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HC upholds withdrawal of SEZ tax exemptions – Blow For Cos As They Need to Pay MAT, DDT June 20, 2013

Posted by Khurana Khurana & Associates LLP Chartered Accountants in Tax Planning & Compliance.
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Courtesy The Times of India, New Delhi, Wednesday, June 19, 2013

Background-

Section 10AA – Special provisions in respect of newly established Units in Special Economic Zones inserted by the Special Economic Zones Act, 2005 provides that in computing the total income of an assessee, being an entrepreneur who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of:-

i.            100% of Profits and Gains derived from the export, of such articles or things or from services for a period of 5 consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services and 50% of such profits and gains for further 5 assessment years thereafter.

ii.            For the next 5 consecutive assessment years, so much of the amount not exceeding 50% of the profit as is debited to the Profit and Loss account of the previous year in respect of which the deduction is to be allowed and credited to Special Economic Zone Re-investment Reserve Account to be created and utilised for the purposes of the business of the assessee in the manner laid down.

 

Sub section (6) 115 JB – Special provision for payment of tax by certain companies Inserted by the Special Economic Zones Act, 2005 w.e.f 10-02-2006 provided that the provisions of section 115JB shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be.

Insertion by the Finance Act, 2011 w.e.f. 01-04-2012 provided that the provisions of this subsection shall cease to have effect in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012.

In the News-

A bunch of companies having units in SEZs and SEZ developers such as MindTree, Biocon, Opto, Circuits, Opto Infrastructure and Primal Projects to name a few had petitioned the Karnataka high court against the withdrawal of MAT and DDT exemption available to them earlier. The petitioners claimed that they had made heavy investment and established units in SEZs or developed SEZs on the basis of the tax holiday benefits available, which included MAT and DDT exemption. Thus withdrawalof the exemption was violative of various articles of the Constitution.

The Karnataka HC dismissed the petition on various grounds. It held that it is a settled position of law that every tax exemption should have a sunset clause. As the MAT and DDT exemption for SEZs did not have a sunset clause, the flaw was removed by an amendment. Second these exemptions created an inequality between SE companies and other companies, which was removed by the amendment.

The  HC pointed out that such exemptions also resulted in erosion of the tax base. It upheld the right of the government to make amendment to fiscal policies.

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AAR Says it is Not Bound by Past Orders – Some transfer pricing verdicts were incorrect, admits quasi-judicial body November 14, 2012

Posted by Khurana Khurana & Associates LLP Chartered Accountants in Tax Planning & Compliance.
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– Courtesy Economic Times

CA. Varun Khurana

The Authority for Advance Rulings (AAR) has held that it is not bound by its earlier orders and can take a contrary view if there are sufficient reasons to believe that the earlier rulings were incorrect.

Our Analogy

The above view though contrary to Clause 2 of Section 245S on the applicability of advance Ruling which state the advance ruling shall be binding unless there is change in law or facts on the basis of which the advance ruling has been pronounced, has specific applicability- referred in Clause 1 of Section 245S.

What is Advance Ruling?

Advance ruling as defined under section 245N of the Income Tax Act, 1961 mean:-

i.            A determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant; or

ii.            A determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with non-resident, and such determination shall include the determination of any question of law or of fact specified in the application;

iii.            A determination or decision by the Authority in respect of an issue relating to computation of total income which is pending before any income-tax authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application;

iv.            A determination or decision by the Authority whether an arrangement, which is proposed to be undertaken by any person being a resident or a non resident, is an impermissible avoidance arrangement as referred to in Chapter X-A or not.

Provided that where an advance ruling has been pronounced, before the date on which the Finance Act, 2003 receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-clause (ii) of this clause as it stood immediately before such date, such ruling shall be binding on the persons specified in section 245S.

What is the applicability of advance ruling (Section 245S)?

The advance ruling pronounced by the Authority under section 245R shall be binding only the following:-

a)      On the applicant who had sought it;

b)      In respect of the transaction in relation to which the ruling has been sought; and

c)       On the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction.

The advance ruling shall be binding unless there is change in law or facts on the basis of which the advance ruling has been pronounced.

Situation in which the Advance Ruling be void- In reference to section 245T

Where the Authority finds, on a representation made to it by the Commissioner or otherwise, that an advance ruling pronounced by it under sub section (6) of section 245R has been obtained by the applicant by fraud or mis representation of facts, it may by order, declare such ruling to be void ab initio and thereupon all the provisions of the Act shall apply to the applicant as if such advance ruling had never been made.

AAR held that its own earlier decisions in cases such as Praxair Pacific, Vanenburg Group and its Corporation, in which it had held that the transfer pricing provisions could not apply if the income was not chargeable to tax in India, were not correct. While hearing an application by Mauritius based Castleton Investments, which had sold shares that resulted into capital gains, AAR held transfer pricing rules would apply even if the capital gains are not liable to tax in India under the India – Mauritius tax treaty. AAR did not accept the company’s argument that since there is no income chargeable to tax in India, the Company is not required to file returns or comply with transfer pricing provisions.

FIAT VS EXCISE DEPARTMENT October 22, 2012

Posted by Khurana Khurana & Associates LLP Chartered Accountants in Tax Planning & Compliance.
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Review of Applicable Tax Law in the matter of FIAT VS EXCISE DEPARTMENT

CA. Varun Khurana

A Supreme Blow – Reference to The Economic Times |New Delhi |Monday | 22 October 2012

Background

  1. The Ruling – Fiat and Premier must pay about Rs. 311Cr and Rs. 49Cr, respectively, in excise duty for Fiat Unos sold below cost between 1996 and 2001.
  2. The Reasoning – SC found Fiat’s strategy to sell below cost was resulting in extra commercial consideration, and hence was not a normal price.
  3. The Outcome – Any company right from a soap manufacturer to a carmaker can be charged by the excise authority, even if they sell products below manufacturing cost.

Our Analogy:-

i.            The Outcome of the case is dependent on the involvement of the extra commercial consideration in addition the transaction value.

ii.            The mere fact a company sells products below manufacturing cost does not mean that the excise duty needs to be paid on the normal value. Since subsection 1 of section 4 clearly defines the transaction value as the value where the buyer is not related and the price is the sole consideration of the sale.

Reference http://www.cbec.gov.in/excise/cx-rules-valuation2000.htm and http://www.cbec.gov.in/excise/cx-act/cx-act-ch2.htm

Subsection 1 of Section 4 of the Act on Valuation of excisable goods for purpose of charging of duty of excise provides where the duty of excise is chargeable on any excisable goods with reference to their value, then on each removal of the goods the value shall be

  1. in case where the goods are sold by the assessee, for delivery at the time and place of the removal, the assessee and the buyer of the goods are not related and the price is the sole consideration for the sale, be the transaction value.
  2. In any other case, including the case where the goods are not sold, be the value determined in the manner as may be prescribed.

Subsection 2 of section 4 stated that the provisions of the section shall not apply in respect of any excisable goods for which a tariff value has been fixed in sub section2 of section3.

It is also clarified that the price cum duty of the excisable goods sold by the assessee shall be the price actually paid to him for the goods sold and the money value of the additional consideration with the sale of such goods and such price cum duty, excluding sales tax and other taxes, if any, actually paid , shall be deemed to include the duty payable on such goods.

Subsection 3 (b) of section 4 state a person is deemed to be related if:-

i.            They are inter-connected undertakings

ii.            They are relatives

iii.            Amongst them the buyer is a relative and a distributor of the assessee, or a sub-distributor of such distributor.

iv.            They are so associated that they have interest, directly or indirectly, in the business of each other.

Subsection 3(d) of section 4 defines transaction value as the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or payable on such goods.

Rule 6 of the Chapter II on Determination of Value of Central Excise Valuation (determination of Price of Excisable Goods) Rules, 2000 states where the excisable goods are sold in the circumstances specified in clause a of sub section 1 of section 4 of the Act except the circumstances where the price is not the sole consideration for sale, the value of such goods shall be deemed to be the aggregate of such transaction value and the amount of money value of any additional consideration flowing directly or indirectly from the buyer to the assessee.

Explanation 1 to Rule 6 clarifies that the value, apportioned as appropriate, of the following goods and services, whether supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale of such goods, to the extent that such value has not been included in the price actually paid or payable, shall be treated to be the amount of money value of additional consideration flowing directly or indirectly from the buyer to the assessee in relation to sale of the goods being valued and aggregated accordingly, namely:-

i.            Value of material, components, part and similar items relatable to such goods;

ii.            Value of tools, dies, mould drawings, blue prints, technical maps and charts and similar items used in the production of such goods;

iii.            Value of material consumed, including packaging materials, in the production of such goods;

iv.            Value of engineering, development, art work, design work and plans and sketches undertaken elsewhere than in the factory of production and necessary for the production of such goods.

Explanation 2 to Rule 6 clarifies where an assessee receives any advance payment from the buyer against delivery of any excisable goods, no notional interest on such advance shall be added to the value unless the Central Excise Officer has evidence to the effect that the advance received has influenced the fixation of the price of the goods by way of charging a lesser price from or by offering a special discount to the buyer who has made the advance deposit.