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UNION BUDGET 2014 -An Analysis of Direct Tax Proposals

Dividend and Income distribution tax

Finance Minister’s speechIn the Finance Ministers’ speech it was stated in Para 206 as follows:-206. In the year 2003, the tax liability on income by way of dividends was shifted from the shareholder to the company. The shareholder was required to pay tax on the gross dividends, but now the company pays tax on the dividend amount net of taxes. Similarly, in the case of Mutual fund, Income distribution tax is paid on the income distributed net of taxes. I propose to remove this anomaly both in the case of the company and the Mutual fund.

Changes in the Statute 40. In section 115-O of the Income-tax Act-After the Explanation to sub-section (1A), the following sub-section shall be inserted with effect from the 1st day of October, 2014, namely:––

“(1B) For the purposes of determining the tax on distributed profits payable in accordance with this section, any amount by way of dividends referred to in sub-section (1) as reduced by the amount referred to in sub-section (1A) [hereafter referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits.”.

41. In section 115R of the Income-tax Act,––(a) after the Explanation to sub-section (2), the following sub-section shall be inserted with effect from the 1st day of October, 2014, namely:––

“(2A) For the purposes of determining the additional income-tax payable in accordance with sub-section (2), the amount of distributed income referred therein shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual Fund.”;

(b) sub-section (3A) shall be omitted with effect from the 1st day of April, 2015.

Notes on ClausesClause 40 of the Bill seeks to amend section 115-O of the Income-tax Act relating to tax on distributed profits of domestic companies.Sub-section (1) of the said section provides that any amount declared, distributed or paid by a domestic company by way of dividends shall be charged to additional income-tax at the rate of fifteen per cent.It is proposed to amend the aforesaid section so as to provide that for the purposes of determining the tax on distributed profits payable in accordance with the said section, any amount by way of dividends referred to in sub-section (1) as reduced by the amount referred to in sub-section (1A) of the said section [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits.This amendment will take effect from 1st October, 2014.Clause 41 of the Bill seeks to amend section 115R of the Income-tax Act relating to tax on distributed income to unit holders. Sub-section (2) of aforesaid section provides that any amount of income distributed by the specified company or a Mutual Fund to its unit holder shall be charged to additional income-tax at the rate of twenty-five per cent., where the income is distributed to any person being an individual or a Hindu undivided family, and at the rate of thirty per cent. on income distributed to any person other than an individual or a Hindu undivided family. It is further provided that an additional tax at the rate of five per cent. shall be levied in case of income distributed by a Mutual Fund under an Infrastructure Debt Fund Scheme to a person who is non resident.It is proposed to amend the said section to provide that for the purposes of determining the additional income-tax payable in accordance with said sub-section (2), the amount of distributed income, referred to therein, shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual Fund.This amendment will take effect from 1st October, 2014.

The existing provisions contained in sub-section (3A) of section 115R provide that the person responsible for making payment of the income distributed by the Unit Trust of India or a Mutual Fund and the Unit Trust of India or the Mutual Fund, as the case may be, shall on or before the 15th September in each year, furnish to the prescribed income-tax authority, a statement in the

By CA Ramesh Kumar Patodia

UNION BUDGET 2014 -An Analysis of Direct Tax Proposals prescribed form and verified in the prescribed manner, giving the details of the amount of income distributed to unit holders during the previous year, the tax paid thereon and such other relevant details as may be prescribed. It is proposed to omit sub-section (3A) of the aforesaid section 115R.

This amendment will take effect from 1st April, 2015.

Memorandum explaining the provisionSection 115-O of the Act provides that a domestic company shall be liable for payment of additional tax at the rate of 15 per cent. on any amount declared, distributed or paid by way of dividends to its shareholders. This tax on distributed profits is final tax in respect of the amount declared, distributed or paid as dividends and no credit in respect of it can be claimed by the company or the shareholder.

Section 115 R of the Act similarly provides for levy of additional income-tax in respect of income distributed by the mutual funds to its investors at the rates provided.

Prior to introduction of dividend distribution tax (DDT), the dividends were taxable in the hands of the shareholder. The gross amount of dividend representing the distributable surplus was taxable, and the tax on this amount was paid by the shareholder at the applicable rate which varied from 0 to 30%. However, after the introduction of the DDT, a lower rate of 15% is currently applicable but this rate is being applied on the amount paid as dividend after reduction of distribution tax by the company. Therefore, the tax is computed with reference to the net amount. Similar case is there when income is distributed by mutual funds.

Due to difference in the base of the income distributed or the dividend on which the distribution tax is calculated, the effective tax rate is lower than the rate provided in the respective sections.

In order to ensure that tax is levied on proper base, the amount of distributable income and the dividends which are actually received by the unit holder of mutual fund or shareholders of the domestic company need to be grossed up for the purpose of computing the additional tax.

Therefore, it is proposed to amend section 115-O in order to provide that for the purposes of determining the tax on distributed profits payable in accordance with the section 115-O, any amount by way of dividends referred to in sub-section (1) of the said section, as reduced by the amount referred to in sub-section (1A) [referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1), be equal to the net distributed profits.

Thus, where the amount of dividend paid or distributed by a company is Rs. 85, then DDT under the amended provision would be calculated as follows:

Dividend amount distributed = Rs. 85Increase by Rs. 15 [i.e. (85*0.15)/(1-0.15)]Increased amount = Rs. 100DDT @ 15% of Rs. 100 = Rs. 15Tax payable u/s 115-O is Rs. 15Dividend distributed to shareholders = Rs. 85

Similarly, it is proposed to amend section 115R to provide that for the purposes of determining the additional income-tax payable in accordance with sub-section (2) of the said section, the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual Fund.

These amendments will take effect from 1st October, 2014. [Clause 40 & 41]

Analysis of the amendment1. Section 196A –Income payable net of tax

2. Section 4 deals with Charge of Income-tax

3. 285 ITR506

4. Section 115BBD – no provision of grossing up – no amendment proposed

5. Grossing up – increase in tax from 16.995% to 19.994%


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals Long term Capital gains on debt oriented Mutual Fund and its qualification as

short term capital assets

Finance Minister’s speechIn the Finance Ministers’ speech it was stated in Para 205 as follows:-205. In the case of Mutual Funds, other than equity oriented funds, the capital gains arising on transfer of units held for more than a year is taxed at a concessional rate of 10% whereas direct investments in banks and other debt instruments attract a higher rate of tax. This allows tax arbitrage opportunity. This arbitrage has hardly benefitted retail investors as their percentage is very small among such Mutual Fund investors. With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains from 10 percent to 20 percent on transfer of units of such funds. I also propose to increase the period of holding in respect of such units from 12 months to 36 months for this purpose.

Changes in the Statute Amendments in section 2 –

(VIII) in clause (42A),––(A) in the proviso, with effect from the 1st day of April, 2015,––(i) for the words “a share held in a company or any other security listed in a recognised stock exchange in India”, the words and brackets “a security (other than a unit) listed in a recognised stock exchange in India” shall be substituted;(ii) for the words, brackets, figures and letter “a unit of a Mutual Fund specified under clause (23D) of section 10”, the words “a unit of an equity oriented fund” shall be substituted;(B) in the Explanation 1, in clause (i), after sub-clause (hb), the following sub-clause shall be inserted with effect from the 1st day of October, 2014, namely:––“(hc) in the case of a capital asset, being a unit of a business trust, allotted pursuant to transfer of share or shares as referred to in clause (xvii) of section 47, there shall be included the period for which the share or shares were held by the assessee;”;

(C) after Explanation 3, the following Explanation shall be inserted with effect from the 1st day of April, 2015, namely:––‘Explanation 4.––For the purposes of this clause, the expression “equity oriented fund” shall have the meaning assigned to it in the Explanation to clause (38) of section 10;’.

Notes on clauses Clause 3The existing provisions contained in clause (42A) of section 2 provide that short-term capital asset means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. However, in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India or a unit of a Mutual Fund or a zero coupon bond, the period of holding for qualifying it as short-term capital asset is twelve months.It is proposed to amend the aforesaid clause so as to provide that in case of a share held in a company which is not listed in a recognised stock exchange, the period of holding for the purpose of its qualification as a short-term capital asset, shall not be more than thirty-six months and for that purpose the words “a share held in a company or any other security listed in a recognised stock exchange in India” shall be substituted with the words “a security (other than a unit) listed in a recognised stock exchange in India”. Further, in the case of a unit corresponding period of holding of twelve months, shall be limited to a unit of an equity oriented fund.

It is further proposed to insert an Explanation to define the expression “equity oriented fund”.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.

It is also proposed to provide in clause (42A) of section 2 that in the case of capital asset being units of a business trust, allotted pursuant to transfer of share or shares as referred to in clause (xvii) of section 47, there shall be included the period for which such share or shares were held by the assessee.This amendment will take effect from 1st October, 2014.

Memorandum explaining the provision


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals The existing provisions contained in clause (42A) of section 2 of the Act provides that short-term capital asset means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. However, in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India or a unit of a Mutual Fund or a zero coupon bond, the period of holding for qualifying it as short-term capital asset is not more than twelve months.The shorter period of holding of not more than twelve months for consideration as short-term capital asset was introduced for encouraging investment on stock market where prices of the securities are market determined.Accordingly, it is proposed to amend the aforesaid clause (42A) of section 2 so as to provide that an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short-term capital asset if it is held for not more than thirty-six months.

These amendments will take effect from 1st April, 2015 and will accordingly apply, in relation to the assessment year 2015-16 and subsequent assessment years. [Clause 3]

Analysis of the amendment

Section 10(38)Explanation- For the purpose of this clause, “equity oriented fund” means a fund –

i. Where the investible funds are invested by way of equity shares in domestic companies to the extent of more than sixty- five percent of the total proceeds of such fund; and

ii. Which has been set up under a scheme of a Mutual Fund specified under clause (23D)

Section 2(h) of SCRA 1956Definition of “Securities”- It include –

i. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

ia. Derivatives;ib. Units or any other instrument issued by any collective investment scheme to the investors in such scheme;

ic. Security receipt as defined in clause (zg) of section 2 of the SRFAESI Act, 2002; id. Units or any other such instrument issued to the investors under any mutual fund scheme.

1. Indexation for 5 years in case of redemption after the period of 36 months 2. Treatment for transaction upto July 10, 2014 3. Shares held in a foreign company – long term after 36 months as per the

proposed amendment.

Tax on Long Term Capital Gains on Units

Changes in the Statute 34. In section 112 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2015,––(a) in the proviso, occurring after clause (d), for the words “being listed securities or unit”, the words and brackets “being listed securities (other than a unit)” shall be substituted;(b) in the Explanation, clause (b) shall be omitted.

Notes on Clauses Clause 34 of the Bill seeks to amend section 112 of the Income-tax Act relating to tax on long-term capital gains.The existing provisions contained in section 112 provide for tax payable in the case of income arising from the transfer of a long-term capital asset. The proviso to sub-section (1) provides that where the tax payable in respect of any income arising from transfer of a long-term capital asset, being listed securities or unit or zero coupon bond exceeds ten per cent. of the amount of capital gains without indexation adjustment, such excess shall be ignored.It is proposed to amend the aforesaid proviso so as to provide that where the tax payable in respect of any income arising from transfer of a long-term capital asset being listed securities (other than a unit) or zero coupon bond exceeds ten per cent. of the amount of capital gains without indexation adjustment, such excess shall be ignored.This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals Memorandum explaining the provisionUnder the existing provisions of section 112 of the Act, where tax payable on long-term capital gains arising on transfer of a capital asset, being listed securities or unit or zero coupon bond exceeds ten per cent. of the amount of capital gains before allowing for indexation adjustment, then such excess shall be ignored. As long-term capital gains is not chargeable to tax in the case of transfer of a unit of an equity oriented fund which is liable to securities transaction tax, the benefit under section 112 in respect of unit cover only the unit of a fund, other than an equity oriented fund.It is proposed to amend the provisions of section 112 so as to allow the concessional rate of tax of ten per cent. on long term capital gain to listed securities (other than unit) and zero coupon bonds.This amendment will take effect from 1st April, 2015 and will accordingly apply, in relation to the assessment year 2015-16 and subsequent assessment years. [Clause 34]

Investment allowance to a Manufacturing Company

Finance Ministers’ Speech In the Finance Ministers’ speech it was stated in Para 198 as follows:-198. The manufacturing sector is of paramount importance for the growth of our economy. This sector has multiplier effect on creation of jobs. Last year, an incentive in the form of investment allowance to a manufacturing company that invests more than 100 crore in plant and machinery during the period from 01.04.2013 to 31.03.2015 was announced. Considering the need to incentivize smaller entrepreneurs, I propose to provide investment allowance at the rate of 15 percent to a manufacturing company that invests more than 25 crore in any year in new plant and machinery. This benefit will be available for three yearsi.e. for investments upto 31.03.2017. The Scheme announced last year will continue to operate in parallel till 31.03.2015.

Changes in Statute11. In section 32AC of the Income-tax Act, with effect from the 1st day of April, 2015,—(i) after sub-section (1), the following sub-sections shall be inserted, namely:—“(1A) Where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new assets and the amount of actual cost of such new assets acquired and installed during any previous year exceeds twenty-five crore rupees, then, there shall be allowed a deduction of a sum equal to fifteen per cent. of the actual cost of such new assets for the assessment year relevant to that previous year:Provided that no deduction under this sub-section shall be allowed for the assessment year commencing on the 1st day of April, 2015 to the assessee, which is eligible to claim deduction under sub-section (1) for the said assessment year.(1B) No deduction under sub-section (1A) shall be allowed for any assessment year commencing on or after the 1st day of April, 2018.”;(ii) in sub-section (2), after the words, brackets and figure “allowed under sub-section (1)”, the words, brackets, figure and letter “or sub-section (1A)” shall be inserted.

Notes on ClausesClause 11 of the Bill seeks to amend section 32AC of the Income-tax Act relating to Investment in new plant or machinery.The existing provisions contained in sub-section (1) of aforesaid section provide that where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new asset after the 31st day of March, 2013 but before the 1st day of April, 2015 and the aggregate amount of actual cost of such new assets exceeds one hundred crore rupees, then, there shall be allowed adeduction,—(a) for the assessment year commencing on the 1st April, 2014, of a sum equal to fifteen per cent. of the actual cost of new assets acquired and installed after the 31st March, 2013 but before the 1st April, 2014, if the aggregate amount of actual cost of such new assets exceeds one hundred crore rupees; and(b) for the assessment year commencing on the 1st April, 2015, of a sum equal to fifteen per cent. of the actual cost of new assets acquired and installed after the 31st March, 2013 but before the 1st April, 2015, as reduced by the amount of deduction allowed, if any, under clause (a).

It is proposed to insert a new sub-section (1A) in section 32AC so as to provide that where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new asset and the amount of actual cost of the new assets acquired and installed during any previous year exceeds twenty-five crore rupees, then, there shall be


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals allowed a deduction of a sum equal to fifteen per cent. of the actual cost of such new assets for the assessment year relevant to that previous year.

It is further proposed to insert a proviso so as to provide that no deduction under sub-section (1A) shall be allowed for the assessment year beginning on the 1st day of April, 2015 to the assessee who is eligible to claim deduction under sub-section (1) of the said section for the said assessment year.

It is also proposed to insert a new sub-section (1B) in the said section 32AC so as to provide that no deduction under subsection (1A) shall be allowed for any assessment year commencing on or after the 1st day of April, 2018.

Sub-section (2) of the aforesaid section provides that if any new asset acquired and installed by the assessee is sold or otherwise transferred, except in connection with the amalgamation or demerger, within a period of five years from the date of its installation, the amount of deduction allowed under sub-section (1) in respect of such new asset shall be deemed to be the income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which such new asset is sold or otherwise transferred, in addition to taxability of gains, arising on account of transfer of such new asset.

It is proposed to amend sub-section (2) of section 32AC to make a reference to sub-section (1A) so as to bring the assessee under the said newly inserted sub-section into the purview of said sub-section (2).

These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015- 16 and subsequent years.

Memorandum explaining the provisionIn order to encourage the companies engaged in the business of manufacture or production of an article or thing to invest substantial amount in acquisition and installation of new plant and machinery, Finance Act, 2013 inserted section 32AC in the Act to provide that where an assessee, being a company, is engaged in the business of manufacture of an article or thing and invests a sum of more than Rs.100 crore in new assets (plant and machinery) during the period beginning from 1st April, 2013 and ending on 31st March, 2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16.As growth of the manufacturing sector is crucial for employment generation and development of an economy, it is proposed to extend the deduction available under section 32AC of the Act for investment made in plant and machinery up to 31.03.2017.Further, in order to simplify the existing provisions of section 32AC of the Act and also to make medium size investments in plant and machinery eligible for deduction, it is also proposed that the deduction under section 32AC of the Act shall be allowed if the company on or after 1st April, 2014 invests more than Rs.25 crore in plant and machinery in a previous year. It is also proposed that the assessee who is eligible to claim deduction under the existing combined threshold limit of Rs.100 crore for investment made in previous years 2013-14 and 2014-15 shall continue to be eligible to claim deduction under the existing provisions contained in sub-section (1) of section 32AC even if its investment in the year 2014-15 is below the proposed new threshold limit of investment of Rs. 25 crore during the previous year.The deduction allowable under this section after the proposed amendment in different scenario of investment is given by way of illustration in the following table:

Sl.No.

Particulars P.Y. 2013-14

P.Y. 2014-15

P.Y. 2015-16

P.Y. 2016-17

Remarks

1. Amount of investment 20 90 - - Under the existing section 32AC(1)Deduction allowable Nil 16.5 - -

2. Amount of investment 30 40 - - Under the proposed section 32AC(1A)Deduction allowable Nil 6 - -

3. Amount of investment 150 10 - - Under the existing section 32AC(1)Deduction allowable 22.5 1.5 - -

4. Amount of investment 60 20 - - No deduction either u/s 32AC(1) or 32Ac(1A)Deduction allowable Nil Nil - -

5. Amount of investment 30 30 30 40 Under the proposed section 32AC(1A)Deduction allowable Nil 4.5 4.5 6

6. Amount of investment 150 20 70 20 Deduction under both 32AC(1) & 32AC(1A)Deduction allowable 22.5 3 10.5 Nil


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. [Clause 11]

Analysis of the amendment1. Acquire and install – both the condition to be fulfilled in one particular year 2. The additional depreciation is not to be reduced from the depreciation

calculation under WDV method

Extension of the sunset date u/s 80IA for the power sector

Finance Minister’s SpeechIn the Finance Ministers’ speech it was stated in Para 200 as follows:-200. Supply of power continues to be a major area of concern for the country. Therefore, instead of annual extensions, I propose to extend the 10 year tax holiday to the undertakings which begin generation, distribution and transmission of power by 31.03.2017. This stability in our policy will help the investors to plan their investments better.

Changes in statute30. In section 80-IA of the Income-tax Act, in sub-section (4), in clause (iv), in sub-clauses (a), (b) and (c), for the words, figures and letters “the 31st day of March, 2014”, the words, figures and letters “the 31st day of March, 2017” shall respectively be substituted with effect from the 1st day of April, 2015.

Notes on ClausesClause 30 of the Bill seeks to amend section 80-IA of the Income-tax Act relating to deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.The existing provisions contained in clause (iv) of sub-section (4) of section 80-IA provide that a deduction shall be allowed to an undertaking which(a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on 1st April, 1993 and ending on 31st March, 2014;(b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on 1st April, 1999 and ending on 31st March, 2014;(c) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time during the period beginning on 1st April, 2004 and ending on 31st March, 2014.

It is proposed to amend sub-clauses (a), (b) and (c) of clause (iv) of the said sub-section so as to extend the time limit from 31st March, 2014 to 31st March, 2017.

These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015- 16 and subsequent years.

Memorandum explaining the provisionUnder the existing provisions of clause (iv) of sub-section (4) of section 80-IA of the Income-tax Act, a deduction of profits and gains is allowed to an undertaking which,—(a) is set up for the generation and distribution of power if it begins to generate power at any time during the period beginning on 1st April, 1993 and ending on 31st March, 2014;(b) starts transmission or distribution by laying a network of new transmission or distribution lines at any time during the period beginning on 1st April, 1999 and ending on 31st March, 2014;(c) undertakes substantial renovation and modernization of existing network of transmission or distribution lines at any time during the period beginning on 1st April, 2004 and ending on 31st March, 2014.

With a view to provide further time to the undertakings to commence the eligible activity to avail the tax incentive, it is proposed to amend the above provisions to extend the terminal date for a further period up to 31st March, 2017 i.e. till the end of the 12th Five Year Plan.

These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years. [Clause 30]

Deduction in respect of Capital Expenditure on Specified Business


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals Finance Minister’s SpeechIn the Finance Ministers’ speech it was stated in Para 199 as follows:-199. I also propose to extend the investment linked deduction to two new sectors, namely, slurry pipelines for the transportation of iron ore, and semiconductor wafer fabrication manufacturing units. This will boost investment in these two critical sectors.

Changes in the Statutes6. In section 10AA of the Income-tax Act, after sub-section (9) but before the Explanation 1, the following sub-section shall be inserted with effect from the 1st day of April, 2015, namely:––“(10) Where a deduction under this section is claimed and allowed in respect of profits of any of the specified business, referred to in clause (c) of sub-section (8) of section 35AD, for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.”.

12. In section 35AD of the Income-tax Act, with effect from the 1st day of April, 2015,––(a) in sub-section (3), after the words “no deduction shall be allowed under the provisions of”, the words, figures and letters “section 10AA and” shall be inserted;

(b) in sub-section (5),—(i) in clause (ah), the word “and” occurring at the end, shall be omitted;(ii) after clause (ah), the following clauses shall be inserted, namely:––“(ai) on or after the 1st day of April, 2014, where the specified business is in the nature of laying and operating a slurry pipeline for the transportation of iron ore;(aj) on or after the 1st day of April, 2014, where the specified business is in the nature of setting up and operating a semi-conductor wafer fabrication manufacturing unit, and which is notified by the Board in accordance with such guidelines as may be prescribed; and”;

(c) after sub-section (7), the following sub-sections shall be inserted, namely:––‘(7A) Any asset in respect of which a deduction is claimed and allowed under this section shall be used only for the specified business, for a period of eight years beginning with the previous year in which such asset is acquired or constructed.(7B) Where any asset, in respect of which a deduction is claimed and allowed under this section, is used for a purpose other than the specified business during the period specified in sub-section (7A), otherwise than by way of a mode referred to in clause (vii) of section 28, the total amount of deduction so claimed and allowed in one or more previous years, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32, as if no deduction under this section was allowed, shall be deemed to be the income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.(7C) Nothing contained in sub-section (7B) shall apply to a company which has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985, during the period specified in sub-section (7A).’;

(d) in sub-section (8), in clause (c), after sub-clause (xi), the following sub-clauses shall be inserted, namely:––“(xii) laying and operating a slurry pipeline for the transportation of iron ore;(xiii) setting up and operating a semi-conductor wafer fabrication manufacturing unit notified by the Board in accordance with such guidelines as may be prescribed;”.

Notes on ClausesClause 6 of the Bill seeks to amend section 10AA of the Income-tax Act, relating to special provision in respect of newly established Units in Special Economic Zones.The existing provisions contained in aforesaid section 10AA, inter alia, provide for a deduction in respect of the profits and gains derived from the export of articles or things or from providing services.It is proposed to amend the said section 10AA by inserting a new sub-section (10) so as to provide that where deduction under section 10AA has been availed by any specified business for any assessment year, no deduction under section 35AD shall be allowed in relation to such specified business for the same or any other assessment year.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16and subsequent years.

Clause 12 of the Bill seeks to amend section 35AD of the Income-tax Act relating to deduction in respect of expenditure on specified business.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals The existing provisions contained in section 35AD, inter alia, provide a deduction in respect of any expenditure of capital nature incurred, other than expenditure incurred on the acquisition of any land or goodwill or financial instrument, wholly and exclusively for the purposes of any specified business carried on by the assessee during the previous year in which such expenditure is incurred. The said section also provides that deduction under the provisions of Chapter VI-A under the heading“C.––Deductions in respect of certain incomes” shall not be available to any specified business which has claimed deduction under the said section.

It is proposed to amend sub-section (3) of the aforesaid section so as to provide that no deduction shall be allowed to the specified business under section 10AA for any assessment year if such specified business has claimed any deduction under section 35AD.

It is further proposed to insert new clauses (ai) and (aj) in sub-section (5) of the aforesaid section to specify that the date of commencement of operation shall be on or after the 1st April, 2014 where the specified business is in the nature of laying and operating a slurry pipeline for the transportation of iron ore or in the nature of setting up and operating a semi-conductor wafer fabrication manufacturing unit and which is notified by the Board in accordance with such guidelines as may be prescribed.

It is also proposed to insert a new sub-section (7A) in section 35AD so as to provide that any asset in respect of which a deduction is claimed and allowed under this section shall be used only for the specified business, for a period of eight years beginning with the previous year in which such asset is acquired or constructed.

It is also proposed to insert a new sub-section (7B) in the aforesaid section so as to provide that where any asset, in respect of which a deduction is claimed and allowed under this section is used for a purpose other than the specified business during the period specified in sub-section (7A) otherwise than by way of a mode referred to in clause (vii) of section 28, the total amount of deduction so claimed and allowed in one or more previous years, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction under said section 35AD was allowed, shall be deemed to be the income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.

It is also proposed to insert a new sub-section (7C) in the aforesaid section so as to provide that nothing contained in sub-section (7B) shall apply to a company which has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985, during the period specified in sub-section (7A).It is also proposed to amend sub-section (8) of section 35AD so as to include the following businesses as specified business for the purposes of deduction under this section,–(i) laying and operating a slurry pipeline for the transportation of iron ore;(ii) setting up and operating a semi-conductor wafer fabrication manufacturing unit notified by the Board in accordance with the prescribed guidelines.

These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015- 16 and subsequent assessment years.

Memorandum explaining the provisionUnder the existing provisions of section 35AD of the Act, investment-linked tax incentive is provided by way of allowing a deduction in respect of the whole of any expenditure of capital nature (other than expenditure on land, goodwill and financial instrument) incurred wholly and exclusively, for the purposes of the “specified business” during the previous year in which such expenditure is incurred. Currently, the following “specified businesses” are eligible for availing the investment-linked deduction under section 35AD as enumerated in clause (c) of sub-section (8) of the said section:-

(i) setting up and operating a cold chain facility;(ii) setting up and operating a warehousing facility for storage of agricultural produce;(iii) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network;(iv) building and operating, anywhere in India, a hotel of two-star or above category as classified by the Central Government;(v) building and operating, anywhere in India, a hospital with at least one hundred beds for patients;


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals (vi) developing and building a housing project under a scheme for slum redevelopment or rehabilitation, framed by theCentral Government or a State Government, as the case may be, and notified by the Board in accordance with the prescribed guidelines;(vii) developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in accordance with the prescribed guidelines;(viii) production of fertilizer in India;(ix) setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962;(x) bee-keeping and production of honey and beeswax; and(xi) setting up and operating a warehousing facility for storage of sugar;

It is proposed to include two new businesses as “specified business” for the purposes of the investment-linked deduction under section 35AD so as to promote investment in these sectors, which are :-

(a) laying and operating a slurry pipeline for the transportation of iron ore;(b) setting up and operating a semiconductor wafer fabrication manufacturing unit, if such unit is notified by the Board in accordance with the prescribed guidelines.

It is also proposed to provide that the date of commencement of operations for availing investment linked deduction in respect of the two new specified businesses shall be on or after 1st April, 2014.

II. The existing provisions of section 35AD do not provide for a specific time period for which capital assets on which the deduction has been claimed and allowed, are to be used for the specified business. With a view to ensure that the capital asset on which investment linked deduction has been claimed is used for the purposes of the specified business, it is proposed to insert sub-section (7A) in section 35AD to provide that any asset in respect of which a deduction is claimed and allowed under section 35AD, shall be used only for the specified business for a period of eight years beginning with the previous year in which such asset is acquired or constructed.

If any asset on which a deduction under section 35AD has been allowed, is demolished, destroyed, discarded or transferred, the sum received or receivable for the same is chargeable to tax under clause (vii) of section 28. This does not take into account a case where asset on which deduction under section 35AD has been claimed is used for any purpose other than the specified business by way of a mode other than that specified above. Accordingly, it is proposed to insert sub-section (7B) to provide that if such asset is used for any purpose other than the specified business, the total amount of deduction so claimed and allowed in any previous year in respect of such asset, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32 as if no deduction had been allowed under section 35AD, shall be deemed to be income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.

Example:Deduction claimed under section 35AD on a capital asset : Rs. 100

Depreciation eligible on such asset under section 32 : Rs. 15

Profit chargeable to tax in accordance with the proposed sub-section (7B) of section 35AD : Rs. 85

The provisions contained in the proposed sub-section (7B) of the said section would, however, not apply to a company which has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 within the time period specified in sub-section (7A).

III. The existing provisions of sub-section (3) of the aforesaid section provide that where any assessee has claimed a deduction under this section, no deduction shall be allowed under the provisions of Chapter VIA for the same or any other assessment year. As section 10AA also provides for profit linked deduction in respect of units set-up in Special Economic Zones, it is proposed to amend section 35AD so as to provide that where any deduction has been availed of by the assessee on account of capital expenditure incurred for the purposes of specified business in any assessment year, no deduction under section 10AA shall be available to the assessee in the same or any other assessment year in respect of such specified business.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals As a consequence of this amendment, section 10AA is also proposed to be amended so as to provide that no deduction under section 35AD shall be available in any assessment year to a specified business which has claimed and availed of deduction under section 10AA in the same or any other assessment year.

These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years. [Clauses 6 & 12]

Analysis of the provisionInvestment-linked tax incentive for specified business [324 ITR (st.) 311] as introduced by Finance Bill (No. 2) 2009 – Explanation memorandum16.1 The Income-tax Act provides for a number of profit-linked exemptions/deductions. Such benefits are inefficient, inequitable, impose higher compliance and administrative burden, result in revenue loss, increase litigations and lead to competitive demand for similar tax benefits. Further, these benefits also encourage diversion of profits from the taxed sector to the exempt/ untaxed sector. However, investment-linked incentives are relatively less distortionary in their impact.

16.2 With a view to creating rural infrastructure and environment friendly alternate means of transportation for bulk goods, provide investment-linked tax incentive has been provided by inserting a new section 35AD in the Income-tax Act for the following businesses:—(a) setting up and operating cold chain facilities for specified products;(b) setting up and operating warehousing facilities for storage of agricultural produce;(c) laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network.

16.3 The salient features of the new regime of investment-linked tax incentives are the following:—(i) 100 per cent. deduction would be allowed in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of the specified business carried on during the previous year in which such expenditure is incurred.(ii) Capital Expenditure incurred prior to the commencement of operations of the specified business and capitalised in the books of account of the assessee on the date of commencement of operations is also eligible for the deduction.(iii) The expenditure of capital nature shall not include any expenditure incurred on acquisition of any land or goodwill or financial instrument.(iv) The benefit is available—(a) in a case where the business relates to laying and operating a cross country natural gas pipeline network for distribution, if such business commences its operations on or after the 1st day of April, 2007 and;(b) in any other case, if such business commences its operation on or after the 1st day of April, 2009.(v) The assessee shall not be allowed any deduction in respect of the specified business under the provisions of Chapter VIA;(vi) No deduction in respect of the expenditure in respect of which deduction has been claimed shall be allowed to the assessee under any other provisions of the Income-tax Act.(vii) Any sum received or receivable on account of any capital asset, in respect of which deduction has been allowed under section 35AD, being demolished, destroyed, discarded or transferred shall be treated as income of the assessee and chargeable to income tax under the head “Profits and gains of business or profession”.(viii) Any loss computed in respect of the specified business shall not be set off except against profits and gains, if any, of any other specified business. To the extent the loss is unabsorbed the same will be carried forward for set off against profits and gains from any specified business in the following assessment year and so on.

16.4 Further, profit-linked deduction provided under section 80-IA to the business of laying and operating a cross country natural gas distribution network will be discontinued. As a result, any person availing of this incentive can avail of the benefit under the proposed section 35AD. All capital expenditure (other than on land, goodwill and financial instrument), to the extent capitalized in the books as on 1st April, 2009 will be fully allowed as a deduction in the computation of total income of the said business for the previous year 2009-2010. This is available in addition to any other capital expenditure (excluding land, goodwill and financial instrument) incurred during such previous year.

16.5 The provisions of section 28, section 43, and section 50B of the Income Tax Act, 1961 have also been amended to make consequential changes. Thus, any sum, whether received or


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD, shall be treated as taxable u/s 28. Further, the actual cost of any capital asset on which deduction has been allowed or is allowable to the assessee under section 35AD, shall be treated as “nil” u/s 43 in the case of such assessee and in any other case if the capital asset is acquired or received – i. by way of gift or will or an irrevocable trust;ii. on any distribution on liquidation of the company; andiii. By such mode of transfer as is referred to in clause (i), (iv), (v), (vi), (vib), (xiii) and (xiv) of section 47.Also, while computing capital gains in case of slump sale under section 50B, the aggregate value of total assets for computing the net worth in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction u/s 35AD shall be treated as nil.

16.6 A new section 73A has also been inserted to give effect to the consequential provisions introduced in section 35AD. Thus, any loss computed in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business. Further, where for any assessment year any loss computed in respect of the specified business has not been wholly set off against profits and gains of another specified business, so much of the loss as is not so set off or the whole loss where the assessee has no income from any other specified business shall be carried forward to the following assessment year, subject to the other provisions of chapter VI and – i. it shall be set off against the profits and gains, if any , of any specified business carried on by his assessable for that assessment year; andii. if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

Applicable from AY 2010-11

1. Section 35AD – investment linked incentive and section 10AA – income do not form part of total income. No link in two

2. New sub section (7A) and (7B) a. Whether taxable after 8 years? Language appears to be retrospective? b. What if acquired for one specified and used for another? c. What if once taxed u/s 35AD(7B) for being used in other than specified

business and then subsequently transferred or demolished. Whether provision of section 28(vii) will attract? If yes, double taxation

d. No consequential amendment in explanation 13 to sub section (1) of section 43 – if once taxed u/s 35AD(7B)

e. Amendment in section 115JC- to include deduction u/s 35AD to widen the tax base. The amount of depreciation allowable u/s 32 will be reduced. – No proposal for any specific exclusion for the amount u/s 115JC in computing adjusted total income in the year of sale/ transfer/ change of use.

Corporate Social Responsibility

Finance Ministers’ SpeechIn the Finance Ministers’ speech it was stated in Para 71 as follows:-71. I also propose to add inclusion of slum development in the list of Corporate Social Responsibility (CSR) activities to encourage the private sector to contribute more towards this activity.

Changes in the Statute13. In section 37 of the Income-tax Act, in sub-section (1), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted with effect from the 1st day of April, 2015, namely:—“Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.”.

Notes on Clauses


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals Clause 13 of the Bill seeks to amend section 37 of the Income-tax Act relating to general expenditure.The existing provisions contained in sub-section (1) of the aforesaid section provide that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

It is proposed to insert a new Explanation in sub-section (1) of section 37 so as to clarify that for the purposes of sub-section (1) of the said section, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.


Memorandum explaining the provision Under the Companies Act, 2013 certain companies (which have net worth of Rs.500 crore or more, or turnover of Rs.1000 crore or more, or a net profit of Rs.5 crore or more during any financial year) are required to spend certain percentage of their profit on activities relating to Corporate Social Responsibility (CSR). Under the existing provisions of the Act expenditure incurred wholly and exclusively for the purposes of the business is only allowed as a deduction for computing taxable business income.

CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business. As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for computing the taxable income of the company. Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.

The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditures cannot be allowed under the existing provisions of section 37 of the Income-tax Act.

Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. [Clause 13]

Analysis of the amendment

1. No consequential amendment u/s 80G relating to amount contributed to trusts created for CRS activities.

2. Neither allowed in section 37(1) nor any relief u/s 80G 3. No rational behind subsidizing the one- third of expense by the Govt. –

particularly as mentioned u/s 35AC

Disallowance of expenditure for non deduction of tax at source

Finance Minister’s SpeechIn the Finance Ministers’ speech it was stated in Para 207 as follows:-


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals 207. Currently, where an assessee fails to deduct and pay tax on specified payments to residents, 100 percent of such payments are not allowed as deduction while computing his income. This has caused undue hardship to taxpayers, particularly where the rate of tax is only 1 to 10%. Hence, I propose to provide that instead of 100 percent, only 30% of such payments will be disallowed.

Changes in Statute14. In section 40 of the Income-tax Act, in clause (a), with effect from the 1st day of April, 2015,—(a) in sub-clause (i),—

(I) for the portion beginning with the words “during the previous year” and ending with the words, brackets and figures “sub-section (1) of section 200”, the words, brackets and figures “on or before the due date specified in sub-section (1) of section 139” shall be substituted;

(II) for the proviso, the following proviso shall be substituted, namely:—“Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.”;

(b) in sub-clause (ia),—(I) for the portion beginning with the words “any interest, commission or brokerage” and ending with the words and brackets “for carrying out any work (including supply of labour for carrying out any work)”, the words “thirty per cent. of any sum payable to a resident” shall be substituted;

(II) in the first proviso, after the words, brackets and figures “sub-section (1) of section 139,”, the words “thirty per cent. of” shall be inserted.

Notes on ClausesClause 14 of the Bill seeks to amend section 40 of the Income-tax Act relating to amounts not deductible.

The provisions of section 40 specify the amounts which shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”.

The existing provisions contained in sub-clause (i) of clause (a) of aforesaid section provide that payment of any sum by way of interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act which are payable outside India or in India to a non-resident, not being a company or a foreign company on which tax is deductible under Chapter XVII-B, shall be disallowed in case of non deduction of tax or non-payment of tax after deduction during the previous year, or in the subsequent year before the expiry of time prescribed under sub-section (1) of section 200.

It is proposed to amend sub-clause (i) of clause (a) of aforesaid section to provide that disallowance under the said sub-clause will be attracted, if, after deduction of tax during the previous year, the same has not been paid on or before the due date of filing of return of income specified in sub-section (1) of section 139.

The existing proviso to the aforesaid sub-clause provides that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

It is proposed to substitute the said proviso so as to provide that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

The existing provisions contained in sub-clause (ia) of clause (a) of the aforesaid section provide that payment of any sum by way of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident on which tax is deductible under Chapter XVII-B, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work) on which tax is deductible under Chapter XVII-B, shall be disallowed in case of non-deduction of tax or after deduction if the same is not paid on or before the due date of filing of return of income specified in sub-section (1) of section 139.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals It is further proposed to amend sub-clause (ia) of clause (a) of aforesaid section to provide that disallowance under the said sub-clause shall be restricted to thirty per cent. and the provisions of this section shall be applicable to all expenditure, which is payable to a resident, on which tax is deductible under the subheading “B.-Deduction at source” of Chapter XVII.

The existing provisions contained in first proviso of sub-clause (ia) of clause (a) of aforesaid section provide that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

It is also proposed to amend first proviso of sub-clause (ia) of clause (a) of aforesaid section to provide that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent. of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015- 16 and subsequent years.

Memorandum explaining the provisionThe existing provisions of section 40(a)(i) of the Act provide that certain payments such as interest, royalty and fee for technical services made to a non-resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time prescribed under section 200(1) of the Act.

The Act contains similar provisions for disallowance of business expenditure in respect of certain payments made to the residents. Under section 40(a)(ia) of the Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act. However, in case of disallowance for non-payment of tax from payments made to non-residents, this extended time limit of payment up to the date of filing of return of income under section 139(1) is not available.

In order to provide similar extended time limit for payment of tax deducted from payments made to non-residents, it is proposed that the deductor shall be allowed to claim deduction for payments made to non residents in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return under section 139(1) of the Act.

As mentioned above, in case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, the entire amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head “Profits and gains of business or profession". The disallowance of whole of the amount of expenditure results into undue hardship.

In order to reduce the hardship, it is proposed that in case of non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed.

Further, existing provisions of section 40(a)(ia) of the Act provides that certain payments such as interest, commission, brokerage, rent, royalty fee for technical services and contract payment made to a resident shall not be allowed as deduction for computing business income if tax on such payments was not deducted, or after deduction, was not paid within the time specified under the said section. Chapter XVII-B of the Act mandates deduction of tax from certain other payments such as salary, directors fee, which are currently not specified under section 40(a)(ia) of the Act. The payments on which tax is deductible under Chapter XVII-B but not specified under section 40(a)(ia) of the Act may also be claimed as expenditure for the purposes of computation of income under the head “Profits and gains from business or profession”.Section 40(a)(ia) has proved to be an effective tool for ensuring compliance of TDS provisions by the payers. Therefore, in order to improve the TDS compliance in respect of payments to residents which are currently not specified in section 40(a)(ia), it is proposed that the disallowance under section 40(a)(ia) of the Act shall extend to all expenditure on which tax is deductible under Chapter XVII-B of the Act.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years. [Clause 14]

Analysis of the provision

1. What about disallowance u/s 40(a)(ia) made upto AY 2014-15? New provision of allowability of 30% is applicable from AY 2015-16.

Tax deducted at sourceChanges in Statute58. In section 200 of the Income-tax Act, in sub-section (3), the following proviso shall be inserted with effect from the 1st day of October, 2014, namely:—“Provided that the person may also deliver to the prescribed authority a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under this sub-section in such form and verified in such manner as may be specified by the authority.”.

59. In section 200A of the Income-tax Act, in sub-section (1), after the words “where a statement of tax deduction at source”, the words “or a correction statement” shall be inserted with effect from the 1st day of October, 2014.

60. In section 201 of the Income-tax Act, for sub-section (3), the following sub-section shall be substituted with effect from the 1st day of October, 2014, namely:—“(3) No order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of seven years from the end of the financial year in which payment is made or credit is given.”.

Notes on ClausesClause 58 of the Bill seeks to amend section 200 of the Income-tax Act relating to duty of person deducting tax.

The existing provisions contained in sub-section (3) of the aforesaid section provide that any person deducting any sum on or after 1st April, 2005 in accordance with the foregoing provisions of Chapter XVII or, as the case may be, any person being an employer referred to in sub-section (1A) of section 192 shall, after paying the tax deducted to the credit of the Central Government within the prescribed time, prepare such statements for such period as may be prescribed and deliver or cause to be delivered to the prescribed income-tax authority or the person authorised by such authority such statement in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed.

It is proposed to insert a proviso to the aforesaid sub-section so as to provide that the person who delivered statement under the aforesaid sub-section may also deliver to the prescribed authority a correction statement for rectification of any mistake or to add, delete or update the information furnished in the statement delivered under this sub-section in such form and verified in such manner as may be specified by the authority.

This amendment will take effect from 1st October, 2014. Clause 59 of the Bill seeks to amend section 200A of the Income-tax Act relating to processing of statements of tax deducted at source.

The existing provisions contained in sub-section (1) of the aforesaid section provide that where a statement of tax deduction at source has been made by a person deducting any sum under section 200, such statement shall be processed in the manner provided in the said sub-section.

It is proposed to amend sub-section (1) of the aforesaid section so as to include the correction statement in addition to the statement of tax deduction at source.

This amendment will take effect from 1st October, 2014. Clause 60 of the Bill seeks to amend section 201 of the Income-tax Act relating to consequences of failure to deduct or pay.

The existing provisions contained in sub-section (3) of section 201 provide that no order shall be made under subsection (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of two years from the end of the financial year in a case where the statement referred to in section 200


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals has been filed, and in any other case six years from the end of the financial year in which payment is made or credit is given.

It is proposed to substitute sub-section (3) of section 201 so as to provide that no order shall be made under sub-section (1) of the said section deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of seven years from the end of the financial year in which payment is made or credit is given.

This amendment will take effect from 1st October, 2014.

Memorandum explaining the provisionUnder Chapter XVII-B of the Act, a person is required to deduct tax on certain specified payments at the specified rates if the payment exceeds specified threshold. The person deducting tax (‘the deductor’) is required to file a quarterly statement of tax deduction at source (TDS) containing the prescribed details of deduction of tax made during the quarter by the prescribed due date.

Currently, a deductor is allowed to file correction statement for rectification/updation of the information furnished in the original TDS statement as per the Centralised Processing of Statements of Tax Deducted at Source Scheme, 2013 notified vide Notification No.03/2013 dated 15th January, 2013. However, there does not exist any express provision in the Act for enabling a deductor to file correction statement.

In order to bring clarity in the matter relating to filing of correction statement, it is proposed to amend section 200 of the Act to allow the deductor to file correction statements. Consequently, it is also proposed to amend provisions of section 200A of the Act for enabling processing of correction statement filed.

The existing provisions of section 201(1) of the Act provide for passing of an order deeming a payer as assessee in default if he does not deduct or does not pay or after deduction fails to pay the whole or part of the tax as per the provisions of Chapter XVII-B of the Act. Section 201(3) of the Act provides for time limit for passing of order under section 201(1) of the Act for deeming a payer as assessee in default for failure to deduct tax from payments made to a resident. Clause (i) of section 201(3) of theAct provides that no order under section 201(1) of the Act shall be passed after expiry of two years from the end of the financial year in which the TDS statement has been filed. Currently, the processing of TDS statement is done in the computerised environment and mainly focuses on the transactions reported in the TDS statement filed by the deductor. Therefore, there is no rationale for not treating the deductor as assessee in default in respect of the TDS default after two years only on the basis that the deductor has filed TDS statement as TDS defaults are generally in respect of the transaction not reported in the TDS statement.It is, therefore, proposed to omit clause (i) of sub-section (3) of section 201of the Act which provides time limit of two years for passing order under section 201(1) of the Act for cases in which TDS statement have been filed.

Currently, clause (ii) of section 201(3) of the Act provides a time limit of six years from the end of the financial year in which payment/credit is made for passing of order under section 201(1) of the Act for cases in which TDS statement has not been filed.

However, notice under section 148 of the Act may be issued for reassessment up to 6 years from the end of the assessment year for which the income has escaped assessment. Therefore, section 148 of the Act allows reopening of cases of one more preceding previous year than specified under section 201(3)(ii) of the Act. Due to this, order under section 201(1) of the Act cannot be passed in respect of defaults relating to TDS which comes to the notice during search/reassessment proceeding in respect of previous year which is not covered under section 201(3)(ii) of the Act but covered under section 148 of the Act. In order to align the time limit provided under section 201(3)(ii) and section 148 of the Act, it is proposed that time limit provided under section 201(3)(ii) of the Act for passing order under section 201(1) of the Act shall be extended by one more year.

The existing provisions of section 271H of the Act provides for levy of penalty for failure to furnish TDS/TCS statements in certain cases or furnishing of incorrect information in TDS/TCS statements. The existing provisions of section 271H of the Act do not specify the authority which would be competent to levy the penalty under the said section. Therefore, provisions of section 271H are proposed to be amended to provide that the penalty under section 271H of the Act shall be levied by the Assessing officer.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals These amendments will take effect from 1st October, 2014.[Clauses 58, 59, 60 & 68]

Analysis of the provision

1. No relief from the penal provisions under chapter XVII- B 2. In the case of NHK Japan Broadcasting Corp (Delhi) 305 ITR 137 – it was held that

where no limitation is prescribed as in section 201, action must be initiated by competent authority under the Act within a period of four years. The court was of view that four years would be a reasonable period of time for initiating actionRecently on 3 rd of July, 2014 the Bombay HC in case of Director of Income Tax(IT) vs. M/s Mahendra and Mahendra Ltd. (ITA No 3489 of 2009) upheld the decision of Delhi HC in case of NHK Japan (supra) and held that though section 201 does not prescribe any limitation period for the assessee being declared as a an assessee in default yet the revenue will have to exercise the powers in that regard within a reasonable time.

Income Tax AuthoritiesChanges in the Statute(III) for clause (15A), the following clause shall be substituted and shall be deemed to have been substituted with effect from the 1st day of June, 2013,––‘(15A) “Chief Commissioner” means a person appointed to be a Chief Commissioner of Income-tax or a Principal Chief Commissioner of Income-tax under sub-section (1) of section 117;’;

(IV) for clause (16), the following clause shall be substituted and shall be deemed to have been substituted with effect from the 1st day of June, 2013,––‘(16) “Commissioner” means a person appointed to be a Commissioner of Income-tax or a Director of Income-tax or a Principal Commissioner of Income-tax or a Principal Director of Income-tax under sub-section (1) of section 117;’;

(V) for clause (21), the following clause shall be substituted and shall be deemed to have been substituted with effect from the 1st day of June, 2013,––‘(21) “Director General or Director” means a person appointed to be a Director General of Income-tax or a Principal Director General of Income-tax or, as the case may be, a Director of Income-tax or a Principal Director of Income-tax, under sub-section (1) of section 117, and includes a person appointed under that sub-section to be an Additional Director of Income-tax or a Joint Director of Income-tax or an Assistant Director or Deputy Director of Income-tax;’;

(VI) in clause (24), after sub-clause (xvi), the following sub-clause shall be inserted with effect from the 1st day of April, 2015, namely:––“(xvii) any sum of money referred to in clause (ix) of sub-section (2) of section 56;”;(VII) after clause (34), the following clauses shall be inserted and shall be deemed to have been inserted with effect from the 1st day of June, 2013,––‘(34A) “Principal Chief Commissioner of Income-tax” means a person appointed to be a Principal Chief Commissioner of Income-tax under sub-section (1) of section 117;

(34B) “Principal Commissioner of Income-tax” means a person appointed to be a Principal Commissioner of Income-tax under sub-section (1) of section 117;

(34C) “Principal Director of Income-tax” means a person appointed to be a Principal Director of Income-tax under sub-section (1) of section 117;

(34D) “Principal Director General of Income-tax” means a person appointed to be a Principal Director General of Income-tax under sub-section (1) of section 117;’;

4. In the Income-tax Act, save as otherwise expressly provided, and unless the context otherwise requires, the reference to any income-tax authority specified in column (1) of the Table below shall be substituted and shall be deemed to have been substituted with effect from the 1st day of June, 2013 by reference to the authority or authorities specified in the corresponding entry in column (2) of the said Table and such consequential changes as the rules of grammar may require shall be made:

Sl.No. (1) (2)1. Commissioner Principal Commissioner or Commissioner


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals 2. Director Principal Director or Director3. Chief Commissioner Principal Chief Commissioner or Chief Commissioner4. Director General Principal Director General or Director General

44. In section 116 of the Income-tax Act,––(i) after clause (a), the following clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of June, 2013,––“(aa) Principal Directors General of Income-tax or Principal Chief Commissioners of Income-tax,”;(ii) after clause (b), the following clause shall be inserted and shall be deemed to have been inserted with effect from the 1st day of June, 2013,––“(ba) Principal Directors of Income-tax or Principal Commissioners of Income-tax,”.

Notes on ClausesClause 3 of the Bill also seeks to proposed to amend section 2 so as to substitute the definitions of clause (15A), clause (16) and clause (21) relating to “Chief Commissioner”, “Commissioner” and “Director General” or “Director”. It is further proposed to insert clauses (34A), (34B), (34C) and (34D) so as to define the terms “Principal Chief Commissioner of Income-tax”, “Principal Commissioner of Income-tax”, “Principal Director General of Income-tax” and “Principal Director of Income-tax” to mean a person appointed to be an income-tax authority under section 117 of the Act.

These amendments will take effect retrospectively from 1st June, 2013.

Clause 4 of the Bill seeks to make consequential amendments in the Income-tax Act in view of the amendments made in section 2 of the said Act relating to definitions of the expressions “Chief Commissioner”, “Commissioner” and “Director General or Director”.


Clause 44 of the Bill seeks to amend section 116 of the Income-tax Act relating to income-tax authorities. Section 116 specifies the income-tax authorities.

It is proposed to include Principal Chief Commissioners of Income-tax, Principal Commissioners of Income-tax, Principal Directors General of Income-tax and Principal Directors of Income-tax as income-tax authorities under the said section 116.


Memorandum explaining the provisionSection 116 of the Act specifies income-tax authorities for the purposes of the Act and section 117 states that the Central Government may appoint such persons as it thinks fit to be income-tax authorities. The income-tax authorities enumerated under section 116 of the Act include Central Board of Direct taxes, Directors-General of Income-tax or Chief Commissioners of Income-tax, Directors of Income-tax or Commissioners of Income-tax etc.

In view of the creation of new income-tax authorities, it is proposed to amend the aforesaid section 116 of the Act so as to include the newly created income-tax authorities. It is further proposed to insert clauses (34A), (34B), (34C) and (34D) in section 2 of the Act so as to define the terms “Principal Chief Commissioner of Income-tax”, “Principal Commissioner of Income-tax”, “Principal Director General of Income-tax” and “Principal Director of Income-tax” to mean a person appointed to be an income-tax authority under section 117 of the Act. It is also proposed to make consequential amendments in clauses (15A), (16) and (21) of section 2 of the Act and in other sections of the Act.

These amendments will take effect retrospectively from 1st June, 2013. [Clauses 3, 4 & 44]

Analysis of the provision1. Revision of designations and creation of new post under IRS and other than IRS –

CBDT

Interest payable by the assessee u/s 220


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals Changes in Statute62. In section 220 of the Income-tax Act, with effect from the 1st day of October, 2014,––(i) after sub-section (1), the following sub-section shall be inserted, namely:––“(1A) Where any notice of demand has been served upon an assessee and any appeal or other proceeding, as the case may be, is filed or initiated in respect of the amount specified in the said notice of demand, then, such demand shall be deemed to be valid till the disposal of the appeal by the last appellate authority or disposal of the proceedings, as the case may be, and any such notice of demand shall have the effect as specified in section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.”;

(ii) in sub-section (2),––(a) after the first proviso, the following proviso shall be inserted, namely:––“Provided further that where as a result of an order under sections specified in the first proviso, the amount on which interest was payable under this section had been reduced and subsequently as a result of an order under said sections or section 263, the amount on which interest was payable under this section is increased, the assessee shall be liable to pay interest under sub-section (2) from the day immediately following the end of the period mentioned in the first notice of demand, referred to in sub-section (1) and ending with the day on which the amount is paid:”;

(b) in the second proviso, for the words “Provided further”, the words “Provided also” shall be substituted.

Notes on ClausesClause 62 of the Bill seeks to amend section 220 of the Income-tax Act relating to when tax payable and when assessee deemed in default.The existing provision contained in sub-section (1) of the aforesaid section provides that any amount specified as payable in a notice of demand under section 156 shall be paid within thirty days of the service of notice at the place and to the person mentioned in the notice.

It is proposed to insert a new sub-section in the said section so as to provide that where any notice of demand has been served upon an assessee and any appeal or other proceeding, as the case may be, is filed or initiated in respect of the amount specified in the said notice of demand, then, such demand shall be deemed to be valid till the disposal of the appeal by the last appellate authority or disposal of the proceedings, as the case may be, and any such notice of demand shall have the effect as specified in section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.

The first proviso to sub-section (2) of the said section provides that where as a result of an order under section 154, or section 155, or section 250, or section 254, or section 260, or section 262, or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount on which interest was payable under this section had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded.

It is proposed to insert second proviso in the said section so as to provide that where as a result of an order under sections specified in the first proviso, the amount on which interest was payable under this section had been reduced and subsequently as a result of an order under said sections or section 263, the amount on which interest was payable under this section is increased, the assessee shall be liable to pay interest under sub-section (2) from the day immediately following the end of the period mentioned in the first notice of demand, referred to in sub-section (1) and ending with the day on which the amount is paid.

These amendments will take effect from the 1st October, 2014.

Memorandum explaining the provisionThe existing provision contained in sub-section (1) of section 220 provides that any amount specified as payable in a notice of demand under section 156 shall be paid within thirty days of the service of notice at the place and to the person mentioned in the notice. Sub-section (2) states that if the amount specified in the notice is not paid within the period, the assessee shall be liable to pay simple interest at one per cent for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in sub-section (1) and ending with the day on which the amount is paid. The proviso to sub-section (2) states that where as a result of an order under sections 154, 155, 250, 254, 260, 262, 264 or sub-section (4) of section 245D, the amount on which interest payable under this section had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals Liability of the assessee to pay interest is based on the theory of continuity of the proceedings and the doctrine of relation back. Accordingly, it is proposed to insert a new sub-section in section 220 so as to provide that where any notice of demand has been served upon an assessee and any appeal or other proceeding, as the case may be, is filed or initiated in respect of the amount specified in the said notice of demand, then such demand shall be deemed to be valid till the disposal of appeal by the last appellate authority or disposal of proceedings, as the case may be and such notice of demand shall have effect as provided in section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.

It is further proposed to provide that where as a result of an order under sections specified in the first proviso, the amount on which interest was payable under this section had been reduced and subsequently as a result of an order under said sections or section 263, the amount on which interest was payable under section 220 is increased, the assessee shall be liable to pay interest under sub-section (2) of the said section on the amount payable as a result of such order, from the day immediately following the end of the period mentioned in the first notice of demand referred to in sub section (1) of the said section and ending with the day on which the amount is paid.

These amendments will take effect from the 1st day of October, 2014. [Clause 62]

Analysis of the provision1. The provision are not consistent and do not take care of a situation where the

assessee appeals before initial authority and wins but looses before HC or SC . Interest on demand payable from which date and on what amount?

R eduction in tax rate on certain dividends received from foreign companies

Finance Minister’s SpeechIn the Finance Minister’s speech it was stated in para 202 as follows:-202. The concessional rate of tax at 15 percent on dividends received by Indian companies from their foreign subsidiaries has resulted in enhanced repatriation of funds from abroad. I propose to continue with this concessional rate of 15 percent on foreign dividends without any sunset date. This will ensure stability of taxation policy.

Changes in the statuteIn section 115BBD of the Income-tax Act, in sub-section (1), the words, figures and letters “for the previous year relevant to the assessment year beginning on the 1st day of April, 2012 or beginning on the 1st day of April, 2013 or beginning on the 1st day of April, 2014” shall be omitted with effect from the 1st day of April, 2015.

Notes on clausesClause 37 of the Bill seeks to amend section 115BBD of the Income-tax Act relating to tax on certain dividends received from foreign companies.

The existing provisions of the aforesaid section provide that where the total income of an assessee, being an Indian company, for the previous year relevant to the assessment year beginning on the 1st day of April, 2012 or beginning on the 1st day of April, 2013 or beginning on the 1st day of April, 2014, includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of the amount of income-tax calculated on the income by way of such dividends at the rate of fifteen percent. and the amount of income-tax with which the assessee would have been chargeable had its total income been reduced by the amount of aforesaid income by way of dividends. It is further provided that no deductions in respect of any expenditure or allowance shall be allowed for computing its income by way of dividend.

It is proposed to amend section 115BBD to provide that the provisions of taxation of foreign dividends shall continue to apply to foreign dividends received during the financial year 2014-15 and subsequent years.


Memorandum explaining the provisionsReduction in tax rate on certain dividends received from foreign companies


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals Section 115BBD of the Act was introduced as an incentive for attracting repatriation of income earned by Indian companies from investments made abroad. It provides for taxation of gross dividends received by an Indian company from a specified foreign company at the concessional rate of 15 per cent. if such dividend is included in the total income for the assessment year 2012-13 or 2013-14 or 2014-2015.

With a view to encourage Indian companies to repatriate foreign dividends into the country, it is proposed to amend the Act to extend the benefit of lower rate of taxation without limiting it to a particular assessment year. Thus, such foreign dividends received in financial year 2014-15 and subsequent financial years shall continue to be taxed at the lower rate of 15%.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.

Analysis of the amendmentsIronically, here there is no requirement regarding grossing up of dividend and thus the provision does not stand in parity with the amendment made to section 115-O of the Income tax Act, 1961 regarding grossing up of the dividend and there is no ostensible reason for this.

Roll back provision in Advance Pricing Agreement scheme

Finance Minister’s SpeechIn the Finance Minister’s speech it was stated in Para 204 as follows:-204. In order to reduce litigation on transfer pricing issues, I propose to make certain changes in Transfer Pricing regulations.

(1) An Advance Pricing Agreement (APA) scheme was introduced in the year 2012. It has received good response. I propose to strengthen the administrative set up of APA to expedite disposal of applications. Further, I propose to introduce a “Roll Back” provision in the APA scheme so that an APA entered into for future transactions may also be applied to international transactions undertaken in previous four years in specified circumstances.

(2) In order to align Transfer Pricing regulations in India with the best available practices, I propose to introduce range concept for determination of arm’s length price. However, the arithmetic mean concept will continue to apply where number of comparable is inadequate. The relevant data is under analysis and appropriate rules will be prescribed.

(3) As per existing provisions of Transfer Pricing Regulations, only one year data is allowed to be used for comparable analysis with some exception. I propose to amend the regulations to allow use of multiple year data.

Necessary legislative amendments to give effect to the above proposals including those relating to the Authority for Advance Rulings and Income-tax Settlement Commission will be moved in the current session of the Parliament.

Changes in the statuteIn section 92CC of the Income-tax Act, after sub-section (9), the following sub-section shall be inserted with effect from the 1st day of October, 2014, namely:––

“(9A) The agreement referred to in sub-section (1), may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the arm’s length price or specify the manner in which arm’s length price shall be determined in relation to the international transaction entered into by the person during any period not exceeding four previous years preceding the first of the previous years referred to in sub-section (4), and the arm’s length price of such international transaction shall be determined in accordance with the said agreement.”.

Notes on clausesClause 32 of the Bill seeks to amend section 92CC of the Income-tax Act relating to advance pricing agreement.

The existing provisions of section 92CC empowers the Board to enter into an advance pricing agreement, with the approval of the Central Government, with any person for determining arm’s length price or specifying the manner in which arm’s length price is to be determined in relation to an international transaction which is to be entered into by such person. The agreement entered


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals into is valid for a period, not exceeding five previous years, as may be mentioned in the agreement. Once the advance pricing agreement is entered into, the arm’s length price of the international transaction, which is the subject matter of the same, is determined in accordance with such agreement. Sub-section(9) of the said section empowers the Board to prescribe the scheme specifying therein the manner, form, procedure and any other matter generally in respect of advance pricing agreement.

It is proposed to insert a new sub-section (9A) in section 92CC to provide that an advance pricing agreement may, subject to such conditions, procedure and manner as may be prescribed, provide for determining the arm’s length price or specify the manner in which arm’s length price shall be determined in relation to an international transaction entered into by the person during any period not exceeding four previous years preceding the first of the previous year for which the agreement applies in case of future transactions. It is further provided that where such agreement provides for determination in respect of past transactions, the arm’s length price of such transactions shall be determined in accordance with the agreement.


Memorandum explaining the provisionsSection 92CC of the Act provides for Advance Pricing Agreement (APA). It empowers the Central Board of Direct Taxes, with the approval of the Central Government, to enter into an APA with any person for determining the Arm’s Length Price (ALP) or specifying the manner in which ALP is to be determined in relation to an international transaction which is to be entered into by the person. The agreement entered into is valid for a period, not exceeding 5 previous years, as may be mentioned in the agreement. Once the agreement is entered into, the ALP of the international transaction, which is subject matter of the APA, would be determined in accordance with such an APA.

In many countries the APA scheme provides for “roll back” mechanism for dealing with ALP issues relating to transactions entered into during the period prior to APA. The “roll back” provisions refers to the applicability of the methodology of determination of ALP, or the ALP, to be applied to the international transactions which had already been entered into in a period prior to the period covered under an APA. However, the “roll back” relief is provided on case to case basis subject to certain conditions. Providing of such a mechanism in Indian legislation would also lead to reduction in large scale litigation which is currently pending or may arise in future in respect of the transfer pricing matters.

Therefore, it is proposed to amend the Act to provide roll back mechanism in the APA scheme. The APA may, subject to such prescribed conditions, procedure and manner, provide for determining the arm’s length price or for specifying the manner in which arm’s length price is to be determined in relation to an international transaction entered into by a person during any period not exceeding four previous years preceding the first of the previous years for which the advance pricing agreement applies in respect of the international transaction to be undertaken in future.This amendment will take effect from 1st October, 2014.[Clause 32]

Analysis of amendmentsThe APA regime has received an encouraging response from taxpayers with over 400 applications filed since its introduction.India has seen a high level of transfer pricing adjustments year-on-year with the adjustment figures being in the range of:

YEAR No of transfer pricing cases Amount of amount adjusted (demand taxes) in INR crore

2009-2010 670 61402010-2011 1138 232372011-2012 1343 443512012-2013 3200 70000

The implementation of “roll-back” provisions will prove an efficient and cost effective manner of resolving pending transfer pricing litigation. The APA and roll back related provisions can be an effective way of resolving transfer pricing issues and achieving certainty for a number of past and future years in a single process.

Allowing rollback of APAs for past 4 years effectively means resolution for 9 years and thus is a very welcome proposition.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals The APA regime was introduced in 2012 and has received an overwhelming response from the taxpayers. However, the current APA regime was available only for future years and could not be applied to past years where returns were filed or litigation was pending. The rollback provisions will enable the taxpayers to apply the APA not only to 5 future years but can also be applied to 4 years preceding the previous year for which it is filed. For e.g. the first year in which APA was applicable was financial year 2013-14, therefore this provision will allow a roll back for preceding 4 open years i.e. from FY 2009-10 to FY 2012-13. Currently TP audits are ongoing for FY 10-11. Therefore, for cases completed last year i.e. for FY 2009-10 instead of preferring an appeal the tax payer will have an option to roll back the APA if concluded after October 1, 2014. This is a commendable change that will help curtail the long drawn litigation for many taxpayers once an APA is executed.

The rollback provisions will enable the taxpayers to apply the APA not only to 5 future years but can also be applied to 4 years preceding the previous year for which it is filed. For e.g. the first year in which APA was applicable was financial year 2013-14, therefore this provision will allow a roll back for preceding 4 open years i.e. from FY 2009-10 to FY 2012-13.

Roll back provisions already exist in other global jurisdictions like Canada, China, Germany, Japan, UK and USA.

Re: Range ConceptIt has been proposed to introduce ‘range concept’ for determination of ALP. However, the concept of arithmetic mean will still continue to apply where number of comparables is inadequate. Appropriate rules are to be prescribed with regard to the same.

Since transfer pricing is not a mathematical or scientific calculation, but a subjective commercial analysis, computation of single arm’s length price (computed under arithmetic mean methodology) has posed many difficulties in the past. The OECD regulations, UN Manual and most regulations globally accept the conceptual framework of a “range” as compared to an “arithmetic mean”. This amendment is in line with global best practices.

Amendment proposed to allow use of multiple year data for comparability analysis vis-à-vis single year data

Amendments are proposed to allow use of multiple year data for comparable analysis. As per existing provisions only single year data is allowed for comparable analysis.

The transfer pricing regime has been further rationalized with the removal of restrictions on the use of multiple year data for the purpose of carrying out comparability or benchmarking analysis.

The main purpose of using multiple year data is to ensure that the outcomes for the relevant year are not unduly influenced by abnormal factors. In attempting to determine an arm’s length outcome for international dealings between AE(s), the results of any one year may be distorted by differences in economic or market conditions and the features and operations of the enterprise, affecting the controlled or uncontrolled dealings. However, the use of such data had been overlooked time and again by the tax authorities in the course of transfer pricing audits. The practical drawbacks owing to this will be addressed with this amendment.

Approach of using multiple year data is consistent with the revised OECD Guidelines on Transfer Pricing.The Delhi Tribunal in the case of Verizon Communication India (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 17(1), {[2012] 27 taxmann.com 328 (Delhi)}, has inter alia held that the use of multiple year data by the assessee for arriving at arm's length price is a bona fide exercise. The use of multiple year data also irons-out yearly fluctuations as well as effects of product and industry lifecycles, thus leading to a better choice of comparable companies. While the proposed changes would benefit all taxpayers across industries, companies operating in the IT and ITeS sectors could stand to especially benefit in view of numerous disputes in these sectors on margins and choice of appropriate comparables

India is the only country which has this arithmetic mean concept and the global best practice is to apply range, so you take comparables, you apply a range and if you fit in the range you are at arm’s length and this arithmetic mean had created a lot of challenges. Under the present regime


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals margins are expected to be very close or exactly same as a competitors margins which was unrealistic.

The law was not very clear in terms of using multiple year data, it was quite restrictive.

Characterization of Income in case of foreign institutional investors

Finance Minister’s SpeechIn the Finance Minister’s speech it was stated in Para 201 as follows:-201. Foreign Portfolio Investors (FPIs) have invested more than Rs 8 lakh crore. (about 130 billion US $) in India. One of their concerns is uncertainty in taxation on account of characterization of their income. Moreover, the fund managers of these foreign investors remain outside India under the apprehension that their presence in India may have adverse tax consequences. With a view to put an end to this uncertainty and to encourage these fund managers to shift to India, I propose to provide that income arising to foreign portfolio investors from transaction in securities will be treated as capital gains.

Changes in the statuteIn section 2 of the Income-tax Act,— in clause (14), with effect from the 1st day of April, 2015,––

(A) for the words in the opening portion ‘ “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include––(i) any stock-in-trade’, the following shall be substituted, namely:––

“capital asset” means––(a) property of any kind held by an assessee, whether or not connected with his business or profession;

(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992,but does not include–(i) any stock-in-trade [other than the securities referred to in sub-clause (b)],’;

(B) the Explanation occurring at the end shall be numbered as “Explanation 1” thereof and after the Explanation as so numbered, the following Explanation shall be inserted, namely:––

‘Explanation 2.––For the purposes of this clause––(a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD;(b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956;’;

Notes on clausesClause 3 of the Bill seeks to amend section 2 of the Income tax Act relating to definitions.

The existing provisions of clause (14) of section 2 define the term “capital asset”. The term is defined to include property of any kind held by an assessee whether or not connected with his business or profession but does not include any stock-in-trade or personal assets as provided in the definition.

It is further proposed to amend the said clause (14) so as to provide that the term “capital asset” shall include any security held by a Foreign Institutional Investor which has invested in such security in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992.


Memorandum explaining the provisionsCharacterisation of Income in case of Foreign Institutional Investors Section 2 (14) of the Act defines the term “capital asset” to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets as provided in the definition.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals The foreign portfolio investors (referred as foreign institutional investors in the Act) face a difficulty in characterisation of their income arising from transaction in securities as to whether it is capital gain or business income. Further, the fund manager managing the funds of such investor remains outside India under the apprehension that its presence in India may have adverse tax consequences.

Therefore, in order to end this uncertainty, it is proposed to amend the Act to provide that any security held by foreign institutional investor which has invested in such security in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 would be treated as capital asset only so that any income arising from transfer of such security by a Foreign Portfolio Investor (FPI) would be in the nature of capital gain.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.[Clause 3]

Analysis of the amendmentCircular F. No. 5(13)SE/91-FIV dated 24-3-1994 issued by the Ministry of Finance, Department of Economic Affairs (Investment Division), New Delhi, the relevant part of which is as under :"The taxation of income of Foreign Institutional Investors from securities or capital gains arising from their transfer, for the present, shall be as under :—

(i)The income received in respect of securities (other than units of off-shore funds covered by section 115AB of the Income-tax Act) is to be taxed at the rate of 20 per cent;

(ii)Income by way long-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 10 per cent;

(iii)Income by way of short-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 30 per cent;

(iv)The rates of income-tax as aforesaid will apply on the gross income specified above without allowing for any deduction under sections 28 to 44C, 57 and Chapter VI-A of the Income-tax Act.

2. The expression "Foreign Institutional Investor" has been defined in section 115AD of the Income-tax Act to mean such investors as the Central Government may, by notification in the Official Gazette, specify in this behalf. The FIIs as are registered with the Securities and Exchange Board of India will be automatically notified by the Central Government for the purpose of section 115AD." From the above Press Note, it became abundantly clear that FIIs have been considered as "investors" (and not as traders). Secondly, income from transfer of securities has been viewed as chargeable to tax under the head `capital gains' as long-term or short-term capital gain depending upon the period for which such securities are held.

The amendment settles the controversy in relation to taxability of income in the hands of an FII, which at times was sought to be taxed as capital gains and sometimes as business income. This is in conformity with the ruling of Mumbai ITAT in case of LG Asian Plus Ltd vs. ADIT (International Taxation )-3(2) [2011] 46 SOT 159]. This judgment relied on the above mentioned circular.

The Tribunal in this case noticed “It is noticed that section 115AD falls in Chapter XII which deals with the determination of tax in certain special cases. This Chapter consists of sections 110 to 115BBC. Each section contains special provisions dealing with specific types of incomes for which a specified rate of tax is provided. If a particular item of income is covered in any of these sections, it shall be strictly governed by the prescription of that relevant section alone. We are reminded of the legal maxim 'Generalia specialibus non derogant', which means that special provisions override the general provisions. The Hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546/ 148 Taxman 468 has held that expenditure towards rent, repairs, maintenance of guest house used in connection with business is to be disallowed under section 37(4) because this is a special provision overriding the general provision.

The heading of section 43 is: 'Definitions of certain terms relevant to income from profits and gains of business or profession'. The opening part of this section is: "In sections 28 to 41 and in this section, unless the context otherwise requires-". Thereafter, six sub-sections have been given, of which sub-section (5) defines "speculative transaction". It is, therefore, clear that section 43(5) defining 'speculative transaction' is relevant only in the context of income under the head 'Profits and gains of business or profession'. It rules out its application to income under any other head. If


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals that be the position, the picture is clear that section 43(5) has no application to FIIs in respect of 'securities' as defined in Explanation to section 115AD, income from whose transfer is considered as short term or long term capital gains.”

Tax department uniformly accepted the position that income arising to an FII is business income. It is really the FIIs who tried to say that their income was business income and because they had no permanent establishment there was no tax at all. Then there were rulings from AAR etc, much of that was buried over the last few years and the practical position on the ground was that both sides accepted it was capital gains. What was giving rise to this uncertainty was that if there were managers in India and they were held to be constituting a permanent establishment would the tax office rake up the issue that this is business income and that is sought to be covered by this amendment.

Still it is not ruled that litigation will not be there since there were lot of FIIs who chose to show business income because it suited them like FIIs in USA. Again re fund managers more clarifications may be needed re permanent establishment.

Rationalization of definition of International Transaction

Change in statuteIn section 92B of the Income-tax Act, in sub-section (2), with effect from the1st day of April, 2015,––

(i) for the words “deemed to be a transaction”, the words “deemed to be an international transaction” shall be substituted;

(ii) after the words “determined in substance between such other person and the associated enterprise”, the words “where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not” shall be inserted.

Notes on clausesClause 31 of the Bill seeks to amend section 92B of the Income-tax Act relating to meaning of international transaction. The existing provisions of section 92B provide for the meaning of “international transaction” for the purposes of applicability of transfer pricing regime. Sub-section (1) defines International transaction as a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property or provision of services or lending or borrowing of money or any transaction having a bearing on profits, income, losses or assets of such enterprises.

Sub-section (2) of the said section provides for deeming of a transaction between an enterprise and unrelated third party as a transaction between two associated enterprises subject to the condition that there exists a prior agreement in relation to the relevant transaction between the third party and associated enterprise or the terms of the relevant transaction are determined in substance between such third party and the associated enterprise.

It is proposed to amend the said sub-section (2) so as to provide that the relevant transaction shall be deemed to be an international transaction, where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not.


Memorandum explaining the provisionsThe existing provisions of section 92B of the Act define 'International transaction' as a transaction in the nature of purchase, sale, lease, provision of services, etc. between two or more associated enterprises, either or both of whom are non-residents.

Sub-section (2) of the said section extends the scope of the definition of international transaction by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation to the transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between the other person and the associated enterprise. The sub-section as presently worded has led to a doubt whether or not, for the transaction to be treated as an international transaction, the unrelated person should also be a non-resident.


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals Therefore, it is proposed to amend section 92B of the Act to provide that where, in respect of a transaction entered into by an enterprise with a person other than an associated enterprise, there exists a prior agreement in relation to the relevant transaction between the other person and the associated enterprise or, where the terms of the relevant transaction are determined in substance between such other person and the associated enterprise, and either the enterprise or the associated enterprise or both of them are non-resident, then such transaction shall be deemed to be an international transaction entered into between two associated enterprises, whether or not such other person is a non-resident.

This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent assessment years.[Clause 31]

Analysis of amendmentsAnother important amendment is in respect of applicability of TP provisions to transactions between two independent enterprises where the pricing arrangement was pre-decided or influenced by the Associated Enterprise (AE) of one of the parties. There have been certain Tribunal rulings including that of Mumbai Tribunal in case of Kotak India Private Limited Vs. Addl. Commissioner Of Income Tax ( ITA No. 7349/Mum/2012 ), where it has been ruled that even if the pricing between two domestic independent entities in India, is pre-decided or in any way influenced by AE of one of the entities, the domestic transaction cannot be subjected to TP regulations.

These rulings were based on the provisions of section 92B(2) of the Income-tax Act, 1961 (I.T.Act), which states that a transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purpose of sub-section (1) to section 92B, be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. The following example can be used to explain the Tribunals stand in this case:

In the above example if there is a global sale of business of ABC USA to PQR USA, as a result of which the business of ABCs Indian subsidiary -ABC India is sold to PQR India, the Mumbai Tribunal had ruled that in order for transfer pricing regulations to be applicable two conditions were to be met (i) the transaction could be deemed to be an international transaction if either or both the parties to the transaction were non-resident, (2) if the provisions of section 92B(2) were to apply there was required to be an AE relationship between ABC India and PQR USA or between PQR India and ABC USA, through which the influence was exercised.

Only to avoid such transactions between two independent parties which are in ‘form’ independent but in substance pre-determined and/ or influenced by Associated enterprises, the above amendment has been made to section 92B(2) of the I.T.Act.

In this context it may also be noted that the Hyderabad Tribunal in case of Swarnandhra IJMII Integrated township Development Co. P. Ltd [2013] 156 TTJ 574 (Hyderabad-Trib) had held that section 92 B(2) does not apply to transactions between domestic entities and the precondition of there being an ‘international transaction’ has to be satisfied if the said section is to be applied.

Levy of penalty u/s 271G by transfer pricing officers

Changes in statuteIn section 271G of the Income-tax Act, after the words “the Assessing Officer”, the words, figures and letters “or the Transfer Pricing Officer as referred to in section 92CA” shall be inserted with effect from the 1st day of October, 2014.

Notes on ClausesClause 67 of the Bill seeks to amend section 271G of the Income-tax Act relating to levy of penalty for failure to furnish information or document under section 92D of the Act.

Under the existing provisions of section 271G, if any person who has entered into an international transaction or specified domestic transactions fails to furnish any such document or information as required by sub-section (3) of section 92D, then,such person shall be liable to a penalty of a sum equal to two per cent. of the value of international transaction or specified domestic transaction for each failure. The said section provides that the above penalty may be levied by the Assessing Officer or the Commissioner (Appeals).


UNION BUDGET 2014 -An Analysis of Direct Tax Proposals It is proposed to amend section 271G to include Transfer Pricing Officer as referred to in section 92CA, as an authority competent to levy the penalty under the section 271G in addition to the Assessing Officer and the Commissioner (Appeals).


Memorandum explaining the provisionsThe existing provisions of section 271G of the Act provide that if any person who has entered into an international transaction or specified domestic transaction fails to furnish any such document or information as required by sub-section (3) of section 92D, then such person shall be liable to a penalty which may be levied by the Assessing Officer or the Commissioner (Appeals).

Section 92CA provides that an Assessing Officer may make reference to a Transfer Pricing Officer (TPO) for determination of arm's length price (ALP). TPO has been defined in the said section to mean a Joint Commissioner or Deputy Commissioner or Assistant Commissioner who is authorised by the Board to perform all or any of the functions of an Assessing Officer specified in sections 92C and 92D. The determination of arm’s length price in several cases is done by the TPO.

It is, therefore, proposed to amend section 271G of the Act to include TPO, as referred to in Section 92CA, as an authority competent to levy the penalty under section 271G in addition to the Assessing Officer and the Commissioner (Appeals).This amendment will take effect from 1st October, 2014. [Clause 67]

Analysis of amendmentsWhile there are thousands of transfer pricing (TP) cases adjudicated at various appellate levels on a variety of transfer pricing issues, only a handful of these cases (less than approximately 10!) have thrown up cases on the levy of penalty under section 271G. Taxpayers generally experience penalty under section 271(1)(c) invoked on an automatic basis wherever there is a TP adjustment being proposed by the TPO, but the authorities are generally not known to invoke the penalty under section 271G on a routine basis. It is interesting to find that the few cases litigated in the context of section 271G penalty are ones where there has not been any TP adjustment! It is even more interesting to note that not a single case of levy of penalty under section 271G has been upheld, all being ruled in favour of the taxpayers.

Some of the judgments are as follows:-1) Income-tax Officer, 8(2)(3)v. Netsoft India Ltd. [2013] 35 taxmann.com 5792)Commissioner of Income-tax –II v. Leroy Somer & Controls (India) (P.) Ltd. [2013] 37 taxmann.com 407 (Delhi)3) Assistant Director of Income-tax (International Taxation), Ahmedabad v.Nikko Resources Ltd. [2013] 36 taxmann.com 378 (Ahmedabad - Trib.).

The correlating penalty provision under section 271AA (penalty on failure to maintain the mandatory transfer pricing documentation) has not been amended similarly.

Penal provisions ensure compliance with the statutory provisions and this amendment would enable the TPOs to perhaps ensure timely adherence to the notices issued to the taxpayers. It is possible that the TPOs start inserting penal clauses in the notices from 1 October 2014 (effective date of the amendment) for cases which are not replied to within the time limit granted by the TPO in the ongoing TP assessments. The failure by companies to respond within the allotted time formally provide by the TPO would definitely not come cheap and taxpayers can expect to start seeing demand notice from the TPO as well on closure of the TP assessment – penalty of 2% of the value of the ITs /SDTs in question.


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