We are pleased to present the fourth issue of Tax Trends – SKP’s quarterly newsletter that aims to

provide insights into key direct tax developments in India. This issue covers developments from

January to March 2016.

The Union Budget for 2016-17 was presented before the Parliament of India on 29 February 2016.

The Budget announced significant tax proposals in line with the government’s continued efforts to

improve the ease of doing business in India and to support the Make in India campaign.

In Spotlight, we discuss the main proposals for improving the ease of doing business in the

country. You may also refer to the SKP Budget 2016-17 Publication for our comprehensive

coverage of the Budget proposals.

The notable tax benefits proposed in the Budget include a 100% tax deduction on start-ups for a

period of three years, tax benefits for providing employment, a reduction in the corporate tax

rate to 25% for manufacturing companies registered from 1 March 2016 onwards, and the

introduction of a Patent Box regime by providing a concessional tax rate of 10% on royalties. Also,

domestic companies with an annual turnover up to INR 50 million in FY 2014-15 would be eligible

for a lower corporate tax rate of 29%.

In line with its intent of phasing out tax exemptions to reduce tax rates, the government has

proposed phasing out tax deductions for the development, maintenance and operation of

infrastructure facilities and Special Economic Zones, and the withdrawal of weighted tax

deductions available for expenditure incurred for scientific research.

With respect to the ease of doing business, the government has proposed to defer the

applicability of Place of Effective Management (POEM) regulations by a year and these regulations

would now apply from 1 April 2016. It has also been clarified that the Minimum Alternate Tax

(MAT) provisions would not apply to foreign companies in most cases. The requirement of

withholding tax at a penal rate of 20% on payments to non-residents who do not have a

Permanent Account Number (PAN) in India is also proposed to be relaxed. The provisions

regarding imposition of penalty are also sought to be liberalised.

The government has also introduced an Income Declaration Scheme providing immunity from

prosecution for taxpayers having undisclosed income. Also, a new Dispute Resolution Scheme has

been proposed for speedy resolution of matters pending at the first appeal level.

To curb the parallel economy, the requirement of Tax Collection at Source (TCS) has been

introduced on transactions of sale of goods or services in cash, subject to certain conditions.

The Budget also provides for revenue mobilisation measures such as an Equalisation Levy @ 6%

on advertising payments to non-residents, levy of tax @ 10% on dividend income earned by

individual and HUF taxpayers where the amount of dividend exceeds INR 1 million, increase in

the rate of surcharge for individual taxpayers having income above INR 10 million from the

existing 12% to 15%, and the advancement of payment of advance tax by non-corporate

taxpayers.

The government had proposed levying a tax on 40% of the interest accrued on an employee’s

contribution to provident fund. However, in view of protests from the general public, this

proposal was withdrawn.

We hope you find this newsletter useful and we look forward to your feedback. You can write to

us at skptax@skpgroup.com.

Warm Regards,

The SKP Direct Tax Team

In this issue

Spotlight 2

Legal Updates 4

Tax Talk 6

Compliance Calendar 7

Corporate Tax Myth 7

Contact Us 8

TAX TRENDS

Volume 1 Issue 4 | Jan–Mar 2016

2

Improving the ease of doing business in India – Key legislative and administrative reforms

Since being elected in 2014, the

government’s intention has been to

promote India as an attractive

business destination. Accordingly, it

has maintained a pointed focus on

improving the ease of doing business

in India. This is reflected in India’s

improved rank in the World Bank’s

Doing Business Report 2016, which

went from 142 to 130. Moreover, the

Prime Minister, Narendra Modi, is

determined to bring India into the

top 50! With this focus in mind, the

government has introduced a slew of

new/revised legislative and

administrative reforms, which

substantiate its commitment to

making India an investor- and

business-friendly destination. Some

key reforms are discussed below:

Legislative reforms

Benefit of weighted deduction for

salary of new employees extended

to all sectors

Prior to 1 April 2016, an Indian

taxpayer engaged in ‘manufacturing’

was permitted to claim an additional

deduction from taxable profits for

salaries paid to ‘new workmen’

employed during the year, subject to

certain conditions.

However, Budget 2016 has extended

the scope of this deduction to all

categories of Indian taxpayers

engaged in business and hiring new

employees, subject to less stringent

conditions than before.

This step is expected to not only

boost the government’s Make in India

initiative but is also expected to

generate employment across all

sectors.

Higher withholding-tax rate of 20%

not to apply to non-resident

taxpayers not furnishing a

Permanent Account Number (PAN)

in India

Currently, any payment to a non-

resident taxpayer that is liable to

withholding tax in India, would

require withholding at the tax rate as

per tax law/tax treaty or 20%,

whichever is higher, if the non-

resident taxpayer does not furnish a

PAN (akin to a tax identification

number) in India. This resulted in

many payments that were liable to a

lower withholding-tax rate of

10%/15% being subject to a higher

withholding tax rate of 20%.

Obviously, this resulted in pressure

on the margins of non-resident

taxpayers along with issues in

claiming tax credit in their home

country.

However, Budget 2016 has amended

the tax law to provide that the higher

withholding tax rate of 20% will not

apply to a non-resident taxpayer,

subject to conditions as may be

prescribed (likely to require such non

-resident taxpayer to furnish

alternate documentation).

This step is expected to reduce the

burden of withholding tax on non-

resident taxpayers thereby improving

their margins and resulting in a more

business-friendly tax regime in India.

Exemption from tax on

distribution of dividend by a

Special Purpose Vehicle/Entity

(SPV) to Real Estate Investment

Trusts (REITs)

The government has taken concrete

steps to implement the REIT structure

in India, which is expected to provide

a significant boost to the Indian real

estate sector.

However, from an income tax

standpoint, one of the deterrents to

the implementation of the REIT

structure was that the dividend paid

by the property-managing SPV was

subject to a dividend distribution tax

(DDT) (approximate effective rate of

20%) before making payment to the

REIT. This resulted in lower returns to

REIT unitholders.

The government, through Budget

2016, has now exempted the SPV

from paying DDT on distribution of

SPOTLIGHT

3

dividend to the REIT, subject to

certain conditions. In fact, the

dividend is also exempt in the hands

of the REIT unitholders.

With these amendments, most of the

uncertainties/anomalies surrounding

REITs have been removed.

Administrative reforms

CBDT issues revised instructions

for staying of disputed tax

demands at the first-level appeal

stage

Previously, there was no specific

guidance on the amount of disputed

tax demand to be kept in abeyance

by the tax officer on an application

made by the taxpayer. Accordingly,

based entirely on the discretion of

the tax officer, at times the amount

recovered was as high as 50–75% of

the disputed tax demand.

However, the Central Board of Direct

Taxes (CBDT) has now issued an

instruction to tax officers revising the

earlier instructions, asking tax

officers to generally insist on the

payment of only 15% of the disputed

tax demand (unless they feel the

need). Furthermore, tax officers have

been instructed to dispose off

applications within two weeks.

E-assessment proceedings/appeal

filing

With a view to reducing the taxpayer’s

compliance burden, the government

has introduced the following two

taxpayer-friendly measures:

Electronic assessment: The

taxpayer can choose to

participate in revenue audit

proceedings through email rather

than making several visits to the

tax office.

Electronic filing of first-level

appeals: With a view to reduce

paperwork and provide

convenience, a taxpayer can now

file an appeal with the first-level

appellate authority in electronic

form.

Clarification that a consortium

formed for executing Engineering,

Procurement & Construction (EPC)

and turnkey contracts will not be

assessed as an Association of

Persons (AOP)

Whether consortiums formed for

undertaking EPC and turnkey

contracts in India are to be treated as

an Association of Persons (AOP) has

been a vexed issue and has been a

subject of prolonged litigation. One of

the biggest drawbacks of being

treated as an AOP is that the

consortium’s income could be taxed

without providing the benefits of the

applicable tax treaties of India. This

was an issue for non-resident

taxpayers involved in the consortium.

With a view to providing certainty to

such consortiums, the CBDT has

clarified that such consortiums will

not be treated as an AOP, provided

the consortium has certain specified

attributes.

Not only does this step provide clarity

on the taxation of consortiums

undertaking EPC/turnkey contracts in

India, but is also expected to

promote infrastructure development

in the country by inviting more non-

resident taxpayers to bring their

expertise and technology to India

without worrying about taxation

issues.

CBDT clarifies that buyback of

shares of unlisted companies prior

to 1 June 2013 cannot be taxed as

payment of ‘dividend’

Prior to 1 June 2013, the buyback of

shares of an unlisted company

resulted in ‘capital gains/loss’ for the

equity shareholder and tax had to be

paid by such shareholder depending

on the applicable provisions of the

tax law (tax treaty for non-residents,

if applicable). At times, non-resident

shareholders did not pay any tax in

India on such gains by applying the

beneficial provisions of the applicable

tax treaties (e.g. Mauritius, Singapore,

etc.).

However, according to a standalone

ruling of the Authority for Advance

Rulings (AAR) on peculiar facts, the

buyback of shares was treated as

payment of dividend by the Indian

company, requiring payment of DDT

by the Indian company (thereby

reducing the amount paid to the

equity shareholder, nullifying the

available tax treaty benefit). Based on

this judgment, the tax authorities

used to consider treating most

buybacks as payment of dividend

which could lead to a DDT liability on

the Indian company.

However, the CBDT has clarified that

the consideration paid on buyback of

shares between 1 April 2000 and 31

May 2013 would only be taxed as

capital gains and this consideration

could not be re-characterised as

dividend.

This is a very proactive and pragmatic

step by the government providing

certainty and demonstrating its

underlying commitment to reduce

litigation in India and thereby

improving the ease of doing business.

The preceding paragraphs highlight

the fact that the government is

extremely serious about and

committed to resolving the

ambiguities/anomalies in the Indian

business environment and is taking

concrete steps to ensure that doing

business in India gets easier.

4

LEGAL UPDATES

Project Office, acting as

communication channel, not

to be treated as PE, such

activity being preparatory

and auxiliary in nature

National Petroleum Construction

Company vs DIT (International tax)

(ITA No. 143, 144 and 533/2013 and

795/2014 (DEL))

The taxpayer, a tax resident of UAE,

undertook a contract for the

designing, engineering, procurement

and fabrication of loaded offshore

platform and its installation, testing

and commissioning at an offshore

facility of ONGC. Out of these only the

survey, installation and

commissioning activities were carried

out in India. According to the

contractual agreement, the taxpayer

established a project office in India to

act as a communication channel

between the taxpayer and ONGC. The

taxpayer had also engaged third

parties in India for some surveys and

marketing support.

The taxpayer offered gross receipt

pertaining to activities in India less

verifiable expense at the rate of 10%

on a presumptive basis and receipt

pertaining to overseas activities at the

rate of 1%.

During the course of the tax

proceedings, the tax officer

contended that the project office

would constitute Fixed Place

Permanent Establishment (PE) in

India and the taxpayer would also

have an installation PE in India as

installation activities are carried out

in India. Furthermore, as the third

party had agreed on not representing

any of the taxpayer’s competitors or

act in a manner detrimental to

taxpayer’s interest, they were

considered as Dependent Agent PE

(DAPE) in India.

The question before the High Court

was whether the taxpayer has a Fixed

Place PE, Installation PE and DAPE in

India.

The High Court observed that the

taxpayer’s main business is

installation and commissioning of

offshore platforms. The activity of

acting as a communication channel

by a project office is purely in the

nature of an auxiliary activity and

would not constitute a Fixed Place PE.

Furthermore, the high court also

observed that the period for which

the activities are carried out by a sub-

contractor would not be considered

as a fixed place of the taxpayer. Also,

it has been held that abnormal

interruptions should not be

considered. Accordingly, it was held

that the taxpayer does not constitute

an installation PE in India as it does

not cross the threshold.

Furthermore, the High Court also

observed that various independent

activities were carried out by third

parties independent activities and

dealings with the taxpayer was on a

principal to principal basis.

Accordingly, it was held that third

party subcontractors cannot be

considered as Dependent Agent PE of

the taxpayer.

Foreign Company having an

Indian holding company does

not result in effective

management and control in

India

Forbes Container Line Pte Ltd vs

ADIT (Intlernational Taxation) (ITA

No. 1607/MUM/2014)

The taxpayer is a company

incorporated in Singapore. It is a non

vessel operating carrier-company and

has operations across Asia and the

Middle East. It is wholly owned

subsidiary of Forbes and Co. Ltd (FCL),

a company incorporated in India. The

tax officer was of the view that

effective management and control of

the taxpayer is in India as FCL was the

only agent of taxpayer in India and

FCL concluded contracts on behalf of

the taxpayer. The tax officer also held

that the taxpayer was a subsidiary of

FCL, one of the directors of FCL was

also a director in the taxpayer’s

company who was residing in India

and looking after policy matters of

the taxpayer and also only one board

meeting was held in Singapore.

Accordingly, the tax officer held that

the taxpayer has a Permanent

Establishment in India and its income

is taxable under Section 44B

(shipping income) of the Income Tax

5

Act, 1961 (ITA). The first appellate

authority agreed with the order

passed by the tax officer.

The question before the tax tribunal

was whether the taxpayer constitutes

a PE in India and whether income is

taxable under section 44B of the ITA.

The tax tribunal observed that the

taxpayer had earned only 2.29% of its

total revenue from FCL. Furthermore,

based on the documents submitted,

the tax tribunal also observed that the

decision of the Singaporean company

were taken in Singapore. Also,

according to Singaporean law, only

one board meeting was required. The

mere location of one of the directors

would not decide the residential

status of the company. Thus, it was

held that the taxpayer cannot be said

to have a PE in India. It was also held

that since the tax officer had

mentioned that shipping an article

under the tax treaty it is not

applicable to the taxpayer, the

question of applicability of section 44B

does not arise.

No separate deduction of fuel

cost, incurred in respect of

contract, could be claimed

where the profits and gains

were to be computed as per

the deeming provisions of

Section 44BB.

Fugro Rovtech Ltd vs ADIT (Intl.

Taxation) (ITA No. 1230/MUM/2014)

The taxpayer is a foreign company

incorporated in UK. Allseas Marine

Contractors SA (Allseas) has a contract

with Reliance to undertake the

construction of an off-shore facility for

the development of certain gas fields.

Allseas had sub-contracted certain

services in connection with this

project to the taxpayer. In order to

render these services, the taxpayer

purchased fuel from Allseas for which

Allseas had issued credit notes. The

taxpayer filed returns declaring

income under the deeming provisions

of Section 44BB of the Act and claimed

the fuel costs as deduction from gross

receipts.

The AO disallowed the fuel cost stating

that the deeming provision under

section 44BB does not provide for

deduction of any additional cost.

The question before the tax tribunal

was whether credit notes issued by

Allseas for fuel can be allowed as

deduction under the deeming

provision of section 44BB.

The tax tribunal observed that the fuel

cost would have been allowed as a

deduction from the profit if the

income was calculated according to

the normal provisions of the ITA.

However, since the taxpayer has opted

for the deeming provision which

provides for an assumed profit

percentage no further deductions can

be allowed, even if such expenses

were payable to the customer and

which resulted in the reduction of net

receipts for the taxpayer. Accordingly,

the tax tribunal rejected the claim of

fuel cost as deduction.

Payment for data

transmission services through

a transponder; Amended

definition of royalty contained

in the Act cannot be applied

to tax treaties

DIT vs New Skies Satellite BV (ITA

No. 473 and 474/2012)

The taxpayer is a company

incorporated in the Netherlands. It

was engaged in providing digital

broadcasting services to its customers.

The taxpayer derived income from the

‘lease of transponders’ of their

respective satellites and filed a ‘Nil’

return of income in India.

The tax officer held that the income

earned from lease of transponders

was in the nature of royalty in view of

the retrospective amendment made

under the ITA.

The tax officer contended that the

term process is not defined under the

tax treaty and hence, the term defined

under the Act (retrospectively) has to

be considered. Thus, the income from

the lease of transponder is in the

nature of royalty.

The question before the High Court

was whether the amendment to the

definition under ITA also applies the

definition provided in the tax treaty.

The High Court held that customers

only get mere access to a broadband

width available in the transponder.

The control over the transponder

remain with the taxpayer, thus it

cannot qualify as royalty for using the

process.

With respect to the application of the

retrospective amendment, the High

Court held that change in executive

position cannot bring about a

unilateral legislative amendment into

a tax treaty concluded between two

sovereign states. It is imperative that

such an amendment is brought into

the agreement as well.

6

Government is open to out-of

-court settlement for legacy

tax issues, states Revenue

Secretary.

[Excerpts from The Economic Times,

dated 27 December 2015]

Revenue Secretary Hasmukh Adhia,

stated that the Indian government is

open to an out-of-court settlement of

retrospective tax issues like the ones

facing Vodafone and Cairn Energy.

Government plans to reduce

the time for revenue audits

to one year

[Excerpts from The Times of India,

dated 25 April 2016]

The Times of India reported that the

government is planning to reduce the

time involved in completing Income-

tax Revenue Audits within a period of

12 months. At present, the time limit

is 36 or 48 months from the end of

the financial year.

Disputed Tax Demands touch

USD 106 billion

[Excerpts from The Hindustan Times,

dated 15 April 2016]

The Hindustan Times, with

reference to a CAG Audit Report,

stated that the amount involved in

disputed tax demands is estimated

to be USD 106 billion (INR 7000

billion] and that 96% of this

disputed tax demand is unlikely to

be recovered in the next financial

year.

India joins global tax probe

on Panama Papers

[Excerpts from The Times of India,

dated 13 April 2016]

The Times of India reported that

India joined tax administrators from

prominent countries across the globe

on Wednesday to discuss ways to

share information on the Panama

Papers revelations.

IND-AS to raise advance tax

liability for June Quarter by

20%

[Excerpts from The Economic Times,

dated 13 April 2016]

The Economic Times reported that

pursuant to the adoption of IND-AS,

the accounting profit of corporates

could increase by around 20%

resulting in higher payment of

Minimum Alternate Tax.

TAX TALK

7

Corporate Tax Myth Income Computation and Disclosure Standards are identical to the Accounting Standards and, therefore, will not affect

income tax liability.

If you would like us to help you ascertain the implications of this myth, please write to skptax@skpgroup.com.

Compliance Calendar (April–June 2016)

Month Due Date Compliances

April 30 TDS payment for TDS deducted in March 2016

May 7 TDS payment for TDS deducted in April 2016

May 15 TDS statements for the quarter of January to March 2016

May 30 Issuance of TDS certificates (Form 16A) for the quarter of January to March 2016

May 30 Submission of statement by non-resident taxpayers with a liaison office in India for financial year

2015-16

May 31 Issuance of Salary and TDS Certificates to employees (Form 16) for financial year 2015-16

June 7 TDS payment for TDS deducted in May 2016

June 15 Advance tax – first instalment for all taxpayers (15% of estimated tax liability to be deposited on

a cumulative basis) (as per proposals contained in Budget 2016)

8

Contact Us

Mumbai

19, Adi Marzban Path

Ballard Estate, Fort

Mumbai 400 001

T: +91 22 6730 9000

Pune

VEN Business Centre

Baner–Pashan Link Road

Pune 411 021

T: +91 20 6720 3800

Hyderabad

6-3-249/3/1 SSK Building

Ranga Raju Lane

Road No. 1, Banjara Hills

Hyderabad 500 034

T: +91 40 2325 1800

New Delhi

B-376

Nirman Vihar

New Delhi 110 092

T: +91 11 2242 8454

Gurgaon

German Centre for Industry and Trade

Building No. 9, Tower B

Level 12, DLF Cyber City Phase III

Gurgaon 122 002

T: +91 124 463 6000

Chennai

3, Crown Court

128 Cathedral Road

Chennai 600 086

T: +91 44 4208 0337

Bengaluru

312/313, Barton Centre

Mahatma Gandhi Road

Bengaluru 560 001

T: +91 80 4277 7800

Canada

269 The East Mall

Toronto

ON M9B 3Z1

Canada

T: +1 647 707 5066

skptax@skpgroup.com

Subscribe to our alerts Connect with us

www.linkedin.com/company/skp-group

www.twitter.com/SKPGroup

www.facebook.com/SKPGroupIndia

plus.google.com/+SKPGroup

SKP is a long established and rapidly growing professional services group located in seven major cities across India. We specialise

in providing sound business and tax guidance and accounting services to international companies that are currently conducting

or initiating business in India as well as those expanding overseas. We serve over 1,200 active clients including multinationals,

companies listed on exchanges, privately held and family-owned businesses from more than 45 countries.

From consulting on entry strategies to implementing business set-up and M&A transactional support, the SKP team assists clients

with assurance, domestic and international tax, transfer pricing, corporate services, and finance and accounting outsourcing

matters, all under one roof. Our team is dedicated to ensuring clients receive continuity of support, right across the business

lifecycle.

About SKP

www.skpgroup.com

DISCLAIMER This newsletter contains general information which is provided on an “as is” basis without warranties of any kind, express or implied and is not intended to address any particular situation. The information contained herein may not be comprehensive and should not be construed as specific advice or opinion. This newsletter should not be substituted for any professional advice or service, and it should not be acted or relied upon or used as a basis for any decision or action that may affect you or your business. It is also expressly clarified that this newsletter is not intended to be a form of solicitation or invitation or advertisement to create any adviser-client relationship. Whilst every effort has been made to ensure the accuracy of the information contained in this newsletter, the same cannot be guaranteed. We accept no liability or responsibility to any person for any loss or damage incurred by relying on the information contained in this newsletter. SKP Business Consulting LLP is a member firm of the "Nexia International" network. Nexia International Limited does not deliver services in its own name or otherwise. Nexia International Limited and the member firms of the Nexia International network (including those members which trade under a name which includes the word NEXIA) are not part of a worldwide partnership. For the full Nexia International disclaimer, please click here. © 2016 SKP Business Consulting LLP. All rights reserved.