill, 2012


                                                  66
the Government of his country of residence containing such
particulars as may be prescribed.

Finance Bill, 2013 proposes to insert section 90(5) in the Act
which provides that TRC shall be a necessary but not a
sufficient condition for claiming any relief under a DTAA.


The provision that a TRC is "necessary but not sufficient"
has led to uncertainty amongst investors. There are
apprehensions of roving enquiries from Tax Authority which
can hamper confidence of taxpayers and can mar investment
climate of the country.

The proposed amendment contradicts CBDT Circular no 789
dated 13 April 2000 which clarifies that "wherever a
Certificate of Residence is issued by the Mauritian Authorities,
such Certificate will constitute sufficient evidence for accepting
the status of residence as well as beneficial ownership for
applying the DTAC accordingly".

The existing provision of obtaining TRC is itself burdensome
for a Non Resident taxpayer. Every Non Resident needs to
undertake additional compliance as the present provision
does not provide for any threshold limit beyond which TRC
may be made compulsory.

The hardship compounds further as the said TRC needs to
be obtained in the form and manner prescribed by the Indian
income-tax authorities. Such a request may or may not be
entertained by the Foreign Government.

Further, there is apprehension that the Non Resident
taxpayer is compelled to obtain TRC before the stage of
payment itself, but for which DTAA benefit may be denied.

In this background, incorporating the condition of TRC being
"necessary, but not sufficient" would make the payer more
hesitant than ever.

Suggestions

We welcome the clarification issued by the Finance
Ministry on 1 March 2013 that TRC will be accepted as
an evidence of tax residency and that the tax
authorities cannot go behind the TRC to question


                            67
residential status.     We would also welcome such
categorical clarification through another CBDT Circular
that reiterates contents of Circular no 789.

A step further, we recommend that the above
clarification may, in fact, be part of the statute. The
Explanation may state that TRC will be regarded as
necessary and sufficient evidence for the purpose of
evidencing residency and beneficial ownership.

Alternatively, with regard to test of beneficial
ownership, reasonable inquiry, if considered necessary,
in the facts of the case, may be permitted. Further, in
such cases, to ensure that roving inquiries are best
avoided, reasonable objective tests for determination of
beneficial ownership may be evolved for guidance of
officers.

It is possible that the TRC issued also indicates
beneficial ownership (example, Italy). Where a TRC
incorporates     this  requirement,   TRC   should   be
considered as sufficient for the purpose of meeting the
test of beneficial ownership as well.

In order to boost the confidence of the investors and to
augment the investment climate of the country, the
following may be clarified to allay doubts and
apprehensions:

     It is not necessary to furnish TRC for each and
     every remittance. A single TRC which is valid for a
     specified period should be sufficient enough for all
     reliefs, etc as are claimed under a tax treaty.

     Even if the recipient of income does not possess a
     TRC at the time of remittance, the same should
     not result in denial of treaty residence provided he
     obtains TRC within a reasonable period of time
     (say, by the end of accounting year or before the
     due date of filing return of income).

     If the taxpayer, despite his best efforts, is not able
     to obtain a TRC from the Government of his home
     country in prescribed form, then, by itself this
     should not be a ground to deny treaty relief



                         68
            claimed by him and a fair opportunity of being
            heard must be given.

            Merely because some of the columns of TRC are
            left blank by the Government of foreign country,
            the same by itself should not be a ground to deny
            treaty benefits.

23.   Clause 28 ­ Chapter XII-DA- Section 115QA and Section
      10(34A) ­ Buyback of unlisted shares by a domestic
      company

      Currently under the Act, income arising from buy back, as
      per section 77A of the Companies Act, is taxed as capital
      gains in the hands of the shareholder under section 46A of
      the Act. Further buy back is specifically excluded from the
      deemed dividend provisions. This has proved to be beneficial
      in certain cases where shareholder who participates in a buy
      back is a resident of tax favourable jurisdiction.

      In order to curb the alleged tax avoidance, Finance Bill, 2013
      has proposed that consideration paid by the company for
      buy back of its own unlisted shares which is in excess of the
      sum received by the company at the time of issue of such
      shares (called as distributed income) will be charged to tax at
      the rate of 20% plus applicable surcharge and cess in the
      hands of the company. The additional income-tax payable by
      the company shall be the final tax on similar lines as DDT
      and the same would be exempt in the hands of the
      shareholder. Further, it is also provided that no credit or
      deduction or allowance of such additional tax will be
      provided. The provision is effective from 1 June 2013.

      Buy back of shares under section 77A of the Companies Act
      is specifically excluded from the deemed dividend provisions
      under the Act. However, the proposed amendment indirectly
      takes away the exclusion provided under the deemed
      dividend provisions by bringing in taxation in the hands of
      company on purchase of its own unlisted shares.

      The distributed income which is proposed to be taxed in the
      hands of the company is not "income" in real sense. The
      computation mechanism for distributed income does not
      consider cost incurred by the shareholder in purchasing the



                                 69
shares and takes into account only the amount received by
the company on issue of shares.

The provision has been proposed on the supposition and
assumption that all buy back schemes, regardless of
composition of shareholding are always planned for the
purpose of tax avoidance. It is a case of legislation and
regulation based on suspicion in complete disregard of
business needs and realities.

The Final report of Expert Committee on GAAR cast doubt
only in those cases where the buy-back was in favour of
foreign parent which is in a tax favourable jurisdiction.
However the proposed amendment tries to capture all Indian
companies, regardless of residential status and composition
of shareholders. In effect, the proposed amendment fast
forwards GAAR provisions in disguise, which has been made
effective only from AY 2016-17.

The intention of introducing this provision is to curb tax
avoidance by companies which otherwise would be liable to
DDT on dividends distributed. The Memorandum to Finance
Bill, 2013 provides that share buy-back is resorted to in a
case where the shareholders of the company are either not
taxable on such an arrangement or taxable at a lower rate of
tax when compared to tax payable on dividends distributed
by a company. However, the proposed provision has led to
various unintended consequences such as:

     Genuine buy back which has commercial reasons
     attached to it are also hit by the proposed amendment

     Provisions are applicable to all shareholders whether
     resident or Non Resident. The intention with which the
     proposed amendment has been introduced is to levy
     taxes on transaction with Non Resident shareholders
     who otherwise would get out of the tax net in India due
     to favorable treaty provisions.

     If the buy back is by a wholly owned subsidiary, the
     same may be protected by section 47(iv)/(v) of the Act.
     However, the proposed amendment is notwithstanding
     any other provisions and hence would override the
     exemption provided under section 47 of the Act.




                          70
     The proposed amendment would trigger taxation even
     in cases where the company suffers losses. This would
     mean that the even in cases where the company is
     unable to distribute dividends, it would be liable to tax
     on buy back.

     Company is presumed to have distributed income even
     if the repayment is out of capital and not out of
     accumulated profits.

Computation related inconsistencies:

     In case of a shareholder who has the benefit of
     computing capital gains based on indexed cost/foreign
     exchange fluctuation protection, there could be
     scenarios where the computation leads to capital loss
     in the hands of shareholder. However, the loss would
     be lost as it is not considered in order to determine the
     distributed income and the company would have to
     pay taxes on an artificially calculated higher amount
     than the actual gains which accrue in the hands of the
     shareholder.

     The computation mechanism provided for determining
     the distributed income does not take into account the
     amount paid to acquire shares from secondary
     sources, which may adversely impact the person
     buying the shares at a higher rate from secondary
     sources.

     The proposed amendment provides that amount
     received by the company at the time of issuance of
     shares shall be reduced from the consideration paid on
     buy back to shareholders. However the method of
     computation of distributed income could be a
     challenge in certain cases such as conversion of
     debentures into equity, shares issued by way of bonus,
     consideration received by predecessor entity pre-
     merger whereas buy back is by successor etc.

     The proposed amendment is applicable to a company
     irrespective of whether the shares are held as a capital
     asset or stock in trade by the shareholder.




                          71
Company (and, thereby, indirectly, the shareholders) would
be subjected to steep rate of tax of 20% even if the
shareholders may have incurred capital loss or business loss
in their personal hands. Rate of tax of 20% is higher than
rate of DDT in section 115-O at 15%.

International experience:

     Most countries recognize that profit distributions have
     already suffered a corporate tax levy in the hands of
     the company distributing dividends. Hence to ease the
     burden on the shareholder (also to avoid economic
     double taxation), it is not once again taxed on either
     distribution in the hands of the distributing company
     or by way of a withholding tax on dividend payments
     on distributions to shareholders (eg. United Kingdom,
     Brazil).

     Avoid economic double taxation : Conscious reversal of
     policy by South Africa

           South Africa had until 31 March 2012 levied a
           tax on a company distributing dividends, but
           since 1 April 2012 has moved to a withholding
           tax regime at a 10% withholding. It is interesting
           to note the reason for South Africa to move to a
           withholding tax regime.

           In the case of Volkswagen of South Africa (Pty)
           Ltd (case No. 24201/2007, judgement dated 14
           April 2008), the issue before its High Court was
           whether secondary tax on companies (STC)
           levied as per the South African domestic tax law
           can be regarded as a tax covered within the
           ambit of South Africa-Germany DTAA for which
           a withholding tax rate of 7.5% under the
           dividends article of the DTAA applied. The case
           was decided against the taxpayer on account of
           various differences such as STC is imposed on
           the company distributing dividends (not on the
           shareholder), etc.

           However, the South African authorities decided
           to move to a withholding tax regime to enable
           foreign investors/taxpayers avail of the DTAA


                          72
        benefit. This demonstrates a conscious taxpayer
        friendly steps being undertaken by the South
        African Government to have the new tax covered
        within the ambit of their DTAAs such that Non
        Resident investors can take the benefit of a
        DTAA. This was a pragmatic approach adopted
        by the South African authorities and it would
        help if India can learn from the South African
        experience.

   In India, where the tax is sought to be levied on the
   company undertaking the buy back, it may not be
   possible for the shareholder (a different taxpayer) to
   avail of the DTAA rate. To this extent, the levy
   proposed by India is unfair as regards fair play in
   respect of DTAAs it has negotiated.

   Avoidance of economic double taxation by providing
   participation exemption ­ an incentive to strategic
   Investment

        In the European Union Region (EU), under the
        EU Parent-Subsidiary Directive, dividends
        distributed by EU subsidiaries to EU parent
        companies are exempt from withholding tax, if,
        among other conditions, the recipient holds 10%
        or more of the shares of the subsidiary for at
        least two years. Accordingly, double economic
        taxation is avoided.

        A scheme comparable to the EU Parent-
        Subsidiary Directive is often extended to third
        country participation as well, but requiring a
        higher threshold for participation (example
        Germany that requires a participation of at least
        15%). These schemes are largely in place to
        invite foreign equity and avoid economic double
        taxation (taxation on profits once by the
        corporate entity earning the income and again in
        the hands of shareholders on distribution of
        such profits as dividends).

        More often than not, these jurisdictions also
        have a participation exemption regime that does



                       73
           not tax capital gains and dividend income where
           there is a participation beyond a prescribed
           limit. This extends beyond the EU region as well
           (example, Germany, Netherlands). Hence, the
           issue of re classification of dividends to capital
           gains does not arise since both income streams
           are not taxed when there is a prescribed level of
           participation (in some cases as low as 5%, as in
           France).

     Buy back treated at par with Dividend:

     Some jurisdictions consider buy back as dividends (Eg
     countries like Australia, Poland, Belgium, South
     Africa, Singapore, Japan etc). However, such treatment
     may not necessarily be unfavorable to the taxpayer,
     because it is taxed at a lower rate as dividends (South
     Africa, Japan), is eligible for participation exemption
     (EU countries), or credit for taxes paid by the company
     is made available to the shareholder (under a franked
     dividend payout concept) [Singapore, Australia].


Suggestions

   (a) There is a need for serious reconsideration of the
       proposal. The proposal may be perceived as India
       attempt    to   override    certain   tax   treaties
       unilaterally. It is inconsistent with the tax norms
       which India has adopted so far in the formulation
       of its domestic law of treating buy back to be a
       transaction which has capital gains implications.

   (b) Considering that the intent is to curb tax
       avoidance the provision may be worded in such a
       way that it captures only transactions which are
       entered into with an intent to avoid tax and
       should not be made applicable to all transactions
       of buy back of unlisted shares.

   (c) The proposal is very unfriendly to those
       companies which do undertake buy back driven
       purely by commercial reasons.      Proposal is
       Investor  unfriendly   for  those   where   the
       Shareholders are, in an indirect manner, denied


                         74
  the benefit of lower capital gains tax levy related
  provisions in the domestic law as also the benefit
  of lower dividend tax provisions in tax treaties. In
  case of partial buy back, the cost of tax liability of
  the company will be borne by shareholders other
  than those who may have exited. While, there is
  no reason for such across the board provision,
  still, if for any reason, it is proposed to retain any
  such provision, a more logical alternative is to
  legislate it in form of SAAR (Specific Anti
  Avoidance Rule) as part of section 2(22) of the Act
  which will be applied in certain abusive
  conditions to be restricted to payments to non-
  residents. It should involve tax in the form of
  lower WHT of 10% and the quantum of chargeable
  amount should be limited to accumulated profits
  of the company.

(d) Even internationally, as would be clear from the
    following table, in cases of dividend repatriation,
    the rate of WHT on dividend repatriation in
    majority of the treaties is 10%. Even in case where
    rate is marginally higher at 15%, the lower rate of
    10% applies if holding of capital exceeds 10% or
    25%. The proposed rate should not be allowed to
    exceed such rate. The next best alternative may be
    to consider buy back at par with a transaction of
    capital reduction to be subjected to tax as
    dividend as part of section 2(22) of the Act.

(e) Instead of a levy on the company, the tax if at all,
    should be levied as a withholding tax on
    dividends. This would enable Non Resident
    shareholders to apply treaty rates and claim
    credit in its home jurisdiction. One may like to
    follow the South African experience where an
    erstwhile STC (comparable to our DDT) has now
    been replaced with a withholding tax regime on
    dividends at 10%.

(f) Adequate safeguards may be incorporated to
    provide for cost step up in case of shares
    purchased from secondary market. Further the
    provisions   should   provide   for   proper


                      75
                 computational mechanism in cases where there is
                 conversion of debentures into equity, issue of
                 bonus shares etc


24.     Clause 27- Section 115-O r.w Section 115BBD- Removal
        of cascading effect of DDT on dividend from foreign
        subsidiary

        Section 115-O (1A) provides relief from cascading effect of
        DDT in a multi-layered structure in respect of dividends
        received    from domestic subsidiary4 where such domestic
        subsidiary has   paid the DDT which is payable under
        section 115-O.

        No such relief is available in respect of dividend received
        from foreign subsidiary which is taxable at 15%5 on gross
        basis under section 115BBD. There is no specific relief or
        mitigation from levy of MAT. The Indian company may have
        MAT exposure where tax payable on book profit at 18.5% is
        higher than tax payable under normal provisions, thus
        diluting the concessional rate of tax and DDT relief.

        Special rate of tax at 15%6 on gross basis under section
        115BBD for dividends received from foreign companies in
        which Indian companies hold more than 26% of equity share
        capital which was to expire on 31 March 2013 is proposed to
        extended by one more year to 31 March 2014

        Further, relief for cascading effect of DDT is proposed to be
        extended to dividends received from foreign subsidiary on
        which tax is payable under section 115BBD. The relief will be
        available for dividends which are distributed in the same
        financial year in which dividends are received from foreign
        subsidiary.

        To avail DDT relief, it is necessary that dividends should be
        distributed by the Indian holding company in the same
        financial year in which dividends are received from foreign
        subsidiary.




4
  i.e where equity share capital holding is more than 50%
5
  Plus applicable surcharge and cess
6
  Plus applicable surcharge and cess


                                                76
       Suggestions

      (i) If it is the desire that the Indian companies are
      effectively persuaded to bring in the accumulated
      surplus from overseas companies during Financial Year
      2013-14, the condition that foreign dividend should be
      distributed in the same year to avail DDT relief may be
      liberalized. It is possible that an Indian company which
      is keen to avail DDT relief may still find it commercially
      unwise to distribute the funds to the shareholders. The
      company is likely to be keen to retain the funds for its
      own internal growth. Also, if dividends are received in
      the month of March 2014, the Indian company will not
      be able to redistribute them in March itself.

      (ii) To make the relief more meaningful, a longer period
      of time ­ say 3 years should be provided for distribution
      to shareholders. The condition that the same amount of
      dividend shall not be taken into account for reduction
      more than once will ensure that there is no abuse of
      elongated time period.

      (iii) Further, to ensure that concession provided by
      Section 115BBD is not diluted by MAT provisions, it
      should be provided that the dividends on which tax is
      payable under section 115BBD will be excluded from
      book profit.

25.   Clause 43 ­ Section 194LC-Concessional rate of tax on
      interest payable to non-residents

      Section194LC provides for concessional rate of withholding
      tax @ 5%1 on payments to non-residents in a case where an
      Indian Company borrows money in foreign currency (FC)
      from a source outside India either

            under a loan agreement; or

            by way of issue of long-term infrastructure bonds (IB)

      The loan agreement/infrastructure bonds and rate of interest
      thereon should be approved by Government. CBDT vide
      Circular no.7 of 2012 dated 21 September 2012 enlisted
      conditions which need to be fulfilled for automatic approval.




                                77
Briefly,  loans/bonds      which    comply    with    External
Commercial Borrowings (ECB) norms under Foreign
Exchange Management Act, 1999 (FEMA) and regulations
there under are granted automatic approval for the purposes
of section 194LC provided they also comply with certain
additional conditions laid down in the said Circular.

The scope of Section 194LC has been expanded by including
,,rupee denominated IB subject to compliance of following
conditions :-

      The Non Resident should deposit foreign currency in a
      designated bank account

      Such sum as converted in rupees should be utilized to
      subscribe to IB in India.

      The above referred borrowing shall be deemed to have
      been made in foreign currency.


The designated bank account has been defined to mean
account of a person in a bank which has been opened solely
for the purpose of deposit of money in foreign currency and
utilization of such money for payment to the Indian company
for subscription to IB issued by it.

The concessional rate of tax has been extended only to rupee
denominated IB and not to rupee denominated loans. FEMA
regulations permit borrowing of rupee denominated loans in
certain circumstances. However, it is ambiguous whether
such loans will be eligible for concessional rate of tax.

The provision requires borrowing from a source outside
India. If the designated bank account is opened in India and
used for subscribing to rupee denominated IB in India, issue
may arise whether the requirement of borrowing from source
outside India is complied with. Though there is a deeming
fiction that such borrowing shall be deemed to have been
made in foreign currency, there is no deeming fiction that
such borrowing shall be deemed to have been made from a
source outside India.

Ambiguity exists in the currently proposed provision whether
the designated bank account should be that of the borrower
or Non Resident lender. Non Resident lenders may face


                          78
difficulty in complying with this condition if they are not
permitted under FEMA to open a separate bank account
exclusively for subscription to Section194LC qualifying IB.

Though the provision provides for concessional rate of tax @
5%, in absence of PAN of the Non Resident lender, section
206AA mandates withholding at higher rate of 20%. This is
perceived to be onerous considering that section 115A
envisages exemption from filing return for the Non Resident
where tax is deducted by the borrower and paid to the
Government. Hence, obtaining PAN for the sole purpose of
avoiding adverse impact of section 206AA results in an
empty formality. Also, where the loan agreement envisages
net of tax payment of interest, higher withholding rate
results in higher cost for the Indian borrowing company.
Furthermore, where IBs are raised outside India through an
intermediary acting as custodian for the Non Resident
investors and payment of interest as also repayment of
bonds is serviced through such intermediary, there is an
ambiguity on whether PAN of such intermediary will suffice
for Section 206AA purposes.

Suggestions

(a) While extension of the provision to rupee
    denominated IB is certainly beneficial to taxpayers
    and the provision is a healthy and welcome
    provision, it would be better that deeming fiction is
    further supplemented by clarifying and presuming
    that the borrowing will be deemed not only to be a
    borrowing in foreign currency, but, also a borrowing
    from a source outside India, there could be scope for
    litigation. To remove any ambiguity in this regard, it
    should be provided that subscription made from
    designated bank account will be deemed to be from a
    source outside India.

(b) Also, the designated bank account requirement
    should be made applicable to the Indian borrower
    and not the Non Resident lender.

(c) In addition to IB, the provision should also be
    expanded to rupee denominated loans which are
    permitted to be borrowed under FEMA regulations.



                          79
(d) Payment of interest under section 194LC should be
    excluded from the scope of Section 206AA and Non
    Resident lenders should not be required to obtain
    PAN in India to avail lower rate of tax under section
    194LC. Alternatively or concurrently, in case of
    foreign intermediary appointed for servicing IBs, it
    should be clarified that PAN of such intermediary
    shall suffice for Section 206AA purposes.



                        X-O-X-O-X




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