Tranfer Pricing, reconstruction and TDS

Relief for Double Taxation
Section 90, 90A and 91
By: CA Shailesh Prajapati

CA Shailesh Prajapati

Relief of Double Taxation


Foreign Income of a person is Taxable in
◦ Country in which Income is earned
◦ Country in which the person is resident

Double taxation of such income is avoided by means of
Double Taxation Avoidance Agreement – Section 90
 Where income accrues or arise in a country with which
no agreement exists, unilateral tax relief is provided on
doubly taxed Income





Two modes of granting relief under DTAA
◦ Exemption Method
 Income is Taxed in one of the two Countries

◦ Tax Credit Method
 Taxable in both countries in accordance with their
respective tax laws read with ADT Agreement


Effect of ADT
◦ If no tax liability imposed under the Act, the question of
restoring to the agreement would not arise



Effect of ADT contd……
◦ If a tax liability is imposed by the ADT, the agreement may
be resorted to for reducing it..
◦ In case of difference between the provision of Act and
Agreement, the provision of the agreement prevail over
the provision of the Act and can be enforced by the
Appellate Authorities and the court.




Section 91– Certain Conditions…..
◦ Assessee must be resident in India
◦ Income must have accrued or arisen to him during that
previous year outside India
◦ In respect of that income which accrued or arisedn outside
India, he must have paid by deduction, or otherwise taxed
under the law in force in the country in question.


Transfer Pricing
Section 92


Section 92-ITA, 1961


Sec 92 requires that income arising from an
“international transaction” shall be computed having
regard to the arm’s length price
◦ Thus, the provision deals with any kind of income



The term “international transaction” is defined as:
◦ A transaction between two or more “associated enterprises”


Associated Enterprise
An enterprise which participated directly or indirectly in the
management or control or capital of the other enterprise; or
 An enterprise in respect of which the person (s) who
participate, directly or indirectly in management or control or
capital also participate in the management or control or
capital of the other enterprise
 The above two conditions are classified as primary
circumstances





Situation 1 – Direct Participation

A

Participates in
management

B




A

Situation 2 – Participation through Intermediary

I

Participates in
management

Intermediary

B

A
Participates in
management, capital control

C

Participates in
management, capital control

D

In the above situation C and D are associated enterprises by virtue of A
participating in the management, capital or Control of both C & D

“Deemed”- Associate Enterprise






When an enterprise holds 26 % or more of the voting
power in the other enterprise
When one enterprise advances loan of 50 % or more of
its assets to the other enterprise
When one enterprise guarantees more than 10 % of
the borrowings of other enterprise
When more than half of the directors or executives of
one enterprise are appointed by the other or by a
common person
When more than 90% of the raw material is sourced
from other enterprise …..cont

When both enterprises are controlled by the same
individual alone or together with his relative; or
 When both enterprises are directly or indirectly subject
to the control of a Hindu undivided family; or
 If one enterprise is a firm, association or a body of
individuals the other enterprise holds at least a 10 per
cent interest in the same; or…. Cont



There exists between the two enterprises, any relationship of mutual
interests, as may be prescribed,
 The goods manufactured or processed by one enterprise, are sold to the
other enterprise or to persons specified by the other enterprise, and the
prices and the other conditions relating thereto are influenced by such
other enterprise,
 The manufacture or processing of goods or articles or business carried out
by one enterprise is wholly dependent on the use of knowhow, patents, copyrights, TMs, licences, franchises or any other business or
commercial rights of similar nature or any data, documentation, drawing or
specification relating to any patent, invention, model, design, secret formula
or process, of which the other enterprise is the owner or in respect of which
the other enterprise has exclusive rights.



Holds at least 26% of Equity Shares

X Ltd
USA

Y Ltd
India

Hold 100% Equity Shares
X Ltd
USA


Holds at least 26% of Equity Shares

Z Ltd
India

Y Ltd
India


X Ltd
USA
P Ltd
Germany

Holds more than 26%
of Equity Shares

A Ltd
USA


Appoints 8 Directors
X Ltd
USA

Y Ltd
India ( Board of Directors –
14 Directors)

Appoints 7 out of 10 Directors Appoints one Executive Director
Y Ltd
X Ltd
A Ltd
India
India
UK


Supplied more than 90% of RM
Y Ltd
India

Z Ltd
USA

Directs
Z Ltd to
Supply
X Ltd.
RM to
Germany
Y Ltd
Other
Enterprise


Contract
Holds at least 10% interest
( Controls)

Influenced pricing and
other conditions of the
Contract
Firm/AOP
BOI



AE comes into existence if any of the criteria is met at
any time during the PY
 Transactions entered into by an enterprise before
becoming an AE and after ceasing to be AE would not
be covered
 The relationship of AE must subsist at the time of
entering into a international transaction



International Transaction
A very wide definition – 92B(1)
 It covers transactions in the nature of purchase, sale or
lease of tangible or intangible property, provision of
services, financial transactions, cost sharing
arrangements and any transactions that may have a
bearing on the profits, income, losses or assets of
“associated enterprise”



The requirement of one of the parties to be nonresident would put transactions between an Indian
entity and its overseas branch out of the purview of the
TP
 Transactions between the foreign entity and its PE
(Indian branch) would be covered
 Transactions between two PE in India would be covered
as both are NR in India



Conditions for applicability of ALP in
Two or more enterprise
 Enterprise should be regarded as Associate Enterprises
 International Transaction should be carried our by the
AE. It should be:


◦ A transaction between two or more enterprises ( either or
both are non resident)
◦ A transaction having bearing on profits. Income, losses or
assets of such AE


For E.g. X of India, Y of Aus are AE. Z of Sing is not an AE
of X
 Y and Z enter into an agreement for determining the
terms of transaction between X and Z
 The transaction as may be entered between X and Z
which is governed by such an agreement existing
between Y and Z shall be deemed to be a transaction
between AE



Associate Enterprise
Y Ltd
(Aus)

X Ltd
India
The
Transaction
Between
X and Z will
Be deemed
To be AE

Z Ltd.
Singapore
Not an
AE of X

Agreement
for determining the
terms of transaction
between X and Z


For E.g: There are 2 US Co which are AE
 If the Indian Subsidiary of one such US Co enters into a
transaction with the Indian Branch or PE in India of the
Other US Co
 The transaction has originated, executed, and
concluded within India
 Even though the above is true, the same shall be
International Transaction as it is between two AE and
one of them is NR



2
US

1
US

Indian
Subsidiary

Non- Resident

Enters into Transactions

India
Branch or
PE



Arms Length Price
ALP is the internationally accepted TP standard which
must be applied for tax purposes by MNEs and tax
administration
 The Indian TP Regulations recognise determination of
pricing between AE on an ALP



Arms Length Price
Meaning : is price applied when two unrelated persons
enter into a transaction in uncontrolled conditions.
 Meaning of Uncontrolled conditions : Conditions
which are not controlled or suppressed or moulded for
achievement of a pre determined results are said to be
uncontrolled conditions. If a buyer is related to a seller
or where prices are governed by the Government
policy then transaction is said to be taking place under
controlled conditions.



Arms Length Price






Conditions for applicability of arm’s length price in International
Transaction
Two or more enterprises- International Transaction is subjected to the
arm’s length price only in case of transaction between tow entities called
associate enterprise.
Enterprises should be regarded as associate enterprises : An enterprise
would be regarded as an associated enterprise of another enterprise if :◦
It participates, directly or indirectly, or through one or more
intermediaries, in the management or control or capital of the other
enterprises; or
◦
In respect of it one or more persons who participate, directly or
indirectly or through one or more intermediaries , in its management
or control or capital, are the same persons who participate, directly or
indirectly, or through one or more intermediaries, in the management
or control or capital of the other enterprise.
Deemed Associated Enterprises are also covered in this section.

Computation of Arms Length Price








Comparable uncontrolled price method (“CUP”);
Resale price method (RPM);
Cost plus method (“CPLM”);
Profit split method (“PSM”);
Transactional net margin method (“TNMM”);
Any other method that may be prescribed by the CBDT (
no other method prescribed till date)


Comparable uncontrolled price method
◦

◦

◦

the price charged or paid for property transferred or services
provided in comparable uncontrolled transaction, (i.e a transaction
between enterprises other than associated enterprises whether
resident or non-resident ) or number of such transaction, is
identified;
Such price is adjusted to account for differences, if any, between the
international transaction and the comparable uncontrolled
transactions or between the enterprises entering into such
transactions, which could materially affect the price in open market;
The adjusted price arrived at under b supra is taken to be an arm’s
length price in respect of property transferred or services provided in
the international transaction.

XYZ of Japan Sells to ABC (India) and MNO (UK) {APL under CUP Method}
INR
Particulars

MNO

Related

Selling Price

ABC

Not- Related

5,000

4,000

1,000

500

Less:
Cost of Services

One Year
Normal Comparable Price

4,000

No of Pieces Sold

1,000

ALP

Six Months

3,500

Difference
Excess TP Charged

3,500

500
500,000

Resale Price Method
◦
◦

◦
◦

◦

The price at which property purchased or services obtained by the enterprise from an
associated enterprise is resold or are provided to an unrelated enterprise, is identified
Such resale price is reduced by the amount of normal gross profit margin accruing to the
enterprise or to an unrelated enterprise from the purchase and resale of the same or
similar property or from obtaining and providing the same or similar services, in a
comparable uncontrolled transaction, or a number of such transactions;
The price so arrived at is further reduced by the expenses incurred by the enterprise in
connection with the purchase of property or obtaining of services;
The price so arrived at is adjusted to take into account the functional and other
differences, including differences in accounting practices if any, between the
international transaction and the comparable uncontrolled transaction;
The adjusted price arrived at under (d) supra is taken to be an arm’s length price in
respect of the purchase of property or obtaining of the services by the enterprise from
the associated enterprise

Most applicable for the Enterprises doing only Marketing, Sales and distribution
Function
UK company ‘A’ Sells a cosmetic perfumes to its related enterprise ‘B’ at Rs. 60/- per
Piece. B resale to unrelated parties at Rs. 100/- The total cost of the product to B is
Rs. 80/- including admin and Selling expenses of Rs. 20/- per piece. In this Trade normal
Margin is 25%

A Ltd Sells Perfumes at Rs. 60/UK
ALP
100-25% = Rs. 75
Less: Cost of B 20
Rs. 55

B Ltd
Related

Sells
Perfumes
at Rs.
100/Resale to
C Ltd
Unrelated

TP of Rs. 60 is excess by Rs. 5/- p.u. reducing the Profit of B causing leakage in Country

Cost Plus Method
◦

◦
◦

◦

The direct and indirect cost of production incurred by the enterprise
in respect of property transferred or services provided to an
associated enterprise, are determined;
The amount of normal gross profit mark up to such cost arising from
the transfer is determined
The normal gross profit mark –up referred to in (b) supra is adjusted
to take into account the functional and other differences, including
differences in accounting practices if any, between the international
transaction and the comparable uncontrolled transaction;
The sum arrived after the adjusted profit mark –up is to be taken as
arm’s length price in relation to supply of the property or provision
of services by the enterprise.


Cost Plus Mehtod
ABC transfers goods to
Particulars

Cost of Production
GP ( %)
Gross Profit
Selling Price
Less: Selling Cost
Adjusted GP Margin
Adjusted GP Margin (%)
Increased GP Per Unit
Alte rna tive ly

INR
MNO
Not- Related
Rs. P.u.

X
YZ
Related
Rs. P.u.
(a)
(b)
a+b=c
d
c-d= e
e/a=f
e-e=g

43.00
20%
8.60
51.60
4.20
4.40
10.23%

43.00
40%
17.20
60.20
3.40
13.80
32.09%

9.40

ALP = Selling Price + Increase in GPM ( 51.60+9.40)
Quantity Sold to X
YZ
50000 units
Actual Rev
enue Booked for X
YZ Limited
Sales at ALP
Increased Income as per ALP

61.00
2,580,000
3,050,000
470,000


Profit Split Method


This method is applicable mainly in international transactions involving
transfer of unique intangibles or in multiple international transactions which
are so interrelated that they cannot be evaluated separately for the purpose of
determining the arm’s length price of any one transaction. As per this
method, which◦
The combined net profit of the associated enterprises arising from the
international transaction in which they are engaged, is determined;
◦
The relative contribution made by each of the associated enterprises to
the earning of such combined net profit, is then evaluated on the basis of
the functions performed, assets employed or to be employed and risk
assumed by each enterprise and on the basis of reliable external market
data.
◦
The combined net profit is then split amongst the enterprises in proportion
to their relative contributions
◦
The profit thus apportioned to the assessee is taken in to account to arrive
at an arm’s length price in relation to the international transaction:

Transaction Net Margin Method


The steps involved in the application of this method:
◦ Identify the net profit margin realised by the enterprise from
the International Transaction. The net profit margin may be
computed in relation to costs incurred or sales effected or
assets employed or any other relevant base;
◦ Identify the net profit margin from a comparable uncontrolled
transaction or a number of such transactions having regard to
the same base;




◦ The net profit margin so identified is adjusted to take into
account the differences if any between the international
transaction and the comparable uncontrolled transaction.
The differences should be those that could materially
affect the net profit margin in the open market




◦ The adjusted net profit margin is taken into account to
arrive at the ALP in relation to the international
transaction


Computation of Arms Length Price






The regulations do not prescribe any hierarchy in the choice of
methodology.
The tax payer is required to select the most appropriate
method.
The primary onus to determine an arm’s length price and
substantiate with the prescribed documentation is on the tax
payer.
The documentation is required to be retained for a period of
eight years…….

Income should not decrease on applying
ALP [sec 92(3),92C(4)]
The Provision of TP shall not be applicable in a case
where the application of ALP results in a downward
revision in the income chargeable to tax in India.
 Total Income of the recipient AE will not be recomputed
if (a) total income of payer (AE) is recomputed by AO on
determination of ALP, and (b) tax has been deducted or
deductible at source by the payee enterprise.



Maintenance of document and information
Every one entering into international transactions
should maintain documents and information as
prescribed.
 The assessing officer or commissioner may require the
documents which should be furnished within a period
of thirty days from the date of receipt of a notice
issued in this regard.



Tax Planning with reference to
Insurance Compensation
Section 45 (1A)

Insurance Claim
Insurance claim received on account of destruction of
Asset is not chargeable to tax as destruction does not
amount to transfer.
 Refer Vania Silk Mills Private Ltd v/s CIT (1991) 59
Taxman 3, Supreme Court held the above.
 The effect of the judgment has been nullified to some
extent by inserting subsection(1A) in section 45 with
effect from the A.Y. 2000-01


Attraction of Section 45 (1A)


When Section 45 (1A) is attracted :
◦ Condition One :The compensation is received because of
damage to or destruction of any capital Asset. If it is not a
capital asset, then, section 45 (1A) is not applicable.
◦ Condition Two : The damage or destruction is as a result of
four circumstances





Flood, Cyclone, earthquake or other convulsion of nature
Riot or civil disturbance
Accidental fire explosion
Action by an enemy or action taken in combating an enemy ( whether
with or without declaration of war)

Consequences where Section 45(1A)
applicable


Where a person receives at any time during the
previous year any money or other assets under any
Insurance from an insurer an the Conditions are
satisfied, then;

◦ Taxability of Income: Any profit or gains form receipts of such
money or other assets shall be charged under “Capital Gain”
◦ Year : It shall be deemed to be the income of such person for
the previous year in which such money or other asset is
received.
◦ Full value of Consideration: The value of any money or the
FMV of other Assets ( on the date of receipt) shall be deemed
to be the FVOC received as a result of trf of asset.

When Section 45(1A) is not applicable


When Insurance compensation is a capital receipt
◦ If two conditions are not satisfied, then section 45 (1A) is not
applicable and consequently, insurance compensation ( if it is
a capital receipt) will not be chargeable to tax as per ruling
given by the Supreme court.
◦ Eg. A road Accident takes place in which vehicles and
Machinery or furniture being carries are destroyed.
◦ A ship, overweight, is sunk and assets are lost



The receipt in such circumstances are not chargeable to
tax under section 45(1A)

When Section 45(1A) is not applicable


When Insurance compensation is a revenue receipt
◦ If two conditions mentioned is not satisfied and insurance
compensation is a revenue receipt, then section 45(1A) is
not applicable but the receipt may be taxable as trading
receipt under section 28 or 56.
◦ Eg. Insurance compensation for theft of stock in trade is
not taxable under section 45(1A) but it will be taxable as
business income under section 28.

Format for Calculation of Capital Gain
Block of Assets

XXX

Add: Cost of Additional FA

XXX

Less: Money Payable in respect of assets
destroyed (Subject to BOA)
Written Down Value

XXX
XXXX

Current year Depreciation

XXX

Depreciated value of BOA

XXXX

Format for Calculation of Capital Gain
Sales Consideration ( Amount of Compensation)

XXX

Less: Cost of Acquisition ( As per section 50

XXX

Short Term Capital Gain

XX

( Section 50 is not applicable if the BOA does
not ceases to exist or WDV of Block is not
reduced to zero.)

Information

Restructuring Business
An Overview

Shailesh Prajapati & Associates

Meaning


Composed of two different words
◦ Business
◦ Restructuring

Business includes trade, commerce etc,
 Restructuring means rearranging the affairs
 Business Restructuring refers to the process by which
the Business enterprises rearrange their affairs



Reason for Restructuring









To acquire competitive strength
To vertically integrate – Forward or Backward
To achieve synergies through consolidation
To avail tax related benefits
To grow in size
To keep pace with changing technologies
Timely updation in Business strategies

Mode of Business Restructuring








Amalgamation
De-merger
Conversion of sole proprietary in to company
Conversion of Firm into Company
Slump Sale
Transfer of Assets between Holding and Subsidiary
Company


Amalgamation
Amalgamation is blending of two or more undertaking
into One undertaking
 Shareholders of each blending company become
substantially the shareholders in the company which is
to carry on the business of blended undertakings
 There may be amalgamation either by transfer of two
or more undertaking to a new company, or by the
transfer to an existing company.



Meaning under Income Tax
Means either merger of one or more companies with
another company or the merger of two or more
companies to form one company
 The definition of amalgamation u/s 2(1B)


◦ Merger of A Ltd with X Ltd
◦ Merger of A Ltd and B Ltd with X Ltd
◦ Merger of A and B Ltd in to New Company X Ltd.


A Ltd, B Ltd is Amalgamating Co and X Ltd is
amalgamated Company

Conditions
All the properties of the amalgamating company
immediately before the amalgamation should become
the property of the amalgamated company by virtue of
the amalgamation.
 All
liabilities of the amalgamating company
immediately before the amalgamation should become
the liabilities of the amalgamated company by virtue of
the amalgamation



Condition…
Shareholders holding not less than 3/4th ( in value) of
the shares in the amalgamating company ( other than
shares already held by the amalgamated company or
by its nominee) should become shareholders of the
amalgamated company by virtue of amalgamation.
 For the purpose of the above the share holders may be
equity share holders or preference shareholders.
Consequently, person holding at least 75% of equity
and pref. shares ( in value) in amalgamating company
should become the shareholders of amalgamated co.



Conditions


Where A Ltd merges with X ltd., in a scheme of
amalgamation, and immediately before the
amalgamation, X Ltd held 20% of the shares in A Ltd.,
the above mentioned condition will be satisfied if
shareholders holding not less than3/4th ( in value0 of
the remaining 80% of the shares in A Ltd i.e 60%
thereof ( ¾ x 80), become shareholders of X Ltd, by
virtue of the amalgamation. ( Circular No. 5P dated
October 9. 1967 )

Transaction not treated as Amalgamation


Section 2 (IB)- There is no amalgamation though the
element of merger exists
◦ Where the property of the company which merges is sold to
the other company and the merger is a result of a transaction
of sale.
◦ Where the company which merges is wound up in liquidation
and the liquidator distributes its property to the other
company.


Actual Cost and WDV when assets are transferred


When Capital Asset (other than a block of asset) is
transferred [Expln. 7 to section 43 (1)]
◦ Where an asset is transferred, in a scheme of
amalgamation, to an Indian company, the actual cost of
transferred assets will be taken to be the same as it would
have been if the amalgamating company had continued to
hold the capital asset for the purpose of its own business.


Actual Cost and WDV when assets are transferred


When Block of asset is transferred [Expln. 2 to section
43 (6)]
◦ Where in any previous year, any block of assets is transferred
in a scheme of amalgamation, then, actual cost of BOA in the
case of amalgamated company, shall be the WDV of BOA as in
the case of amalgamating company for the immediately
preceding previous year as reduced by the amount of
depreciation actually allowed in relation to the said previous
year. This rule is however, applicable only if the amalgamated
company is an Indian company

Transfer of Capital Assets – When not
treated as transfer
Transfer of Capital Assets to amalgamated Indian Company [
Section 47 (vi)]:
 Any Transfer in scheme of amalgamation of capital assets by
the amalgamating company to amalgamated company is not
taken as “transfer” if the following conditions are satisfied

◦ If the scheme of amalgamation satisfies the conditions of section
2(IB)
◦ The amalgamated company is Indian Company.


treated as transfer


Transfer of shares in an Indian company held by a foreign
company to another foreign company in a scheme of
amalgamation [ Section 47 (via)]:
◦ Shares in an Indian company are held by a foreign company
◦ The business of the above foreign company ( including shares
mentioned above ) is taken over by another foreign company;
◦ At least 25% of the share holders of the amalgamating foreign
company continue to remain share holders of the amalgamated
foreign company
◦ Such transfer does not attract tax on capital gains in the country in
which amalgamating company is incorporated.

treated as transfer
Allotment of shares in amalgamated company to the share
holders of amalgamating company
 [Sections 47 (vii and 49 (2)]: Any transfer by a shareholder in a
scheme of amalgamation of shares held by him in the
amalgamating company shall not be regarded as transfer if

◦ Transfer is made in consideration of allotment to him of shares in the
amalgamated company;
◦ Amalgamated company is an Indian Company.
◦ According to Section 49 (2), the cost of shares of the amalgamating
company shall be the cost of shares of the amalgamated company.

Carry fwd & set off of loss and depreciation- Sec72A
Section 72A of the Act deals with the permissibility of
and set off of loss and Depreciation in the hands of
amalgamated Co.
 If the following conditions are satisfied, then the
accumulated loss and the unabsorbed depreciation of
the amalgamating company shall be deemed to be the
loss/depreciation of the amalgamated company for the
previous year in which amalgamation is effected



There is an amalgamation of a company owning
industrial undertaking, ship or hotel with another
company
 The accumulated losses or depreciation remains
unabsorbed for 3 or more years.
 The amalgamating company has held continuously as
on the date of the amalgamation at least 3/4th of the
book value of fixed assets held by it two years prior to
the date of amalgamation.



The amalgamated company continues to hold at least
3/4th in the book value of the fixed assets of the
amalgamating company which is acquired as a result of
amalgamation for five years from the effective date of
amalgamation.
 The amalgamated company continues the business of
amalgamating company for a minimum five years from
the date of amalgamation.



The amalgamated company, which has acquired an
industrial undertaking of the amalgamating company
by way of amalgamation, shall achieve the level of
production of at least 50% of the installed capacity of
the said undertaking before the end of 4 years from the
date of amalgamation and continue to maintain the
said minimum level of production till the end of 5 years
from the date of amalgamation.
 However CG, on an application, may relax this
condition.



The amalgamated company shall furnish to AO, a
certificate in form No. 62.
 If the above all the conditions are satisfied, the
accumulated Depreciation and Loss shall be deemed to
be of amalgamated company for the previous year in
which amalgamation is effected.
 In case the above conditions are not fulfilled, then that
part of brought forward of loss and unabsorbed
depreciation which has been set off by the
amalgamated company shall be treated as the income
of the amalgamated company for the year in which the
failure to fulfill the conditions occurs.



Expenditure on Amalgamation- Sec 35DD
Where an assessee, being an Indian Company, incurs
expenditure, wholly and exclusively for the purpose of
amalgamation or de merger, the assessee shall be
allowed a deduction equal to one fifth of such
expenditure for 5 successive pervious years beginning
with the previous year in which amalgamation takes
place.
 Even capital expenses would be available for deduction
under section 35DD.



De- merger
Meaning [Section 2 (19AA)]:
 One division of a company is hived off from the
company.
 The company whose undertaking is transferred
pursuant to de-merger is known as “de-merged”
company.
 The company to which the undertaking is transferred is
known as “resulting” Company.



De- merger- conditions


Entities involved should be companies
◦ De-merger is possible between companies only.
◦ De-merger of a division of a firm with a company would
not to be covered by the definition under the Act although
it is permitted under the Companies Act.

Section 391 to 394 of the Companies Act should be
satisfied
 It Involves transfer of an division/unit.





All property of the undertaking should be transferred
to the resulting company
◦ It Includes all assets ( fixed, Current) but does not include
miscellaneous
expenditure
(
like
Preliminary
expenses, discount allowed o issue of shares and other
deferred revenue expenditure) which appears on assets
side of a Balance sheet.



The resulting company should take over all liabilities of
the undertaking.



The Liabilities shall include:
◦ The liabilities which arise out of the activities or
operations of the undertaking
◦ The specific loans or borrowing for the activities or
operations of the undertaking
◦ If any multipurpose borrowing, the same to be
apportioned in the value of the assets transferred in a
demerger bears to the total value of the assets of such
demerged company immediately before demerger.


Liabilities/properties are to be transferred at book
value
 Shares in the resulting company are issued to the
shareholders of de-merged company.


◦ The resulting company issues shares to the shareholders of
the de-merged company on a proportionate basis as a
consideration for de-merger.


Person holding 75% shares in a demerged company to
become shareholders in the resulting company.
 Transfer should be ongoing concern basis. It means the
business should be continuing at the time of demerger.



AC and WDV when assets are transferred in
a De-merger


When Capital Asset (other than a block of asset) is
transferred [Expln.7A to sec 43 (1)]
◦ Capital Asset is transferred by the de-merged company to
resulting company, the AC of the transferred asset to the
resulting company shall be taken to be the same as it
would have been if the de-merged company had
continued to hold the assets.
◦ Such AC shall not exceed the WDV of such capital assets in
the hands of de-merged company.


AC and WDV when assets are transferred in
a Demerger


When an asset forming part of BOA is transferred
[Explns. 2A and 2B to Sec 43 96)]
◦ Expln 2A provides that where in any P.Y. any assets forming
part of BOA is transferred by a de-merged company to the
resulting company, the WDV of the BOA of the de-merged
company for the immediately preceding year shall be
reduced by the WDV of the assets transferred to the
resulting company.


AC and WDV when assets are transferred in a
Demerger
Explanation 2B provides that where any assets forming
part of a BOA transferred by a de-merged company to
the resulting company, the WDV of the BOA in the case
of resulting company shall be the WDV of the
transferred assets of the de-merged company
immediately before the de-merger
 For the aforesaid purpose, the WDV of the assets
transferred by de-merged company shall be
determined on the assumption that the assets
transferred were the only assets in the block since their
acquisition



De-merger vis-a vis CG


The following are not treated as transfer by virtue of
Section 47
◦ Any transfer in a de-merger of a capital assets by demerged company to a resulting company provided that
resulting company is an Indian Company [Sec 47 (vib)]
◦ Any transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company
if the certain conditions are satisfied:


De-merger vis-a vis CG
◦ The shareholders holding not less than 3/4th in value of shares
of the de-merged foreign company continue to remain
shareholders of the resulting foreign company and
◦ Such transfer does not attract tax on capital gain in the
country, in which the de-merged foreign company is
incorporated. [ Section 47(ic)]


Any transfer or issue of shares by the resulting
company in a scheme of de-merger to the shareholders
of the de-merged company if the transfer or issue is
made in consideration of the de-merger of the
undertaking [Section 47 (id)]

Cost of Acquisition of shares in a Resulting Company
◦ COA of shares in the resulting company shall be the
amount which bears to the COA of shares held by the
assessee in the de-merged company the same proportion
as the NBV of the assets transferred in a de-merger bears
to the Net worth of the de-merged company immediately
before such de-merger.
◦ Net worth means the aggregate of the paid up share
capital and Gen Reserves as appearing in the books of
account of the de-merged company immediately before
the de-merger.

Cost of Acquisition of shares in a Resulting
Company
◦ Following should be noted:

◦ To find out whether or not shares in the resulting company
are long term capital asset, the period of holding shall be
determined from the date of acquisition of shares in the de
merged company.
◦ The indexation will start from the date of allotment of
shares in the resulting company

Expenditure on De-merger
Where an assessee, being an Indian Company, incurs
expenditure, wholly and exclusively for the purpose of
amalgamation or de-merger, the assessee shall be
allowed a deduction equal to one fifth of such
expenditure for 5 successive pervious years beginning
with the previous year in which amalgamation takes
place.
 Even capital expenses would be available for deduction
under section 35DD.



Carry forward and set- off of
Losses/Depreciation
The accumulated loss and unabsorbed depreciation of
the de-merged company will be allowed to be carried
forward and set off in the hands of resulting company.
 If the loss/depreciation is directly relatable to the
undertaking transferred to the resulting company, then
such loss/depreciation shall be allowed to be carried
forward in the hands of the resulting company.



Carry forward and set- off of
Losses/Depreciation


Where however such loss or unabsorbed depreciation
is not directly relatable to the undertaking transferred
to the resulting company, it will be apportioned
between the DC and RC in the same proportion in
which the assets of the undertaking have been retained
by the DC and transferred to the RC, and it will be
allowed to be carried forward and set off in the hands
of the DC or the RC, as the case may be.


Conversion of Sole Proprietary into
Company


If the following conditions are satisfied, then transfer of
capital assets in case of conversion of sole proprietary
business into Company is not chargeable to tax by
virtue of sec 47 (xiv)◦ All Assets and Liabilities of the sole proprietary concern
relating to the business immediately before the succession
shall become the assets and liabilities of the company.


Conversion of Sole Proprietary into
Company

◦ The shareholding of the sole proprietor in the company is
not less than 50% of the total voting power in the
company and the shareholding shall continue to so remain
for a period of five years from the date of succession.
◦ The sole proprietor does not receive any consideration or
benefit directly or indirectly, in any form or manner other
than by way of allotment of shares in the company.




If the following conditions are satisfied, then transfer of
capital assets in case of conversion of Firm into
Company is not chargeable to tax by virtue of [Section
47(xiii)]
◦ All Assets and Liabilities of the Firm relating to the
business immediately before the succession shall become
the assets and liabilities of the company.


◦ All the partners of the firm immediately before the
succession become the shareholders of the company in he
same proportion in which their capital account stood in
the books of the firm on the date of succession.
◦ The partners of the firm do not receive any consideration
or benefit directly or indirectly, in any form or manner
other than by way of allotment of shares in the company
and


◦ The aggregate of the share holding in the company of the
partners of the firm is not less than 50% of the total voting
power in the company and their share holding continues
to be as such for a period of five years from the date of
succession.
◦ If after conversion, any of the conditions of section
47(xiii)/(xiv) are not satisfied, then capital gain ( which was
not taxed earlier) will become chargeable to tax in the
hands of company.

Set off and Carried fwd of Loss of PC/Firm by
Company
The accumulated loss and the unabsorbed depreciation
of the predecessor firm or proprietary concern, as the
case may be, shall be deemed to be the
loss/unabsorbed depreciation of the successor
company for the previous year in which business
reorganization was effected.
 When conditions of sections 47(xiii)/(xiv) are not
complied with, the set off of loss or allowance of
depreciation in the hands of he successor company
shall be deemed to be the income of the company
chargeable to tax in the year in which such conditions
are not complied with.



Slump Sale
Definition: Slump sale means the transfer of one or
more undertakings as a result of the sale for a lump
sum consideration without values being assigned to the
individual assets and liabilities in such sales. [Section 2
(42C)]
 Conditions:


◦ The Tax payer should own an undertaking ( division/unit)
◦ He transfers the undertaking by way of sale
◦ The transfer is for lump sum consideration without assigning
values to individual assets and liabilities.

WDV in the hands of transferor


WDV of a Block of Assets shall be determined as
follows, in the case of slump sale—
◦ Find out Depreciated value of Block on the first day of the
previous year
◦ Add: Actual Cost of the assets acquired during the previous
year
◦ Less : Money received/receivable in respect of assets
sold/discarded/demolished during the year.


Capital Gain in case of Slump Sale ( Section 50B)











Long Term Capital Gain if assets transferred >36 months
Short Term Capital Gain if assets transferred <36 Months
The benefit of indexation will not be available
If Net worth is Negative, it is taken as equal and the Sales
consideration will become capital gain.
If the Sales Consideration = Book Value of Assets Transferred then
the Capital Gain will be Zero.
Assessee shall furnish for 3CA indicating the computation of Net
worth of the division certifying the Net worth of the division has
been arrived correctly
Revaluation of the Assets shall be ignored for the purpose of
computing the networth.

Other Points- Slump Sale
If transfer agreement specifies the individual value of
assets to be transferred, then such a transaction is not
covered by “ Slump Sale”
 Accumulated loss/depreciation will be carried forward
and set off by the transferor.
 From the aggregate value of the total assets of the
undertaking, which is transferred, liabilities of the
undertaking shall be deducted. Contingent liability
should not be considered.



Transfer of Assets between holding and
subsidiary companies


When a capital assets ( other than BOA) is transferred [
Expln. 6 to sec 43 (1)]
◦ Where a parent company transfers a capital assets to its
100% subsidiary company or vice versa, the AC of the
assets transferred to the transferee company will be taken
to be the same as it would have been if the transferor
company had continued to hold the capital asset for the
purpose of its business provided that the transferee –
company is an Indian Company.


Transfer of Assets between holding and
subsidiary companies


When a BOA is trfd. [Expln 2 to sec 43 (6)
◦ Actual cost of BOA shall be WDV of BOA of the transferor
company for the immediately preceding previous year as
reduced by the depreciation actually allowed in relation to
the said preceding previous year. This rule
is, however, applicable only if the transferee-company is
an Indian Company.


Exemption under section 47


The following are not treated as transfer
◦ Any transfer of capital asset by a company to its wholly
owned Indian subsidiary company [ sec 47(iv)]; and
◦ Any transfer of capital asset by a wholly owned subsidiary
company to its Indian holding Company [ sec 47(v)].
◦ It covers only the immediate subsidiary company of the
holding company.


Withdrawal of Exemption


In the following two cases the exemption shall be
withdrawn and in the third case, the exemption is not
available.
1.
2.
3.

If at any time before the expiry of 8 years from the date of
transfer of a capital asset, such asset is converted by a
transferee company into stock in trade of its business.
The holding company ceases to hold the whole of the
share capital of the subsidiary company before the expiry
of 8 years.
The holding/subsidiary company transfers a capital asset as
stock in trade after February, 1988. In such a case the
transfer shall be regarded as “ transfer” and will be taxed
accordingly to normal provisions of capital gain.

Limited Liability Partnership
Some Key Points related to Taxation and Conversion into
LLP

Basics… of LLP
It is not a new concept but an international wine in an
Indian Bottle.
 It
is
prevalent
in
many
countries
like
UK,, Japan, Canada, USA, Germany etc..
 LLP Act, 2008 was published in the official gazette pm
9thJanuary, 2009.
 Some of the Provisions introduced from 31st
May, 2009.


Basics… of LLP
LLP Rules 2009 were published in the official gazette on
01st April, 2009. Rules were made effective from 31st
May, 2009.
 LLP Rules 2010 were published in the official gazette on
11th January, 2010 and was made effective from 15th
January, 2010.
 It is a hybrid form of business having the colours of
both, General Partnership and Company.


Basics…. Of LLP
It provides the benefits of Limited Liability but allows
its members the flexibility of organising their internal
structure as partnership based on a mutually arrived
agreement.
 LLP shall be taxed at par with Partnership Firm i.e
taxation in the hands of the entity and exemption from
tax in the hands of its partners.
 Therefore LLP shall pay tax @ 33.99% on its profit
 Provision of MAT and DDT will not be applicable.


Partners








Any Individual or body corporate can become partner in LLP.
Every designated partner of a LLP shall obtain a
Designated Partner Identification Number (DPIN).
Every LLP shall have atleast two Partners.
Every LLP shall have atleast two designated Partners and
atleast one of them shall be a resident in India.
Cessation by an Agreement, by giving a notice, by his
death, or by dissolution, or by insolvency or is declared as of
unsound mind.

Extent of Liability





LLP is not bound by anything done by a Partner in dealing
with a person if a partner has no authority to act for the LLP.
The Liability of the LLP is to be met out of the Property of
LLP.
A partner is not personally liable, directly or indirectly for
any obligation solely by reason of being a partner of LLP.
He shall be personally liable for his own wrongful act and not
of the other partner.

Partners and Remuneration
LLP shall be eligible to claim remuneration and interest
paid to its partners up to the permissible limit given
under section 40 (b) subject to LLP Agreement
authorizes such payment.
 Maximum Rate of Interest is 12%
 Maximum Remuneration is as per Section 40(b) i.e On
First Rs. 3 Lacs of Book Profit or in case of Loss= Rs.
1.50Lacs or 90% of Book Profit whichever is more, On
balance=60%.


Taxation of Partners
Profit from the LLP is exempt in the hands of Partners
under Section10(2A).
 Remuneration and Interest paid by LLP to its partners
shall be taxable in the hands of partners upto which
deduction has been claimed by LLP u/s. 40(b).


Incorporation and Registered Office








Incorporation documents with such fees as prescribed shall
be filed with Registrar of the state in which Registered Office
of LLP is situated;
The Registrar within 14 days register the Incorporation
document and give certificate that LLP is incorporated with
the name prescribed in document.
Every LLP should have designated Registered Office.
Every LLP shall have either the words “ Limited Liability
Partnership” or the acronym “ LLP” as the last words ofthe
name of the LLP.

Forms of Business Vs LLP


Following can be converted into LLP:
◦ Partnership Firm
◦ Private Company
◦ Unlisted Public Company

There are no provisions in LLP Act to re‐convert back
into a PSF or Company from LLP.
 So there is no U‐ turn..


Conversion of PSF into LLP


It is conversion to itself‐ No change in the eyes of IT
Laws
◦ if the rights and obligations of the partners remain the
same after conversion and;
◦ if there is no transfer of any Assets or Liability after
conversion.

No Capital Gain in the hands of PSF or Partners
 All Provisions of ITA, 1961 shall continue to apply on
LLP.


Conversion of Pvt or Unlisted Public Company into
LLP


Transfer of Assets shall not be regarded as transfer. (Section 47).
All conditions are to be satisfied.
◦ All Assets and Liabilities of the company immediately before the
conversion become co e s o beco e the assets and Liability of the LLP
◦ All the shareholders of the company immediately before the
conversion become the partners of the LLP and their capital
contribution and PSR in LLP are in the same proportion as their
shareholding in the company on the date of conversion.
◦ The Shareholders of the company do not receive any consideration
or benefit, directly or indirectly in any form or manner other than by
way of share in profit and capitalcontribution in LLP.

LLP






Aggregate of the PSR of the shareholders of the company in
LLP shall not be less than 50% at any time during the period
of Five years from the date of conversion.
The Total Sales Turnover Sales, Turnover, Gross receipt does
not exceed Rs.60 Lacs in any of the three previous years
preceding the previous year in which conversion takes place.
No amount is paid, either directly or indirectly,, to any
partner out of balance of AP standing in the accounts of the
company on the date conversion for a period of three years
From the date of conversion.

LLP


Point of Concern:
◦ Fifth condition to discourage the big companies to be
converted into LLP.
◦ Sixth condition restricts partners of LLP to distribute its AP
standing on the date of conversion in the accounts of
company to avoid the conversion only for saving DDT.
◦ Issue of Bonus shares is not dividend. Sec 2(22)
◦ Conversion after issue of Bonus shares out of Free
Reserves!!

LLP


Withdrawal of Exemption.[Section 47A]
◦ If any of the conditions are violated;
◦ Such income shall be chargeable to tax in the P.Y in which
the conditions are violated;
◦ Not clear under which head it will be taxed!!
◦ It appears that it will be taxed as capital gain

LLP








Amortization of Expenses incurred under VRS shall be available
for the remaining period to the LLP. [Section 35DDA]
No deduction on account of Section 35DDA shall be allowed in
the year of conversion to the company.
AC of BOA in the case of successor LLP shall be WDV of BOA as
in the case of the predecessor Company on the date of
conversion.
COA of Capital Asset shall be deemed to be the cost for which
the previous owner (Company) of the property acquired it, as
increased by COI borne by previous owner or the successor LLP
as the case may be.
Credit lying under section 115JAA shall not be allowed LLP

LLP


Carry Forward of Business Loss and Unabsorbed
Depreciation.
◦ Business Loss can be allowed in the P.Y. in which such
conversion has taken place and allowed to carried forward
for a fresh period of 8 years.
◦ Unabsorbed Depreciation shall be allowed to set off and
carried forward for the indefinite period under section
32(2).

LLP


Taxation of Shareholders:
◦ The shares held by Shareholders of the company will get
extinguished and will be substituted by balance in their
respective capital accounts.
◦ No capital Gain on such conversion.

Taxation in Mauritius


Taxation in Mauritius


Caveat



This presentation of slides is intended as a guide for general information only, and the
application of its contents to specific situations will depend on the particular
circumstances involved. Accordingly, users should seek appropriate professional advice
regarding any particular problems that they encounter, and this presentation should
not be relied on as a substitute for this advice.



While all reasonable attempts have been made to ensure that the information
contained in this presentation is accurate, we accept no responsibility for any errors or
omissions it may contain, whether caused by negligence or otherwise, or for any
losses, however caused, sustained by any person that relies on it.



This presentation is based on “reasonable working knowledge” of the tax systems of
the respective countries and not on “expert knowledge”of the said tax systems.


Mauritius


Mauritius Tax Systems


Basics of Mauritius
Island Country in Indian Ocean.
 Known for Three S’s


◦ Sun
◦ Sand
◦ Sea

2nd largest source of FDI into India
 No tax on capital gains under domestic law.‐India does
not tax CG of M Co under DTAA
 DTAA with India has blessings of Indian SC.



Tax Rates for Different Types of companies
TAXATION RATE
AFTER THE APPLICATION ON INCOME TAX (FOREIGN TAX CREDIT REGULATIONS
1995
TYPE OF INCOME
TRADING AND OTHER INCOME

3%

0

DOMESTIC CO
15%

0

0

0

DIVIDENDS FROM ZERO TAX JURIDICTION

3%

0

15%

INTEREST FROM MAURITIUS BANKS
INTEREST FROM OTHER BANKS
CAPITAL GAINS TAX

0
3%
0

0
0
0

15%
15%
0

0

0

0

DIVIDENDS FROM A COUNTRY WITH
ATLEAST 15% HEADLINE TAX

ANY INCOME TAXED PREVIOUSLY AT 15%

GBC 1

GBC 2


GBC 1 Companies


A Company holding a GBC‐1 is engaged in a whole range of
activities including those involving capital raising from public. These
are
◦ Offshore Insurance, Re Insurance
◦ Management of Fund and Assets
◦ Operational Head Quarters and Employment Services
◦ Consultancy Services and Training
◦ Shipping
◦ Aircraft Financing and Leasing
◦ Franchising
◦ Information Technology Services and Telecommunications

GBC- 1 Companies
The Companies holding GBC‐1 are characterized by their
provisions for protection of investors and are required to file
Annual Audited financial statements with the Financial Service
Commission.
 It is one of the vehicle used to access the Mauritius network of
Double Tax Avoidance Treaties.
 Its Registers are not open to Public for Inspection.



GBC- 1 Companies


GBC1 Company should be structured to be fiscally
resident in Mauritius. This can be achieved by:
◦
◦
◦
◦

Appointing two Local Directors
Appointing a Local Secretary
Establishing a Bank account in Mauritius
Maintaining Books and records in Mauritius


Taxation of GBC- 1
Companies holding GBC‐1 will be taxed at 15% subject to
Income Tax (Foreign Tax Credit) Regulation GN 80 of July 1996.
 It introduced elaborate provisions on the calculation of net
foreign source income and foreign Tax credits (with or without
evidence), which may reduce tax considerably the effective tax
burden to either Zero or 3%.



Round Tripping not permitted by RBI
Funds from
India

Re Invest in
India as FDI or
FII

Invest in GBC-1

Foreign Tax Credit


A GBC 1 pays tax at the rate of 15% in Mauritius, but is entitled to
certain foreign tax credit. Where a GBC 1 pays foreign tax
elsewhere and can show proof that it has actually paid tax at the
rate of 15% or more on its foreign income earned, it is entitled to
claim a 15% foreign tax.



The foreign tax credit is available only if documentary evidence can
be provided to the effect that tax has been actually paid. This 15%
foreign tax credit will offset the 15% tax liability of the GBC 1 will
have in Mauritius on the foreign income; thus rendering the tax
paid in Mauritius to nil.

Foreign Tax Credit
According to the foreign tax credit (regulations) Act
1996, a GBC 1 which does not pay tax on its foreign
income, is presumed to have paid tax elsewhere.
 Upon application of this presumption, it will be able to
claim a deemed tax credit of 80% out of the full 15%
tax rate, thus rendering the effective tax rate at 3%.
 If the GBC 1 does not pay tax else where on its foreign
income, it will have a nominal tax liability of only 3% in
Mauritius.



Credit in Ordinary manner









M Co earns Royalty from I
Co – US$ 100,000
TDS from India @ 10 5575%
Actual Tax paid in India =
$ 10,558
Tax in Mauritius 15% =
$ 15,000
Net Tax to be paid in Mauritius=
4,442

Deemed Credit









M Co earns Royalty from I
Co – US$ 100,000
TDS from India @ 10 5575%
Actual Tax paid in India =
$ 10,558
Tax in Mauritius 15% =
$ 15,000
Deemed Credit @80% of USD 15000= USD
12000
Net Tax to be paid in Mauritius= USD3000

Foreign Tax Credit Eg-1

Credit in Ordinary Manner






M Co earns Dividends from
I Co – US$ 100,000
TDS from India- Nil
Actual Tax paid in India= $ 15,000
(DDT Credit Available)
Tax in Mauritius @15%=$ 17,250 (
15% of 1,00,000+15,000)
Net Tax to be paid in Mauritius=$
2,250

Deemed Credit







M Co earns Dividends from
I Co – US$ 100,000
TDS from India- Nil
Actual Tax Paid in India= $15,000
(DDT)
Tax in Mauritius @15%=$ 17,250 (
15% of 1,00,000+15,000)
Deemed
Credit
80%
of
$17,250=13800
Net Tax to be paid in Mauritius
=$3,450/-

Foreign Tax Credit- Eg:2

FII from Mauritius
Investors from US,UK Germany Etc…

GBC 1 in Mauritius

Invest in Indian Stock Exchanges
Global Investors converge at Mauritius to enter in India as FII

FDI from Mauritius
Investors from US,UK Germany Etc…

GBC 1 in Mauritius

FDI in Indian Companies


ODI from India
Take advantage of DTAA
between Mauritius and
Target

• Indian
Promoter

Amount invested in
Mauritius for the purpose
of Investment Globally

• GBC 1 in
Mauritius

Low Tax/No Tax as
Capital Gain

• ODI in Target
Company


GBC 2 Companies
A Company holding a GBC 2 provides the confidentiality
required by the international investors, as its registers
are not opened to general public. It is not subject to
taxation and is suited for holding managing private
assets and funds.
 It therefore can not access the treaty network as it is
“not liable to tax” in Mauritius.



GBC 2 Companies
Global
Trading
• Direct Shipment
• Billing to
Mauritius GBC-2

Buy from
Say Poland

• Promoter from
India or
anywhere
• Takes GBC-2
License
• Remit Net Price
to Vendor and
keep MarginFree of Tax

• Direct Shipment
from Poland
• Remit Price to
Mauritius

Sell to
Russia


Domestic Companies


Free Port Business
◦ Low tax of 3% in Mauritius
◦ Agreement with Various African countries
◦ Quota Regime

Source from
Indian Global

Carry Value
addition in Free
Port

Export to Buyer


TAX DEDUCTED AT SOURCE

Indian Income Tax Act, 1961

INTRODUCTION:


To avoid cases of tax evasion, the Income-Tax Act has made
provisions to collect tax at source of accrual of income. Cases
included in the scheme are, generally, those where income can
be computed at the time of accrual of income. Under this
scheme, persons responsible for making payment of income
covered by the scheme are responsible to deduct tax at source
and deposit the same to the Government’s treasury within the
stipulated time. The recipient of income—though he gets only
the net amount (after deduction of tax at source)—is liable to
tax on the gross amount and the amount deducted at source is
adjusted against his final tax liability. It is essentially an indirect
method of collecting tax which combines the concepts of “pay

Who is to deduct TDS?


Under the process of TDS, the person/company
who deducts TDS is called as Deductor.



Deductor is a person/company who is liable to
deduct the Tax at source, from the payment being
made to the party. Deductor is also termed as
Employer in cases where the payments are under
Salaries.

Who is deductee?


Deductee is the person, from whom the tax is being deducted or
accrued for deduction. Depending on the nature of the deduction being
made, deductees and respective submission forms are categorized to 3
types:
Types of
Forms
Salary

All Assessee

24 Q

Non- Salary

Resident

26 Q

NonResident

27 Q

Payment covered under the scheme of TDS.


Salary (Sec.192)



Interest on Securities (Sec.193)



Dividends (Sec.194)



Interest other than Interest on Securities (Sec.194A)



Winnings from Lotteries or crossword puzzles (Sec.194B)



Winnings from Horse Races (Sec.194BB)



Payments to Contractors and Sub-contractors (Sec.194C)



Insurance Commission (Sec.194D)



Payment to Non-resident sportsmen or sports association (Sec.194E)



Payment in respect of NSC (Sec. 194EE)



Payments in respect of Repurchase of units of Mutual Funds or UTI (Sec.194F)

Payment covered under the scheme of TDS.


Commission on Sale of Lottery Tickets (Sec.194G)



Commission or Brokerage (Sec.194H)



Rent (Sec.194I)



Fees for Professional or Technical Services (Sec.194J)



Payment of Compensation on acquisition of certain immovable property
(Sec.194LA)



Other Sums (Sec.195)



Long term capital gain (Sec.196B)




Income or Long term capital gain from Foreign Currency bonds/Global
Depository Receipts (Sec.196C)
Income of Foreign Institutional Investors from Securities (Sec.196D)

Salary (Sec.192)
Who is the payer

Employer

Who is the recipient

Employee

Payment Covered

Taxable Salary of the employee.

At what time TDS to be deducted

At the time of payment or credit, whichever is
earlier.

Maximum amount which can be paid without tax
deduction

The amount of exemption limit
(i.e.,Rs.200000/250000/500000 for A.Y. 2013-14)

Rate at which tax to be deducted.

As per Income Tax Rate.

When the provisions are not applicable

Till the employee falls under IT exemption limit.

Is it possible to get the payment without tax
deduction or with lower tax deduction

The employee can make application in Form No.13
to the Assessing Officer to get the certificate of
lower tax deduction or no tax deduction.

Salary (Sec.192) at a glance
Salary

Exemption limit

Rate

When TDS is
Deducted?

As per IT slab
Rates

As per IT slab
Rates

At the time of
Payment or
credit, whichever
is earlier

Interest on Securities (Sec. 193)
Who is the payer

Payer of interest on securities


A resident person holding securities

Payment covered

Interest on securities

At what time TDS to be deducted.

At the time of payment or at the time of credit,
whichever is earlier.

deduction

Rs. 5000.

Rate at which TDS to be deducted

10%


Interest on Central/State Government securities


The recipient can make application to the
Assessing Officer in Form No. 13 or declaration to
the payer in Form 15G or 15H as applicable

(Before 01.07.2012 Rs. 2500/-)

Interest on Securities (Sec. 193) at a glance
Interest on
Securities.

Exemption limit

Rs. 5000

Rate

When TDS is
deducted?

When Provisions
are not
applicable?

10%

At the time of
Payment or
credit, whichever
is earlier

Interest on
Central/State
Government
securities

Dividends (Sec. 194)
Who is the payer

Domestic company


Resident shareholder

Payment Covered

Deemed dividend under section 2(22)(e)

At what time TDS to be deducted

At the time of payment.

deduction

Rs.2500


10%


Dividend covered by section 115-O


The recipient can make application to the
Assessing Officer in Form No. 13 or declaration to
the payer in Form 15G or 15H as applicable

Dividends (Sec. 194) at a glance
Dividends

Exemption limit

Rs. 2500

Rate

When TDS is
deducted?

When
Provisions are
not applicable?

10%

At the time of
Payment.

Dividend
covered
u/s 115O

Interest Other Than Interest On Securities (Sec
194A)
Who is the payer

Any person paying interest other than interest on
securities


A Resident person

Payment covered

Interest other than interest on securities



deduction

If payer is banking company, co-operative engaged in
banking business Rs 10000/- p.a. if Payer is any other
person Rs 5000/- p.a.


10% if the recipient is resident non-corporate
assessee and 20% if the recipient is resident
corporate assessee.


If the payee are Insurance companies or financial
institutions including co-operative societies etc.

Is it possible to get the payment without tax deduction
or with lower tax deduction

Declaration to the payer in Form 15G or 15H as
applicable

Interest Other Than Interest On Securities (Sec
194A) at a glance
Interest
Other than
Interest on
Securities

Exemption
limit

If Payer Is:

Banking
Co.
Rs5000/p.a.

For Other
Rs.10000/p.a.

When TDS
is
deducted?

Rate

Resident
NonCorporate
Assessee

Resident
Corporate
Assessee

10%

20%

When
Provisions
are not
applicable?

At the time
of Payment
or credit,
whichever
is earlier.

Insurance
companies
or financial
institutions
including
cooperative
societies
etc.

Winnings from Lotteries or Crossword Puzzles
(Sec. 194B)
Payment covered

Winnings from lotteries/crossword puzzles/card
games/other games


At the time of Payment

deduction

Rs. 10000/-


30%


--


Not Possible

Winnings from Lotteries or Crossword Puzzles
(Sec. 194B) at a glance
Winning from
Lotteries or
Crossword
Puzzles

Exemption limit

Rate

When TDS is
Deducted?

Rs.
10000/-

30%

At the time of
Payment.

Winnings From Horse Races (Sec. 194BB)
Payment covered

Winnings from Horse Races


At the time of payment

deduction

Rs. 5000/-


30%


--


Not Possible

Winnings From Horse Races (Sec. 194BB)
at a glance
Winning
from Horse
Races

Exemption
limit

Rate

When TDS
is
Deducted?

Rs.
5000/-

30%

At the time
of Payment.

Payments to Contractors And Sub-contractors
(Sec.194C)
Who is the payer

Specified person


A resident person

Rate of TDS

1% for Individual/HUF and 2% for Others.

Payment Covered

Consideration for any Work Contract.

At what time TDS has to be
deducted

At the time of payment or at the time of credit whichever is earlier.

Maximum amount which can be
paid without tax deduction

The tax is required to be deducted if a single payment exceeds Rs.
30000/- or if the aggregate payments exceed Rs. 75000/- per annum

Is it possible to get the payment
without tax deduction or with lower
tax deduction

The recipient can make application to the Assessing Officer in Form
No. 13

Payments to Contractors And Sub-contractors
(Sec.194C) at a glance
Payment to
Contractors &
Sub Contractors.

Exemption
limit

When TDS is
Deducted?

Rate

&
Rs. 30000/in case of
single bill

Aggregate
payment of
Rs.75000
p.a.

Individual &
HUF
1%

Others
2%

At the time
of Payment
or Credit,
whichever is
earlier .

Payment of Insurance Commission (Sec 194D)
Who is the payer

Any person paying insurance commission.


A resident person

Payment covered

Insurance Commission


At the time of payment or at the time of credit

deduction

Rs. 20000/-


10% if the recipient is resident non-corporate
assessee and 20% if the recipient is resident
corporate assessee.


--

Is it possible to get the payment without tax deduction
or with lower tax deduction

The recipient can make an application in Form No. 13
to the Assessing Officer to get the certificate of lower
tax deduction or no tax deduction.

Payment of Insurance Commission (Sec 194D) at a
glance
Payment of
Insurance
Commission

Exemption
limit

Rs. 20000

When TDS is
deducted?

Rate

Resident
NonCorporate
Assessee

Resident
Corporate
Assessee

10%

20%

At the time of
Payment or
credit, which
ever is
earlier.

Payment to Non-resident sportsmen or sports
association (Sec.194E)
Who is the payer

Any person making payment to non-resident
sportsman/sports association


Non-resident sportsman/sports association

Payment covered

Payment to non-resident sportsman/sports
association


At the time of payment or at the time of credit
whichever is earlier

Maximum amount which can be paid without
tax deduction

Nil


20%*
(before 01.07.2012 10%)
*Education cess etc and Surcharge if applicable.


--


No Provision

Payment to Non-resident sportsmen or sports
association (Sec.194E) at a glance
Payment to Non
Resident
Sportsmen or
Association

Exemption limit

Nil

* + Education cess /Surcharge if applicable.

Rate

When TDS is
Deducted?

20%*

At the time of
Payment or
Credit, whichever
is earlier.

Payments in respect of deposits under NSS
(Sec.194EE)
Who is the payer

Post Office


Any Person

Payment covered

Payment (Principal+Interest) out of National Saving
Scheme, 1987.



deduction

Rs.2500/-


20%


The payment is made to legal heirs of the deceased
depositor.

Payments in respect of deposits under NSS
(Sec.194EE) at a glance
Payments in
respect of
deposits under
NSS

Exemption limit

Rs. 2500

Rate

20%

When TDS is
deducted?

When Provisions
are not
applicable?

At the time of
Payment

When payment is
made to legal
heirs of the
deceased
depositor. .

Payments on account of repurchase of units of
Mutual Funds or UTI (Sec. 194F)
Who is the payer

Mutual Fund or UTI


Unit holder under section 80CCB

Payment covered

Payment on account of repurchase of units referred
to in section 80CCB


At the time of payment

deduction

Rs. 1000/-


20%


--


No Provision

Payments on account of repurchase of units of
Mutual Funds or UTI (Sec. 194F) at a glance
Payments on
account of
repurchase of
units of Mutual
Funds or UTI

Exemption
limit

Rate

When TDS is
Deducted?

Rs. 1000/-

20%

At the time of
Payment.

Who is the payer

Any person paying commission of sale of lottery
tickets


Any person

Payment covered

Commission on sale of lottery tickets



deduction

Rs. 1000/-


10%


--


The recipient can make an application in Form No.
13 to the Assessing Officer to get a certificate of
lower tax deduction or no tax deduction

at a glance
Commission
on Sale of
Lottery Tickets

Exemption
limit

Rate

When TDS is
Deducted?

Rs.
1000/-

10%

At the time of
Payment.

Commission or Brokerage (Sec.194H)
Who is the payer

Any person paying commission or brokerage.


Any resident person

Payment covered

Commission or brokerage (not being insurance
commission).



deduction

Rs. 5000/-


10%


--


The recipient can make an application in Form
No.13 to the Assessing Officer to get a certificate of
lower tax deduction or no tax deduction

Commission or Brokerage (Sec.194H) at a glance
Commission or
Brokerage

Exemption limit

Rs. 5000/-

Rate

When TDS is
Deducted?

10%

At the time of
Payment or at the
time of credit,
whichever is
earlier.

Rent (Sec.194-I)
Who is the payer

Any person paying rent (not being an individual or HUF
whose books of account are not required to be audited
under section 44AB in the immediately preceding
financial year)


A Resident Person

Payment covered

Rent


At the time of payment or at the time of credit, whichever
is earlier

tax deduction

Rs. 180000/- p.a.


For Plant and Machinary Rent 2% and for
For Use of and Land or Building including Furniture etc.
Individual / Huf 10%
For any other 20%


The recipient can make application in Form No. 13

Rent (Sec.194-I) at a glance
Rent

Exemption
limit

Rs. 180000
p.a.

When TDS is
deducted?

Rate

Land or
Building
including
Furniture etc.

Plant &
Machinery

2%

Individual/
HUF
10%

Others
20%

At the time
of Payment
or credit,
whichever is
earlier.

Fees for Professional or Technical Services
(Sec.194J)
Who is the payer

Any person paying professional charges (not being an
individual or HUF whose books of account are not
required to be audited under section 44AB in the
immediately preceding financial year)


Any Person

Payment covered

Professional services, technical services, Royalty,



deduction

Rs. 30000/-


10%



Fees for Professional or Technical Services
(Sec.194J) at a glance
Fees for
Professional or
Technical
Services

Exemption limit

Rate

When TDS is
Deducted?

Rs. 30000/-

10%

At the time of Payment
or at the time of credit,

Remuneration / commission to director of the
company (Sec.194J1(ba))
Who is the payer

The Organization


A Resident Person

Payment covered

Any remuneration / fees / commission to a director of a
company, other than those on which tax is deductible
under section 192.



deduction

Nil


10%



Remuneration / commission to director of the
company (Sec.194J1(ba)) at a glance
Remuneratio
n/
commission
to director of
the company

Exemption
limit

Rate

When TDS
is Deducted?

Nil

10%

At the time
of Payment.

Compensation on acquisition of Capital Asset
(Sec 194LA)
Who is the payer

The Person/Organization Acquiring the Asset.


A Resident Person

Payment covered

Acquisition of Immovable Property.



tax deduction

Rs. 200000/Before 01.07.2012 Rs. 100000/-


10%


On Agricultural Land


The recipient can make application in Form No. 13.

Compensation on acquisition of Capital Asset
(Sec 194LA) at a glance
Compensati
on on
acquisition
of Capital
Asset

Exemption
limit

Rate

When TDS
is
Deducted?

Rs.
200000/-

10%

At the time
of Payment.

When
Provisions
are not
applicable?
On
Agricultural
Land

Compensation on acquisition of Certain
immovable property (Sec 194LAA)
Payment covered

Acquisition of Immovable Property.



Maximum amount which can be paid
without tax deduction

Rs. 200000/-


10%

When the provisions are not
applicable

Rs 50 lakhs in case such property is situated
in a 'specified urban agglomeration area‘.
Rs 20 lakhs in case such property is situated
in any area other than specified areas.

Is it possible to get the payment
without tax deduction or with lower
tax deduction

The recipient can make application in Form
No. 13

Compensation on acquisition of Certain
immovable property (Sec 194LAA) at a glance
Compensation on acquisition
of Certain immovable
property

Exemption
limit

Rs. 200000/-

Rate

When TDS is
Deducted?

10%

At the time of
Payment.

When
Provisions are
not
applicable?

Up to Rs 50
lakhs in case
such property
is situated in a
'specified
urban
agglomeration
area‘.

Up to Rs 20
lakhs in case
such property
is situated in
any area other
than specified
areas.

Provisions for Filing Returns
Different Payments

In case the person deducting tax is a
company or a Government department
or a person whose books are required
to be audited u/s. 44AB in the
immediately preceding year or in
whose case number of deductees in
any of the quarterly statements in the
immediately year is 20 or more

In case the person
deducting tax is
any other person

Salary

Form No. 24Q in Electronic format and
Form No. 27A

Form No. 24Q

Payment (other
than salary) to a
resident

Form No. 27A

Form No. 26Q

Payment (other
than salary) to a
non-resident

Form No. 27A (quarterly)

Form No. 27Q
(quarterly)

TAN
 Every deductor is required to obtain a unique

identification number called TAN (Tax Deduction
Account Number) which is a ten digit alpha
numeric number. This number has to be quoted by
the deductor in every correspondence related to
TDS.

Tax Deduction & Collection Account
Number
 Every person deducting tax or collecting tax should obtain a tax

deduction & collection number
 Such person should quote such number in every challan for

payment u/s 200 or 206C(3), in every certificate furnished u/s
203 or u/s 206C(5)
 In all the TDS returns delivered
 In all other documents pertaining to such transaction as may

be prescribed in the interest of revenue.

Due Dates for Deposition of TAX
Deductor

For April to February

For March

Government

On the same day for other than salary &
on or before 7th of next month for
salary.

On or before 7th of next
month for salary.

Other than
Government

On or before 7th of next month.

On or before 30th April.

Special Cases

Quarterly payment on or before 7th of
the month succeeding quarter.

30th April.

Due Dates for Filing of Return
Quarter
Ending Date

If Deductor is an Office of
Government

Due Date For Others

30th June

31st July of the F.Y.

15th July of the F.Y.

30th
September

31st October of the F.Y.

15th October of the F.Y.

31st December

31st January of the F.Y.

15th January of the F.Y.

31st March

15th May of the F.Y. immediately
following the F.Y. in which deduction
is made.

15th May of the F.Y. immediately
following the F.Y. in which
deduction is made.

Furnishing of quarterly returns for
payment of interest to residents without
Deducting Tax (Sec. 206A)
 Banking company, Cooperative societies, & Public

Companies shall furnish quarterly return to
department in respect of payments of Interest (other
than Interest on Securities) in any computer
readable media.

TDS Certificates
• A tax deductor is also required to issue TDS certificate to the
deductee within specified timed under section 203 of the I T
Act. The conformation from the deductor, for the deduction and
payment of the respective TDS amount to the bank, issued to
the deductee is a TDS certificate.

• The deductee should produce the details of this certificate,
during the regular assessment of income tax, to adjust the
amount of TDS against the Tax payable by the Deductee
[assessee].

Types of TDS certificates
S. No.

Form No.

Periodicity

Date

1

16 – For
Salary

Annual

31st May of following
financial year.

2

16A – For
Non Salary

Quarterly

Within 15 days from due
date of furnishing the TDS
statement under rule 31A.

Rates for Collection of TAX
Collection Code

Nature of Purchase

Tax (%)

6 CA

Alcoholic liquor for human consumption.

6 CB

Timber obtained under a forest lease.

2.5

6 CC

Timber obtained under any mode other than forest lease.

2.5

6 CD

Any other forest product not being timber or tendu leave.

2.5

6 CE

Scrap

1

6 CF

Parking Lot

2

6 CG

Toll Plaza

2

6 CH

Mining and Quarrying

2

6 CI

Tendu Leaves

5

Surcharge (on tax)

Applicable for Foreign Companies if collections exceeds Rs. 1
crore of such companies.

Education Cess (on
tax)

Applicable for Foreign Companies .

1

2.5
3

Effects of Evasion of TDS (Sec 201)
S. No.

Reasons

Effects

1

Non deduction
of TDS

The expenditure for which TDS to be deducted gets
DISALLOWED & penal interest @1% for every month
or part of month from the date on which such tax was
deductible to the date of deduction

2

Non payment of
TDS

The expenditure for which TDS deducted but not paid
gets disallowed.

3

Less deduction
of TDS

The amount less deducted is required to be paid by the
deduct or along with penalty.

4

Late Payment of
TDS

The deductor should have to pay penal interest @1.5%
for every month or part of month from date of deduction
to the date of payment.

Fee and Penalty for TDS return filed after due date
Section

Section 234E - Fee

Section 271H - Penalty

W.e.f.

01-Jul-12

01-Jul-12

When leviable

If the TDS return is not filed within due date If incorrect information is
furnished in return or if return
is not filed within one year from
the due date

Minimum

Rs. 200 per day till the return is filed

10,000/-

Maximum

TDS amount

1,00,000/-

Whether
mandatory

Yes, to be deposited before filing of such
TDS return

No

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