1
Report of the Standing Committee on Finance on DTC 2010 – Analysis of key recommendations
In 2009, the government released the Direct Taxes Code 2009 (DTC 2009) along
with a discussion paper. The DTC 2009 proposed to replace the Income-tax Act,
1961 and the Wealth-tax Act, 1957.
After receiving several representations from across stakeholders, the government
issued a revised Direct Taxes Code 2010 (DTC 2010). The DTC 2010 addressed the
issues and concerns raised by various stakeholders. The DTC 2010 was referred to
a Standing Committee on Finance (the Committee or SCF) headed by the former
Finance Minister, Mr. Yashwant Sinha.
The Committee prepared a report providing its recommendations after collating
the representations made by various stakeholders and the response of the Ministry
of Finance (MoF). The report was released recently.
The Alert contains the key provisions relevant for both residents and non-
residents. The response of the MoF and the recommendations of the Committee
provide clarity and are indicative of the forthcoming approach that can be expected
in the final version of the Direct Taxes Code to be released.
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News Alert 15 March, 2012
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
2
Provisions in the Direct Taxes Code (DTC) Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Place of Effective Management in India (POEM)
• Foreign companies are to be treated as
‘resident’ in India if their Place of Effective
Management (POEM) in India, at any time in
the year, is in India.
• POEM has been defined to mean :
- the place where the board of directors
(BoD) of the company / its executive
directors make their decisions; or
- in cases where the BoD routinely
approves the commercial and strategic
decisions made by the executive directors
or officers of the company, the place
where such executive directors or officers
of the company perform their functions.
[Sections 4(3), 314(192)]
Recommendations from Independent Bodies
• The company should be resident in India only where
it habitually takes strategic decisions in India, it is
effectively managed in India.
• The definition of residency as contained in Direct
Taxes Code (DTC) may lead to increase in instances
where a single company may be considered to be a
resident of two countries. This would lead to
taxation of global income of the said company in two
countries
• The DTC should provide for detailed guidelines on
tie breaker test with a defined timeline for
application of the process of the tie-breaker test.
• The DTC should contain guidelines for establishing
a POEM.
• The words adjacent to POEM ‘at any time in the
year’ should be deleted.
MoF response
The MoF has stated that it would consider
recommendations in relation to,
• Obviating situations of a single company becoming
resident of two countries.
• Issuing guidelines for establishing a POEM.
• Several aspects of the definition of POEM are unclear
and provide room for uncertainty in following
situations:
- Executive Director is not defined and would lead to
ambiguity.
- The expression ‘officer’ would lead to
ambiguity/uncertainty as in these times,
commercial and strategic decisions are made at
various levels.
• Determining POEM on the basis as to where such
officers perform their functions is not an objective
criteria of deciding fiscal residency.
• Reference to Executive Directors (ED) or officer may be
removed from the definition of POEM and residency
should instead be determined on the basis of
internationally accepted standards and judicially
settled principles,
- where the focus is on the place,
- where the key management and commercial
decisions as a whole are made, or,
- where the ‘head and brain’ of the company is
situated.
PwC’s Comments
• Broadly, the recommendations of Independent bodies have been favourably considered by the committee.
• The committee has appreciated the possible conflicts arising out of the definition contained in the DTC.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
3
Provisions in the Direct Taxes Code (DTC)
Recommendations from Independent Bodies1 and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing Committee on Finance (the Committee or SCF)
Indirect transfer (IDT)
• The income from the transfer outside India
of any share or interest in a foreign
company shall be tax exempt, provided that
in the 12 months preceding the transfer, the
fair market value (FMV) of the assets
owned by the company in India, directly or
indirectly, represents less than 50% of the
FMV of all assets owned by the company.
• The term ‘asset’ as defined by the DTC
includes business assets and investment
assets, including intangible assets, for the
purpose of determining the FMV.
• For a non-resident, a formula is provided
for computation of income accrued in India,
arising out of transfer outside India. [Sections 5(4)(g) & 5(6)]
Recommendations from Independent Bodies
• Since the GAAR provisions encompass even indirect
transfer of capital assets outside India, specific
provisions to tax the same should be excluded from
the DTC.
• The provisions of ‘indirect transfer’ should not be
applicable when the :
- Where the primary objective of the transfer is not
to avoid tax in India.
- In case of overseas restructuring of group
companies outside India.
- The transactions involve less than 50% of shares
or interest of the foreign company ; or
- Transactions done on a stock exchange outside
India.
• Criteria for computing the FMV of the assets could
be applied on a particular date instead of at any time
during the 12 months preceding the transfer.
• For the purpose of applying the 50% parameter, the
value of ‘all assets directly or indirectly owned by
the company’ should be considered.
• The provisions of ‘indirect transfer’ should be
applied only on ‘direct transfer’ of the shares of the
foreign company. ‘Indirect transfer’ of shares in, or
interest of, a foreign company should not result in
any Indian tax liability i.e. the shares of an
• Exemption should be provided to transfer of small
shareholdings and transfer of shares listed outside
India.
• The criteria for computing FMV of assets any time
during 12 months preceding the transfer date is
onerous, and hence, comparison be made as per the
last balance sheet date.
• Exemption may be provided to intra-group
restructuring outside India, as the DTC itself exempts
such transactions from capital gains.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
4
Provisions in the Direct Taxes Code (DTC)
Recommendations from Independent Bodies1 and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing Committee on Finance (the Committee or SCF)
Indirect transfer (IDT)
intermediary foreign company should not be taxed
under these provisions.
• Comparison to be restricted to latest available
audited balance sheet and the onus to prove that tax
liability is triggered should be on the tax
department.
MoF response
• The income has to be first covered within the scope
of total income and then only it can be brought to
tax by invoking the anti-evasion provisions.
• The date of valuation would be considered for
transfer of small holdings.
• The provisions are intended to outline the source
rule with regard to indirect transfer of assets
situated in India. PwC’s Comments It is necessary that the provisions relating to indirect transfer are revisited and introduced in a manner to be fair and workable as per the recommendations made by the independent bodies and the Committee.
Provisions in the Direct Tax Code (DTC) Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
General Anti Avoidance Rule (GAAR)
• General Anti Avoidance Rule (GAAR)
provisions would override tax treaty
provisions.
• GAAR empowers tax authorities to declare
Recommendations from Independent Bodies
• Suitable safeguards must be built in to ensure that
GAAR is applied in appropriate cases. GAAR
Observations
• The committee observes that GAAR proposals seek to
empower the income tax authorities, namely the
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
5
Provisions in the Direct Tax Code (DTC) Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
General Anti Avoidance Rule (GAAR)
any transaction as impermissible and
determine the tax consequences, if the
transaction has been entered into with the
main object of obtaining a tax benefit and if
it lacks commercial substance.
• The provisions cover aspects such as the
interposition of an entity, the piercing of
the corporate veil, round-trip financing and
thin capitalisation.
• The onus to prove that tax avoidance is not
the main purpose of a transaction shifted to
the tax-payer.
• Situations resulting in a reduction in the
tax base, including an increase in loss, can
attract GAAR provisions.
• The GAAR provisions will be applied to all
parties to a transaction if they are
applicable to any of the parties to the
transaction.
• The definition of an arrangement suggests
that if a tax benefit is the sole purpose
under an arrangement, then it would be
regarded as an impermissible avoidance
arrangement.
[Sections 123,125, 154, 291(9)]
should be administered by an independent panel
unlike the current Dispute Resolution Panel (DRP).
• GAAR will not apply to such arrangements which
can reasonably be considered to have been
undertaken primarily for genuine purposes.
• GAAR should not apply to transactions already
completed prior to the date of enactment of the
DTC
• GAAR should not apply to transactions which were
subject matter of a ruling given by the Authority for
Advance Rulings (AAR).
• GAAR override should not apply to treaties which
already have the ‘limitation of benefit’ clause.
• The definition of the term ‘impermissible
avoidance arrangement’ be replaced.
• It should be clarified that if a tax benefit has been
derived by virtue of a tax treaty provision and such
tax treaty already contains a specific provision to
prevent abuse of the tax treaty, the GAAR should
not be applied overriding such anti-abuse
provisions of a treaty.
• The terms ‘commercial substance’ and ‘bona fide
business purpose’ should be defined in an
exhaustive manner as the current definition could
result in some degree of subjectivity and ambiguity
in its application.
• An independent authority comprising of members
who have judicial experience including
Commissioners to invoke the applicability of the
provisions and shifts the onus to the taxpayer. The
Ministry has stated that appropriate guidance for
applying these provisions will be provided to tax
authorities through guidelines. The Committee finds
the following serious concerns which need to be
addressed:
- GAAR confers vast and discretionary powers to
tax authorities to disregard any business
transactions and which would lead to significant
uncertainty with respect to conducting business in
India.
- A tax treaty override (without any objective
parameters) under GAAR could raise concerns
about the sanctity of benefits conferred under
treaties and affect India’s credibility as a reliable
treaty partner.
- The DTC does not contain any ‘grandfathering’
provisions to cover structures that are currently in
place
- The application of GAAR to a specific structure by
the tax authorities could change from year to year,
resulting in significant fiscal uncertainty.
- Transactions/structures that have been
specifically upheld by Courts could also
potentially be targeted under the GAAR.
- GAAR could lead to cumbersome, time-
consuming and costly litigation each time a
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
6
Provisions in the Direct Tax Code (DTC) Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
General Anti Avoidance Rule (GAAR)
businessmen and professionals of experience
should be constituted for objectively reviewing and
approving all cases proposed by a Commissioner of
Income-tax (CIT) for invoking GAAR.
• GAAR should provide for a maximum period (say,
12 months from date of filing of tax return) within
which the CIT should seek to invoke GAAR
• The threshold limit for invoking GAAR should be
reasonable.
• The tax authorities should be restricted from
invoking the provisions of GAAR during the course
of reassessment proceedings and should also be
prohibited from initiating reassessment
proceedings by invoking GAAR.
• GAAR provisions should not apply in cases where a
transaction/arrangement has been approved by a
High court or a Supreme Court.
MoF response
• Conditions and the manner under/in which GAAR
would be applicable be prescribed through Rules.
• Using the phrase ‘genuine purposes’ would create
ambiguity as this phrase is difficult to define. On
the other hand, the four criteria mentioned in
clause 134(15) would in themselves exclude a
genuine transaction.
• The MoF accepts that GAAR would not apply to
transactions prior to enactment of the DTC while
transaction or structure is sought to be tested
under the GAAR by the tax authorities.
Recommendations
• The onus should rest on the tax authorities to invoke
GAAR and this should not be shifted to the taxpayer.
• Uncertainties with regard to applicability of tax treaty
provisions should be removed so that India’s
credibility as a reliable treaty partner is not affected.
• The MoF and the Central Board of Direct Taxes
(CBDT) should seek to bring greater clarity and
preciseness to the scope of the provisions. There
should be certainty on these provisions so that foreign
investors do not become wary of investing in the
country.
• The conditions dealing with ‘misuse or abuse of DTC
provisions’ and the ‘manner applied for the
arrangements not for bona fide business purpose’ and
‘lacks commercial substance’, being very widely
worded and subjective, need to be more specifically
defined to avoid undue discretion to tax authorities.
• A threshold may be prescribed under the Rules to
cover small cases which should be outside the purview
of GAAR.
• It has been proposed that the orders of the
Commissioner invoking GAAR provisions will be
subject to approval of DRP which is a collegium of
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
7
Provisions in the Direct Tax Code (DTC) Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
General Anti Avoidance Rule (GAAR)
prescribing guidelines.
• The AAR gives rulings only in cases where the
transaction is not part of the avoidance
arrangement.
• Limitation of benefit clause as available in India’s
Tax treaties has limited application and would not
cover all the cases/circumstances which would be
covered through GAAR.
• The suggestion in relation to changing the
definition of the term ‘impermissible avoidance
arrangement’ is not acceptable as the definition
provided in the DTC is based on international
practice. The suggested definition would make all
conditions unilateral which would narrow the
scope of the provision to such an extent so as to
make it ineffective as an anti avoidance tool.
• GAAR provisions will check treaty shopping by tax
payers for avoidance of payment of tax in India.
CFC being anti-deferral measure is applicable in
limited number of cases involving foreign
companies. The definitions of ‘commercial
substance’ and ‘bona fide purpose’ are based on
international practices.
• GAAR provisions will be invoked by the
Commissioner who is a senior functionary of the
Department. Besides, the orders will be subject to
approval of DRP, a collegium of three
Commissioners. There would be adequate
three Commissioners of Income tax.
• The DRP should be headed by a Chief Commissioner
of Income-tax and two other members who should be
independent technical persons.
• GAAR provisions should apply prospectively so that it
is not made applicable to existing
arrangements/transactions. Alternatively, suitable
grandfathering provisions may be made to protect the
interest of the tax- payers who have entered into
structures/arrangements under the existing law.
• Tax-payers may also be permitted to obtain an
advance ruling to determine whether any kind of
transaction would be covered by GAAR.
• While invoking GAAR provisions, the entire
arrangement may be declared as an ‘impermissible
arrangement’. It should be clarified that only that part
of the arrangement would be invoked which is
considered as ‘impermissible’.
• The proposals should not lead to any fiscal
uncertainty or ambiguity. It should be ensured that
any of the proposals does not pave the way for
avoidable litigation, which is already at a very high
level in tax matters.
• The guidelines to address concerns on GAAR should
be laid in the Parliament along with the duly amended
DTC Bill.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
8
Provisions in the Direct Tax Code (DTC) Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
General Anti Avoidance Rule (GAAR)
safeguards built into the system when the
conditions and circumstances are prescribed. This
should allay such apprehensions
• Such a time limit cannot be provided as the tax
avoidance arrangement may pertain to more than
one year. The tax authorities are required to invoke
provisions of GAAR as and when relevant
information comes to its notice.
• The Ministry has accepted to consider bringing in
the threshold limit to invoke GAAR while framing
guidelines.
• As GAAR is intended to deal with impermissible
avoidance arrangements, which may have impact
over several years, placing this type of restriction is
not feasible.
• The approval of High Court or Supreme Court is
with specific objective and may not take into
account tax avoidance issues and circumstances
which are relevant at the time of invocation of
GAAR.
• There is no need to defer the implementation of
GAAR. Since GAAR would be operational under a
set of guidelines framed by CBDT, there should be
no cause for concern in this regard.
PwC’s Comments
The Committee has recommended very pragmatic and favourable provisions for the GAAR framework. It is hoped that the GAAR provisions, when introduced, are
based on the recommendations of the Committee.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
9
Provisions in the Direct Tax Code (DTC) Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Minimum Alternate Tax (MAT)
• Minimum Alternate Tax (MAT) is
proposed to be levied at 20% on the book
profit
• Book profit has been defined to mean
profit as per profit and loss account
adjusted for items on same lines as the
current provisions contained in section
115JB of the Income-tax Act (the Act)
• Every company shall prepare its profit and
loss account for the relevant financial year
in accordance with the provisions of Parts
II and III of Schedule VI to the Companies
Act, 1956.
• The provisions give the manner in which
tax credit for a financial year, arising due
to payment of income tax on book profit in
such year is to be calculated and carried
forward and allowed set-off in succeeding
years.
[Section 104(1), Second Schedule]
Recommendations from Independent Bodies
• MAT should not be levied on companies eligible for
claiming investment based incentives. A waiver be
provided on such companies in the initial years.
• Investment companies should not be subject to
MAT or provided concessional tax treatment as
their only source of income is investment income.
• Every company should be allowed to set-off entire
book losses being subject to MAT.
• Insurance companies (also banks and electricity
companies) should be out of the purview of MAT as
they are not required to prepare their profit and
loss account as per the Companies Act, 1956.
• Special Economic Zones (SEZ) units/developers
should not be made subject to MAT.
• MAT credit balance under the Act should be
grandfathered and allowed to be carry forward for
the unexpired period that is eligible for set-off.
• MAT credit should be allowed to be carry forward
at the time of conversion of a company into a
limited liability partnership (LLP).
MoF response
• The MoF did not accept the suggestions relating to
providing relief to companies claiming investment
linked incentives.
• The current law is also changed in regard to levy of
MAT on SEZ units/developers and hence, the
• The committee has recommended that service
companies be allowed set-off of loss and depreciation
both and then be subjected to MAT.
• The SCF recommended suitable
amendments/rectifications to enable banks and
electricity companies to be out of the purview of MAT.
• It is recommended that appropriate grandfathering
provisions be introduced in the DTC Bill for SEZ
units/developers being made eligible for the balance
period of exemptions.
• MAT credit should be grandfathered and carried
forward under the new legislation for set-off against
MAT payable.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
10
Provisions in the Direct Tax Code (DTC) Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Minimum Alternate Tax (MAT)
suggestion was not accepted.
• Grandfathering of MAT credit would be
considered.
• There is no justification to allow carry forward and
set-off of MAT credit to an LLP as the status of
business organisation changes from a company
into an LLP. This is not accepted even under the
current law.
PwC’s Comments
Most of the recommendations have been accepted by the Committee.
Provisions in the Direct Taxes Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Controlled Foreign Companies (CFC)
• The total income of the resident company
for the financial year (FY) would include
income that is attributable to a Controlled
Foreign Companies (CFC).
• For a company to conform to the definition
of a CFC, it should be a resident of a
territory with lower rate of taxation.
• Territory with a lower rate of taxation
means a country or a territory outside
India in which the amount of tax paid
under the laws of that country or territory
Recommendations from Independent Bodies
• To avoid double taxation of income of CFC, all
dividends be excluded from the profits for the
purpose of computation.
• The clause defining ‘dominant influence’ or
‘decisive influence’ be removed as it provides
avoidable discretion to the assessing officer (AO).
• The 50% control test would be restricted to cases of
individual who owns more than 10% voting right
and owns more than 50% collectively with others
acting in concert.
• Suitable amendment be made in proposals dealing with
the territory with lower rate of taxation to clarify that
foreign tax credit in respect of actual tax paid in any
other territory would be included in the tax paid.
• The control tests prescribed define the terms such as
‘directly or indirectly’, ‘dominant influence’ and
‘decisive influence’. They require to be more precisely
defined in scope to avoid ambiguities and unnecessary
litigation. It should be clarified that the attributable
income of the persons resident in India and exercising
control over the CFC should be the amount of current
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
11
Provisions in the Direct Taxes Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Controlled Foreign Companies (CFC)
in respect of profits of a company that
accrue in any accounting period, is less
than one-half of the corresponding tax
payable on those profits computed under
the DTC, as if that company was a domestic
company.
• A foreign company is not treated as a CFC
if it is engaged in any active trade or
business. The concept of active trade or
business has been elucidated whereby not
more than 50% of the foreign company’s
income should have been derived from, (i)
dividends, (ii) interest, (iii) income from
house property, (iv) capital gains, (v)
annuity payments, (vi) royalty, (vii) sales to
related / associated enterprises, (viii)
income from management of securities,
etc.
• The definition of CFC includes one or more
persons exercising control over a CFC,
whether individually or collectively. The
term ‘control’ is defined to include
dominant influence due to a special
relationship or sufficient votes to exercise
dominant influence in a shareholders
meeting.
• The definition of passive income also
includes related party transactions.
• Clarification is required for the context of the
determination of control test linked to capital and
which should not include loan creditors.
• Applicability of the CFC refers to ‘amount of tax
paid’, in the context of ‘territory with a lower rate of
taxation’ the reference should be to ‘tax rate’,
instead of to ‘amount of tax paid’. Clarification
required in relation to ‘tax payable’ in offshore
jurisdiction that it would be the effective tax rate
after taking into account any foreign tax credit in
that jurisdiction.
• Comparison at income level is inappropriate as
otherwise it may cover even loss making companies
having passive income.
• Unfair to include companies that have set-up global
sourcing or distribution companies for business
purposes and not for tax considerations.
• ‘Motive’ test should be prescribed to decipher
whether CFC regulations are triggered.
• The provisions of CFC should not be triggered
where distribution of income is not permissible in
the foreign jurisdiction.
• On consolidation of income, the loss of CFC should
be allowed to be clubbed and set-off against the
profits of the income company. Also, provisions for
carry forward and set-off of losses incurred by CFC
in the hands of the Indian company be permitted.
• CFC regime be deferred as Indian outbound
profits of a CFC, which are capable of being distributed
as per the applicable laws of the foreign country.
• Since the triggering points to invoke CFC regulations
are so many that cumulative or combined trigger of two
or three points/criteria ought to be stipulated instead of
a single-point trigger.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
12
Provisions in the Direct Taxes Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Controlled Foreign Companies (CFC)
• Where the income attributable to a CFC is
a loss as per the computation provisions,
the provisions as worded do not specifically
allow the loss to be set-off in the hands of
the Indian holding company.
[Sections 5, 113(2)(k), 291, Twentieth
Schedule]
investment is still at a nascent stage.
MoF response
• Underlying tax credit, if any, to be granted as per
the country specific tax treaty. Therefore, cannot be
provided as a general rule in domestic law.
• Current year’s CFC attributed to resident
shareholders, hence dividend paid from current
year’s profit is allowed as deduction and earlier
years’ dividend is disallowed.
• Internationally, in addition to the objective test, the
subjective test is required as the threshold of
exercising dominant influence differs from
jurisdiction to jurisdiction. In appropriate cases,
CBDT has powers to issue circular for guidance of
AO.
• One of the criteria to be a CFC is that company’s
shares are unlisted. Such companies are generally
controlled by one or two groups through multitude
of relatives and entities, and the condition of 10%
individual holding can easily be circumvented. In
such instances, the condition of joint or multiple
ownership exceeding 50% to define control over a
corporation is most appropriate legislation.
• It is clarified that tax paid in any other territory
would be treated as tax paid for foreign tax credit.
• Manufacturing company may not have any
attributable profits and even if there are profits, the
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
13
Provisions in the Direct Taxes Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Controlled Foreign Companies (CFC)
income threshold provided would take care of such
small income or in cases of companies having long
gestation period.
• Internationally, such provisions are adopted to
prevent tax planning through use of base
companies. Transfer pricing is applicable to
prevent shifting of excess profits and does not
provide for expediting repatriation of profits.
• The motive test is inbuilt in the provisions and
where the entity fails the active business test then
only it is treated as CFC. The active business test in
its ambit has motive test as the underlying idea.
Safe harbour provisions would be considered to
take care of exceptional circumstances.
• In the current scheme of taxation, the loss of a
subsidiary cannot be clubbed with the holding
company as there is no concept of group taxation in
India.
• It will not hamper either the competitiveness or the
investment potential of Indian corporates. The
applicability of CFC rules is triggered only when the
entity is situated in a tax haven or in a very low tax
jurisdiction. Most of the developed and developing
countries, which are a preferred destination for real
business activity, would remain out of the scope of
CFC.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
14
Provisions in the Direct Taxes Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Controlled Foreign Companies (CFC)
PwC’s Comments
The Committee has recommended very pragmatic and favourable provisions for CFC framework. It is hoped that the CFC provisions, when introduced, are as
recommended by the independent bodies and the Committee.
Provisions in the Direct Taxes Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Branch Profit Tax (BPT)
• A foreign company, in addition to
income-tax payable, shall be liable to BPT
on its branch profits at 15%.
• Branch profits would be the income
attributable, directly or indirectly, to the
Permanent Establishment (PE) or an
immovable property situated in India.
[Section 111, 291(9)]
Recommendations from Independent Bodies
• The method of computing BPT be amended to
provide for levy only on profits repatriated out of
India by the PE instead of it being a levy on the
income attributable to the PE.
• Levy of BPT should be on profits and not on gross
receipts as the expression income is largely defined
as gross receipts.
• It should be clarified that BPT is in the nature of
income-tax so as to enable foreign companies to
claim tax credit under the tax treaty.
• The BPT should be restricted to a foreign company
that establishes a branch in India and which is
registered under part XI of the Companies Act 1956.
• It should be clarified that BPT would be levied on a
consolidated basis in case of multiple branches and
not on a stand-alone basis.
• BPT should not be levied on the PE of an entity
which is subject to presumptive taxation.
• It should be clarified that the concept of a branch and a
PE be aligned with bilateral tax treaties/agreements for
direct tax purposes. This will enable foreign entities to
avail tax credit under their domestic law.
• The BPT provisions should bring in equality between
domestic and foreign companies.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
15
Provisions in the Direct Taxes Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee on Finance (the Committee or SCF)
Branch Profit Tax (BPT)
MoF response
• BPT is not a remittance tax and is to be levied at the
first point when income is earned.
• Liability of BPT is on computed total income under
the DTC and would be computed after allowing
available deductions.
• The BPT is in the nature of income-tax and tax
credit would be available the tax treaties.
• The concept of a branch is aligned with that of a PE
as contemplated in various tax treaties entered into
by India with other countries.
• Since total income is that of an assessee, the income
of all the PEs would get clubbed. Thereafter, income
payable would be reduced and branch profits
worked out for levy of BPT.
• There is no justification to exempt presumptive
income as it is only one mode of computation. It
does not alter the character of income of the PE.
PwC’s Comments
• Levy of of BPT on full amount of branch profits would be improper where the same are retained in India.
• Levy of BPT only on profits repatriated outside India should be considered.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
16
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee or SCF)
Definition of the term ‘associated enterprise’
• Two additional parameters have been
proposed to be introduced by the DTC in
section 124(5) of the DTC whereby two
enterprises, shall be deemed to be
associated enterprises (AEs) at any time
during the financial year, if they are
associated with each other by virtue of:
- the services provided, directly or
indirectly, by one enterprise to
another enterprise or to persons
specified by the other enterprise, and
the amount payable and the other
conditions relating thereto are
influenced by such other enterprise
[Section 124(5) (x)];
- any specific or distinct location of
either of the enterprises as may be
prescribed [Section 124 (5)(xiv)].
Recommendations from Independent Bodies
• In order to avoid arbitrariness in interpretation of
section 124(5) (x) of the DTC, and similar to section
125(5)(viii) of the DTC2, a threshold of ninety
percent of total services provided by the service
provider should be incorporated.
• The following recommendations were made on
section 124(5)(xiv) of the DTC
- Merely transacting with parties in a specified
location should not be the basis of making the
transacting parties to be associated.
- There may be hardships for the taxpayer
because the provision aims to scrutinise
genuine commercial transactions between
unrelated parties where there may be no real
motive or ability for a taxpayer to shift profits
overseas effectively as the beneficiary in this
case would be an entity that has no nexus with
the taxpayer. The Government should
therefore clarify its intent in introducing this
provision.
- A monetary threshold for granting exemption
from this provision should be prescribed in
order to avoid small and economically
insignificant transactions falling within the
ambit of the Transfer Pricing legislation.
- There may be practical difficulties in obtaining
details about the transactions of enterprises in
• The Committee did not provide any comments on the
recommendations to section 124(5)(x) of the DTC.
• However, as regards section 124 (5)(xiv), the
Committee acknowledged that the proposed
regulation was an anti-abuse measure to prevent tax
evasion and made the following specific comments
- Hardship to tax payers should be avoided by
excluding purely commercial transactions
between unrelated parties, from the purview of
this section.
- A monetary threshold may also be prescribed for
granting exemption from these regulations to
small and economically insignificant transactions.
2Which is similar to existing provisions under section 92A(2)(h) of the Indian Income Tax Act, 1961.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
17
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee or SCF)
Definition of the term ‘associated enterprise’
specified locations.
MoF response
• W.r.t. section 124(5)(x) of the DTC, the MoF stated
that services cannot be equated to a transaction
involving raw material purchases. In any case, two
enterprises will not be categorised as AEs unless
the amount payable and conditions relating to the
services are influenced by the other enterprise.
• On section 124(5)(xiv), the MoF did not accept the
suggestions as the introduction of this section was
an anti-abuse measure so as to prevent tax evasion,
and a counter measure to deal with non-
cooperative jurisdictions.
• Since the assessee would be having transactions
with parties in the notified jurisdictions, it may not
be too difficult for it to gather requisite
information.
PwC’s Comments
Section 124(5)(x)
• Section 124(5)(x) is very similar to the previous sub-section, i.e., section 124(5)(ix), which is in fact identical to the existing section 92A(2)(h) of the Income-tax
Act, 1961 (the Act).
• The primary difference in the abovementioned two sub-sections of the DTC is that section 124(5)(ix) deals with manufacturing/ processing activities, while
section 124(5)(x) now stands to also cover service activities, which were not earlier covered in the Act.
Undoubtedly, the definition under section 124(5)(x) is very wide, however, practically speaking, most entities that would fall under the ambit of this definition may
have anyways been covered under at least one of the definitional criteria prescribed in section 124(5) of the DTC.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
18
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee or SCF)
Definition of the term ‘associated enterprise’
Therefore, effectively, the practical impact of introducing this definitional criteria may not be very significant.
Section 124(5)(xiv)
• Going by the MoF’s response, it seems that the Government would retain section 124(5)(xiv) of the DTC. However, though the objective of this section is to arrest
any tax avoidance, the location of enterprises by itself may not be an indicator of such avoidance unless other clearly measurable parameters are set out.
Therefore, if the suggestion of the Committee were to be followed then that would necessitate precise guidance on what constitutes ‘purely commercial’, and how
such transactions would be identified.
The Committee’s suggestion to introduce a monetary threshold for granting exemption from section 124(5)(xiv), is certainly welcome, as it would eliminate
unwarranted burden that may have arisen on small and economically insignificant transactions.
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee of SCF)
A. Determination of Arm’s Length Price
• The price at which the international
transaction has been undertaken shall be
deemed to be the arms length price (ALP)
if the variation between the ALP (i.e.,
price determined by the most appropriate
method, if only one price is determined;
or arithmetic mean of prices if more than
one price is determined) and the price at
which the international transaction has
been undertaken does not exceed 5% of
the latter [Sections 117 (4) and 117 (5) of
the DTC]
Recommendations from Independent Bodies
• A range concept, instead of arithmetic mean,
should be introduced to provide more sanctity to
the comparison being made.
MoF response
• The arithmetic mean concept is simple to
understand and easy to administer. The Central
Government would modify the DTC to incorporate
the percentage of variation for different kinds of
transactions.
No response
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
19
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee of SCF)
B. Most Appropriate Method
• ‘The arm’s length price in relation to an
international transaction shall be
determined in accordance with any of the
methods as may be prescribed, being the
most appropriate method.’
Recommendations from Independent Bodies
• The following methods should be specified in
section 117(1):
- comparable uncontrolled price method (CUP);
- resale price method (RPM);
- cost plus method (CPM);
- profit split method (PSM);
- transactional net margin method (TNMM);
- such other method as may be prescribed by the
Board
• It is proposed that CPM should be strictly followed
in majority of the transfer pricing (TP) assessment
proceedings, for the following reasons:
• information regarding elements of cost are
available from books of account
• this is not based on subjective judgement
• fair determination of cost is possible
• being the most reliable method.
MoF response
• It would be inappropriate to provide that CPM be
used in majority of the TP cases. Cost is not the
only aspect of a transaction. The most appropriate
method as mandated by the statute should be used,
and its selection should be based on the nature of
the international transaction, availability of data
and the functional and risk profile of the taxpayer.
No response
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
20
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee of SCF)
PwC’s Comments
The MoF has simply reiterated the statute with respect to selection and application of the most appropriate method, and has also reaffirmed the position that there is
no prescribed priority of methods.
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee or SCF)
Advance Pricing Agreement (APA)
Section 118 of the DTC deals with provisions
relating to Advance Pricing Agreement (APA).
Key provisions are as below
• The CBDT with the approval of the
Central Government may enter into an
APA with any person, specifying the
manner in which ALP is to be determined
in relation to an international transaction,
to be entered into by that person.
• The APA binds the taxpayer as well as the
department in relation to only that
particular transaction which is covered
under the APA, the validity of which is up
to a maximum period of 5 years. The APA
shall not be binding in case of an
amendment to the DTC.
• The CBDT, may, by notification, frame a
scheme for APAs.
[Section 118]
Recommendations from Independent Bodies
• Safeguards should be put in place to ensure that a
corresponding adjustment is allowed in the books
of the other transacting AE.
• Framing APAs should be entrusted to an
independent agency appointed by the CBDT.
• A mechanism should be formulated by which the
taxpayer may apply for a review of an APA.
• Time limit for finalising the APA should be
prescribed to avoid undue delay in finalizing the
APA.
• A procedure to enable withdrawal of an application
for APA should be provided.
• There should be provisions for renewal of the APA
after the expiry of 5 years, in case the business
model of the taxpayer remains the same;
• It should be provided that an APA should be
valid/binding on the successor of the business,
subject to the successor opting for the same.
• If the APA is not accepted by the tax authorities of
• Mechanism for framing APAs should be entrusted to
an independent agency appointed by the CBDT.
• Independent agency should consist of technical and
judicial members to ensure that the APAs reflect the
prevalent commercial practices/ realities.
• Procedural safeguards to fortify the interest of
applicants should be put in place.
• APAs should be concluded in a time-bound manner.
• Tax treaties, already concluded, should be suitably
amended to include APAs and in future, the APAs
should be included in the tax treaties.
• The existing Advance Ruling System should also be
expanded to cover the resident entities.
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
21
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee or SCF)
Advance Pricing Agreement (APA)
the other country, a mechanism should be in place
for the applicant to review the APA based on the
consideration of the tax authorities of the other
country.
MoF response
• Domestic law cannot force foreign governments to
provide corresponding adjustments. Conflicting
interests of two jurisdictions can be addressed only
through bilateral APAs under tax treaties.
• Issues raised as regards review would be examined
at the time of framing of the scheme by the CBDT.
PwC’s Comments
• Whilst the concept of having an independent agency for framing the APA mechanism is welcome, it may be worthwhile to also consider having industry
representatives/specialists as part of the agency panel to ensure that the APA program meets its objectives. The combined acumen of technical, judicial and
industry experts will also truly help in reflecting the prevalent commercial practices/ realities as suggested by the Committee.
• The Committee has suggested incorporation of procedural safeguards to protect the applicants’ interests. Although not specified, however, this could
optimistically be read to include provisions relating to maintenance of confidentiality, i.e., prevention of use of one taxpayer’s information against another;
provisions relating to immunity from retroactive amendments in law; provisions which allow a one-time transfer pricing adjustment (once the APA is concluded
- for the differential price, and covering the period during which the APA was being negotiated) without application of interest /penalty/ withholding related
provisions; etc.
• Such procedural safeguards, if introduced, will render significant credibility to the APA program and build trust and confidence, amongst taxpayers, in the APA
process.
• Whilst it is ideal to have a time bound plan for completion of an APA process, however based on practical experience, bilateral or multilateral APAs typically take
a longer time to settle, owing to the number of tax jurisdictions involved. The unilateral APA process, on the other hand, is known to take approximately a year in
jurisdictions having developed and mature APA programs. Hence a time bound APA process may be more appropriate in the case unilateral APAs.
• In spite of representations from several stakeholders, neither the MoF nor the Committee has made any comments relating to provisions for roll-back of APAs;
PwC News Alert
March 2012
1Independent bodies include CII, ICWAI, Bombay Chartered Accountant’s Society, Indian Banks’ Association, Bombay Chamber of Commerce and Industry and others.
22
Provisions in the Direct Tax Code
(DTC)
Recommendations from Independent Bodies1
and Ministry of Finance’s (MoF) response
Observations/Recommendations of Standing
Committee of Finance (the Committee or SCF)
Advance Pricing Agreement (APA)
withdrawal of APA applications; acceptable levels of changes in critical assumptions (such that every small change does not lead to re-negotiation or cancellation
of an APA); renewal and review of APAs, etc. Such provisions would go a long way to ensure effective implementation of the APA program in India.
• The Committee has suggested that tax treaties be amended to include APAs. This is, however, not clear, because once there are APA related provisions in the
domestic law, unilateral APAs would get implemented there under, while bilateral APAs would anyways be executed under the tax treaties (under the Mutual
Agreement Procedure).
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