admin, Author at Cogent Prof

Missed the Belated Return Deadline? Here’s Your Guide on Filing ITR After December 31st

Introduction:

As the repercussions of the recently passed Belated Income Tax Return deadline continue to be felt, there’s a silver lining for those who failed to meet the initial cutoff. The prospect of redemption presents itself in the shape of the Revised Income Tax Return, affectionately referred to as ITR-U. This blog strives to act as your guide through the intricate terrain of tax filing, offering a detailed understanding of the purpose, eligibility prerequisites, and a systematic, step-by-step approach to submitting an ITR-U.

Understanding ITR-U: Let’s decode the acronym. ITR-U, or the Updated Income Tax Return, is your ticket to rectify any errors or omissions made during the initial filing process. You have a window of two years from the end of the financial year, extending until March 31, 2026, to set things right. However, it’s crucial to note that ITR-U comes with some constraints; taxpayers cannot reduce income, claim refunds, increase losses, or introduce new losses during this process.

Who Can File ITR-U?

The eligibility criteria for ITR-U extend to anyone who stumbled upon errors or omissions in their original, revised, or belated tax returns. It serves as a safety net, allowing individuals to correct inadvertent mistakes.
Any taxpayer can file an updated return u/s 139 (8A) whether he has furnished/not furnished an original return.

Who is Not Eligible to File ITR-U? Not everyone can ride the ITR-U wave. The following scenarios deem ITR-U inapplicable:

If an Updated Return has already been filed.
For those seeking tax refunds.
Individuals filing a NIL ITR.
When filing an updated return results in reduced income tax liability.

How to File ITR-U Form:

Download the Relevant ITR Form:

Begin your journey by choosing and downloading the utility of the applicable ITR form (ITR1/2/3/4, etc.) for each of the three years from the official Income Tax Department’s website.

Fill in the Details:

Armed with the ITR form, embark on the data-filling journey. Detail your income from diverse sources, deductions claimed, and taxes paid for each of the three years.

Compute Tax Liability:

With the details in place, leverage online tax calculators to compute your tax liability for each year.

Pay Pending Taxes:

Before submitting your ITR, settle any outstanding taxes for the three years. The Income Tax Department’s website offers a seamless online payment gateway for your convenience.

File the ITR Form:

Once the information is meticulously filled, and any pending taxes are cleared, proceed to file the ITR for each of the three years online on the official Income Tax Department’s website.

Verify the ITR:

The journey concludes with the verification of your ITR. This can be done using your Aadhaar card, net banking, or by dispatching a physical copy of the ITR-V to the Income Tax Department.

Conclusion:

Submitting an ITR-U can serve as your guiding light in case you’ve overlooked the extended deadline. Navigating the complex terrain of tax obligations, it’s crucial to recognize that filing ahead of the deadline is the optimal approach. Taking a proactive stance in managing your financial responsibilities not only ensures compliance but, more importantly, provides tranquility. Stay well-informed and stay proactive for a peace of mind.

ROI Calculator - Return on Investment

RECENT POSTS

Categories

23 FebAllTaxation

Filing Taxes as an NRI: A Guide to Relevant Returns and Forms

Navigating the Indian income tax filing process as a non-resident Indian (NRI) can be intricate due to specific regulations and forms. This comprehensive guide aims to condense crucial information, highlighting the essential returns and forms that NRIs must be familiar with to ensure a seamless tax compliance experience.

Income Tax Returns for NRIs

The main income tax return forms relevant for NRIs are:

ITR-1 – This is for resident and non-resident individuals having total income up to Rs.50 lakhs from salaries, one house property, interest, family pension, etc. This simplest ITR form cannot be used by NRIs having income from business/profession or capital gains.

ITR-2 – This return form is for individuals and HUFs not having income from business or profession. All types of incomes applicable for NRIs can be reported in this form like rental income, capital gains, foreign assets/incomes, etc. It is applicable for non-resident individuals with income over Rs.50 lakhs.

ITR-3 – This is applicable for NRIs having income under the head “Profits and Gains from Business or Profession”. So any NRI with turnover above the threshold limit (Rs.10 lakhs or Rs.25 lakhs depending on business type) has to file ITR-3 regardless of overall income levels.

The major challenge is to identify which ITR form correctly matches the NRI’s income profile. So they should carefully assess their various income sources before selecting the applicable ITR.

Key Forms to be Furnished by NRIs

Apart from income tax returns, NRIs may also be required to furnish other forms and declarations such as:

Form 12BB – For providing investment/exemption details to employers for TDS calculations
Form 16/16A – Tax deduction certificate from employer/clients to track TDS credits
Form 26AS – Consolidated annual tax statement from IT Department
Form 10E – For income tax relief on salary arrears/advance
AIS – Annual Information Statement received via email from IT Dept
Form 3CB-3CD: Tax audit report from chartered accountant
Form 3CEB: CA certificate for international transactions
Form 3CE: CA certificate regarding royalty/FTS income

The deadline for submitting audit forms (No.6, 7 & 8 mentioned above) is one month prior to the due date for filing ITR. Failure to comply with this requirement may result in penalties ranging from Rs.1-2 lakhs, depending on the duration of the default.

Navigating the complexities of NRI tax filing can be daunting. Therefore, staying informed about the latest regulations and seeking professional expertise can prove beneficial in optimizing tax liability.

IRR Calculator - Internal Rate of Return

RECENT POSTS

Categories

23 FebAllTaxation

Understanding Residential Status Under Indian Income Tax Law

The determination of an individual’s residential status under Indian income tax law is a crucial factor influencing their tax liability, whether they are categorized as a resident or non-resident. Section 6 of the Income Tax Act, 1961, outlines essential rules for establishing residential status:

1. Resident An individual satisfies the basic conditions to be considered a resident if:

They are in India for at least 182 days in the relevant financial year.

They are in India for at least 60 days (120 days for NRIs with income over Rs 15 lakhs) in the relevant financial year AND at least 365 days in the preceding 4 years. For NRIs/PIOs visiting India with income under Rs 15 lakhs, this 60 day rule is relaxed to 182 days.

2. Non-Resident
An individual who does not meet the above residential status tests would be considered a non-resident. They are subject to different tax treatment than residents.

3. Deemed Resident There is also a concept of “deemed resident” under Section 6(1A) for Indian citizens with income over Rs 15 lakhs who do not meet the basic resident conditions but are not liable to tax in any other country.

To illustrate these rules, the document provides some examples. An Indian citizen staying for 54 days in India with income over Rs 15 lakhs would be deemed a resident since they do not pay tax anywhere else. However, a PIO visiting India for 181 days with income below Rs 15 lakhs would be a non-resident since they fail the 182 day test applicable to them instead of the regular 60 day rule.

Establishing residential status can become intricate due to numerous exceptions and special circumstances. Generally, being a resident for tax purposes in India is determined by substantial time spent in the country or maintaining strong connections, as demonstrated by previous visits. Individuals with limited presence, primarily for temporary reasons, are categorized as non-residents.

Budget Calculator

RECENT POSTS

Categories

23 FebAllTaxation

Liberalised Remittance Scheme (LRS)

The Liberalized Remittance Scheme (LRS) is a scheme introduced by the Reserve Bank of India (RBI) that allows resident individuals in India to remit a certain amount of money abroad for various purposes without seeking prior approval from the RBI. The LRS aims to facilitate resident individuals to diversify their investment portfolio and engage in international financial transactions.

The LRS can be used for a variety of purposes, including travel, education, medical treatment, gifts, maintenance of relatives abroad, and investment in stocks and real estate outside India.

Under the Liberalised Remittance Scheme, all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 /- per financial year (April – March) for any permissible current or capital account transaction or a combination of both. Further, resident individuals can avail of foreign exchange facility for the purposes mentioned in Para 1 of Schedule III of FEM (CAT) Amendment Rules 2015, dated May 26, 2015, within the limit of USD 2,50,000 only.

Purposes under FEM (CAT) Amendment Rules, 2015, under which a resident individual can avail of foreign exchange facility:

Individuals can avail of foreign exchange facility for the following purposes within the LRS limit of USD 2,50,000 on financial year basis:

Private visits to any country (except Nepal and Bhutan)
Gift or donation
Going abroad for employment
Emigration
Maintenance of close relatives abroad
Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up
Expenses in connection with medical treatment abroad
Studies abroad
Any other current account transaction which is not covered under the definition of current account in FEMA 1999.

The AD bank may undertake the remittance transaction without RBI’s permission for all residual current account transactions which are not prohibited/ restricted transactions under Schedule I, II or III of FEM (CAT) Rules, 2000, as amended or are defined in FEMA 1999. It is for the AD to satisfy themselves about the genuineness of the transaction, as hitherto.

However, for the purposes i.e., Emigration, Expenses in connection with medical treatment abroad & Studies abroad, the individual may avail of exchange facility for an amount in excess of the limit prescribed under the Liberalised Remittance Scheme as provided in regulation 4 to FEMA Notification 1/2000-RB, dated the 3rd May, 2000 (here in after referred to as the said Liberalised Remittance Scheme) if it is so required by a country of emigration, medical institute offering treatment or the university, respectively:

LRS scheme for NRIs

The LRS scheme applies to the residents of India, and thus, the remittance takes place through a savings account. Non-Residential Indians are not supposed to have any savings accounts in Indian banks. Thus, they cannot remit funds from India, but they are permitted to transfer funds from NRO, NRE, and FCNR accounts abroad as per the regulations and requisite documentation:

They are permitted to transfer up to USD 10,000 from an NRO account.
No limitations apply to payments made from an NRE or FCNR account.
The Liberalised Remittance Scheme has made it simpler for Indian citizens to manage financial transactions abroad.
You can use the funds for debt repayment, education, and other needs. You can also invest outside of India, which is a great method of diversifying your investment portfolio.

Tax on Liberalised Remittance Scheme (LRS)

LRS- Remittance for	TCS rate with effect from 01.10.2023
	Exemption Limit	Rate
a) Education abroad If the amount being remitted out is a loan obtained from any approved financial institution.	7 Lakhs	0.5%
b) Education abroad if the remittance is out of own funds and not out of loans as mentioned in (a) above	7 Lakhs	0.5%
c) Medical treatment	7 Lakhs	5%
d) Any other such as gift, emigration, family maintenance, investments etc	7 Lakhs	20%
e) Purchase of overseas tour program package	Nil	5% till Rs. 7 lakhs. 20% Above Rs. 7 lakhs.

# 1/3rd reduced for Land value.

Form 15CA and Form 15CB

Conditions under New GST Rate for the Builders:

Form 15CA and 15CB which does not require RBI approval will NOT be required to be furnished by an individual for remittance.
List of payments of specified nature mentioned in Rule 37BB, which do not require submission of Forms 15CA and 15CB, has been expanded from 28 to 33 including payments for imports.
Form No.15CB will only be required for payments made to non-residents, which are taxable and if the payment exceeds Rs.5 lakh.

A person responsible for making a payment to a non-resident or to a foreign company has to provide the following details:

When payment made is below Rs 5 lakh: For such payments information is required to
be submitted in Part A of Form 15CA

When payment made exceeds Rs 5 lakh:

Following documents is required to be submitted:

Part B of Form 15CA has to be provided
Certificate in Form 15CB from an accountant
Part C of Form 15CA

When the payment made is not chargeable to tax under IT Act: Part D of Form 15CA is required to be submitted.

In the following cases, no submission of information is required:

The remittance is made by an individual and it does not require prior approval of Reserve Bank of India [as per the provisions of section 5 of the Foreign Exchange Management Act, 1999 (42 of 1999) read with Schedule III to the Foreign Exchange (Current Account Transaction) Rules, 2000] T
The remittance is of the nature specified in the list below:

Overall list of payments where no forms 15CA and 15CB are required are as follows (Rule 37BB):

S.No	Nature of Payment
1	Indian investment abroad -in equity capital (shares)
2	Indian investment abroad -in debt securities
3	Indian investment abroad-in branches and wholly owned subsidiaries
4	Indian investment abroad -in subsidiaries and associates
5	Indian investment abroad -in real estate
6	Loans extended to Non-Residents
7	Advance payment against imports
8	Payment towards imports-settlement of invoice
9	Imports by diplomatic missions
10	Intermediary trade
11	Imports below Rs.5,00,000-(For use by ECD offices)
12	Payment- for operating expenses of Indian shipping companies operating abroad.
13	Operating expenses of Indian Airlines companies operating abroad
14	Booking of passages abroad -Airlines companies
15	Remittance towards business travel.
16	Travel under basic travel quota (BTQ)
17	Travel for pilgrimage
18	Travel for medical treatment
19	Travel for education (including fees, hostel expenses etc.)
20	Postal Services
21	Construction of projects abroad by Indian companies including import of goods at project site
22	Freight insurance – relating to import and export of goods
23	Payments for maintenance of offices abroad
24	Maintenance of Indian embassies abroad
25	Remittances by foreign embassies in India
26	Remittance by non-residents towards family maintenance and savings
27	Remittance towards personal gifts and donations
28	Remittance towards donations to religious and charitable institutions abroad
29	Remittance towards grants and donations to other Governments and charitable institutions established by the Governments.
30	Contributions or donations by the Government to international institutions
31	Remittance towards payment or refund of taxes.
32	Refunds or rebates or reduction in invoice value on account of exports
33	Payments by residents for international bidding.

Parts of Form 15CA

The form is divided into four parts, to be filled based on the scenario that is prevalent at the time. The four parts are:

Part A

To be filled irrespective of whether taxable or not and the remittance or its aggregate does not exceed Rs. 5 lakh in a financial year.

Part B

To be filled when the Certificate under Section 195(2)/195 (3)/197 of the Income Tax Act has been obtained from the Assessing Officer.

Part C

To be filled when the remittance or its aggregate exceeds Rs. 5 lakh in a financial year and that remittance is chargeable to tax.

Part D

Is filled when as per the domestic laws, the remittance is not chargeable to tax.

Illustrations:

1. Arjun wants to get his heart surgery done at United Kingdom. Up to what limit Foreign Exchange can be drawn by him and what are the approvals required?

2. Mr. Rana, an Indian Resident individual desires to obtain Foreign Exchange for the following purposes:

(A) US$ 120,000 for studies abroad on the basis of estimates given by the foreign university.

(B) Gift Remittance amounting US$ 10,000.

Whether he can get Foreign Exchange and if so, under what condition(s)?

Remittance of Foreign Exchange for studies abroad: Foreign exchange may be released for studies abroad up to a limit of US $ 250,000 for the studies abroad without any permission from the RBI. Above this limit, RBI’s prior approval is required. Further proviso to Para I of Schedule III states that individual may be allowed remittances exceeding USD 250,000 based on the estimate received from the institution abroad. In this case since US $ 120,000 is the drawal of foreign exchange, so permission of the RBI is not required.

Gift remittance exceeding US $ 10,000: Under the provisions of Section 5 of FEMA 1999, certain Rules have been made for drawal of foreign exchange for current account transactions. Gift remittance is a current account transaction. Gift remittance exceeding US $ 250,000 can be made after obtaining prior approval of the RBI. In the present case, since the amount to be gifted by an individual, Mr. Rana is USD 10,000, there is no need for any permission from the RBI.

Declared for residential use to Regulatory Authority Part of a Residential Real Estate Project (RREP) where commercial apartment carpet area is <=15% of total

Partially Amortized Loan Calculator

RECENT POSTS

08 FebAllTaxation

GST Implications for Real Estate

The Indian real estate sector has complex Goods and Services Tax (GST) implications based on project and apartment type. This article summarizes GST rates and definitions for key real estate terms.

Residential Apartments face 5% GST (without input tax credit) if the following conditions are met:

Declared for residential use to Regulatory Authority
Part of a Residential Real Estate Project (RREP) where commercial apartment carpet area is <=15% of total

Commercial Apartments face 18% GST (with input tax credit)

Affordable Housing Units up to 60 sq.mts (645 sq.ft) in metro cities or 90 sq.mts (969 sq.ft) in other cities, with value <= 45 Lakhs face 1% GST (without input tax credit).

Real Estate Projects (REPs) refer to development of apartments for sale. Gross value of an apartment includes construction cost, land cost, preferential location charges, development charges, parking charges, etc.

When can resolution be sought under DRP?

The entry of international businesses into the Indian market not only expands the avenues for tax collection in the country but also underscores the need for a robust Revenue department capable of effectively addressing growing disputes. The Finance Bill of 2009 introduced an extra avenue to aid in the resolution of transfer pricing matters through the establishment of the Dispute Resolution Panel (DRP).

The DRP serves as an Alternative Dispute Resolution (ADR) mechanism specifically designed for addressing disputes pertaining to Transfer Pricing in International Transactions. Its establishment aims to ensure the prompt and equitable resolution of cases in a fair and just manner.

GST Rate for Builders for the supply of Residential or commercial projects:

Project Type	Rate of tax	ITC
Affordable Residential	1.5%*2/3=1%	No
Non-Affordable Residential	7.5%*2/3=5%	No
Pure Commercial	18%*2/3=12%	Available

# 1/3rd reduced for Land value.

GST Rate for Builders for the supply of Residential and commercial projects:

Project type	REP where Commercial Apartment is < =15% of Total Carpet Area		EP where Commercial Apartment is >15% of Total Carpet Area
	Rate of tax	ITC	Rate of tax	ITC
Affordable Residential	1.5%*2/3=1%	No	1.5%*2/3=1%	No
Non-Affordable Residential	7.5%*2/3=5%	No	7.5%*2/3=5%	No
Pure Commercial	7.5%*2/3=5%	No	18%*2/3=12%	Available

Conditions under New GST Rate for the Builders:

Do not avail of Input tax credit and the same report is ineligible in GSTR 3B
 GST has to be paid on the transfer of Development Rights under RCM by the
Builder
 At least 80% of Procurement should be bought from registered vendors other than
TDR, long-term lease premium, salami, FSI, electricity, high-speed diesel, motor
spirit, and natural gas.
 GST has to be paid @18% on purchases from an unregistered person when the
purchases fall less than 80% rule other than cement. For cement GST rate @ is 28%.

GST on Joint Development Agreement(JDA):

JDA for Builder Perspective:

Area Sharing Agreement

Nature of project	Rate of tax	Conditions
Sold units before completion certificate [CC] / Occupancy Certificate [OC]. Sale of Flats – GST levy	7.5%*2/3=5% (Forward Charge)	Amount to be collected from Customer. No ITC
Unsold Units after completion certificate [CC] / Occupancy Certificate [OC]. Sale of Immovable property, No GST levy. However, the same portion of amount to be paid for the Transfer of Development Rights	7.5%*2/3=5% (Reverse Charge)	It should be paid by the Builder from his own pocket. No ITC

JDA for Landowner Perspective:

Nature of project	Rate of tax	Conditions
Sold units before completion certificate [CC] / Occupancy Certificate [OC]. Sale of Flats – GST levy	7.5%*2/3=5% (Forward Charge)	Amount to be collected from Customer. ITC Available
Unsold Units after completion certificate [CC] / Occupancy Certificate [OC]. Sale of Immovable property, No GST levy. However, the same portion of amount to be paid for the TDR’s	NIL GST Levy	Treated as Immovable Property ITC to be reversed since the services are exempted
Development Rights which are to be paid by the Builder	NIL GST Levy	Exempted for Builder ITC is to be reversed since the services are exempted

ROI Calculator - Return on Investment

RECENT POSTS

Categories

29 DecAllTaxation

Safe harbour rules

SAFE HARBOUR RULES

To curb the rising frequency of transfer pricing audits and protracted disputes, the Finance (No.2) Act of 2009, effective from April 1, 2009, introduced a new provision, Section 92CB. This section stipulated that the determination of the arm’s length price under Section 92C or Section 92CA would be subject to safe harbor rules.

Through this amendment, the Indian government granted the Central Board of Direct Taxes (CBDT) the authority to formulate safe harbor rules. The term “safe harbor” was defined to encompass situations in which the income-tax authorities would acknowledge the transfer price declared by the assessee.

Benefits Of Safe Harbor Rules in India- To The Taxpayers And Revenue Authorities:

Advance information or knowledge about the range of profits or prices to qualify for SHR. This brings certainty in transactions.
Elimination of the possibility of litigation between the taxpayers and the revenue authorities.
Automatic approvals and self-assessment procedures.
Ease in compliance.
Reduction in compliance cost.

The Eligible Assessees under Safe Harbor Rules:

The eligible assessee under Safe Harbour Rules in India has been defined in Rule 10TB. The Board has now amended Rule 10TD(3B) to further extend the applicability of Safe Harbour Rules until Assessment Year 2023- 24.
The eligible assessee is as under:

An assessee who is engaged in providing software development services or information technology-enabled services or knowledge process outsourcing services, with insignificant risk, to a non-resident associated enterprises.
Who has made any intra-group loan
Who has provided a corporate guarantee
Who is engaged in providing contract research and development services wholly or partly relating to software development, with insignificant risk, to a foreign principal.
Who is engaged in manufacture and Export of core or Non-core Auto Components
Who is engaged in Low value-adding Intra-group Services

Eligible International Transaction Currently Subject To Safe Harbour Rules:

The salient features of the new Safe Harbour Regime are:

It has come into effect from 1st of April, 2017, i.e. A.Y. 2017-18 and Assessees eligible under the present safe harbour regime up to AY 2017-18 shall also have the right to choose the safe harbour option most beneficial to them.

The new safe harbour regime is available for transactions limited to Rs. 200 crore in provision of software development services, provision of information technologyenabled services, provision of knowledge process outsourcing services, provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs.
In respect of transactions involving provision of software development services and provision of information technology-enabled services, safe harbour margins have been reduced to peak rate of 18% from 22% in the previous regime.
In respect of transactions involving provision of knowledge process outsourcing services, a graded structure of 3 different rates of 24%, 21% and 18% has been provided, based on employee cost to operating cost ratio, replacing the single rate of 25% in the previous regime.
In respect of transactions involving provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs, safe harbour margins have been reduced to 24% from 30% and 29% respectively in the previous regime.
Risk spreads on intra-group loans denominated in foreign currency will be benchmarked to the 6-month London Inter-Bank Offer Rate (LIBOR) as on 30th September of the relevant year and on loans denominated in Indian Rupees to the 1- year SBI MCLR as on 1st April of the relevant year.
The safe harbour regime is optional to taxpayers.

29 DecAllTaxation

ADVANCE PRICING AGREEMENT (APA)

An APA, or Advance Pricing Agreement, is a pact between a taxpayer and a tax authority that establishes the transfer pricing methodology for the international transactions of the taxpayer in upcoming years. The chosen methodology is intended to be implemented over a specific timeframe, contingent upon the satisfaction of predefined terms and conditions referred to as critical assumptions.

Benefits of Advance Pricing Agreement:

The benefits Advance Pricing Agreement is explained in detail below:
a) APA is designed to help taxpayers by resolving actual or potential transfer pricing disputes cooperatively, as an alternative to the traditional examination process.
b) Advance Pricing Agreement programme strengthens the Government’s resolve to fostering a non-adversarial tax regime.
c) An Advance Pricing Agreement provides certainty concerning the tax outcome of the taxpayer’s international transactions
d) The Indian Advance Pricing Agreement scheme has been appreciated nationally and internationally for being able to address complex transfer pricing issues fairly and transparently.

Terms of Advance Pricing Agreement:

The Advance Pricing Agreement includes the following things:
a) The international transactions covered by the APA
b) The agreed transfer pricing methodology
c) Determination of Arm’s length price
d) Definition of any relevant terms
e) Critical assumption

Different types of APAs

An APA can be unilateral, bilateral, or multilateral

Unilateral APA: an APA that involves only the taxpayer and the tax authority (CBDT) of the country where the taxpayer is located.
Bilateral APA (BAPA): an APA that involves the taxpayer, associated enterprise (AE) of the taxpayer in the foreign country, tax authority of the country where the taxpayer is located, and the foreign tax authority.
Multilateral APA (MAPA): an APA that involves the taxpayer, two or more AEs of the taxpayer in different foreign countries, tax authority of the country where the taxpayer is located, and the tax authorities of AEs.

Eligibility for Advance Pricing Agreement

The following persons are eligible to apply for the Advance Pricing Agreement:

The person who has entered into an international transaction (rollback)
The person proposing to undertake an international transaction

The Advance Pricing Agreement (APA) is valid for a period specified in APA, but not exceeding 5 consecutive financial years. APA can be extended or renewed for a further period of up to 5 years

Fee for filing an Advance Pricing Agreement

Document

S.No	Amount Of International Transaction	Fee Details
1	Amount	Rs.10 Lakh
2	Amount	Rs.15 Lakh
3	Amount	Rs.20 Lakh

Pre-Filing Consultation for APA

The person proposing to enter into an APA have to make an application in writing for a prefiling consultation to the Director-General of Income Tax (DGIT). On receipt of the request, the team will hold pre-filling consultation with the person. The component authority in India or his representative will be associated in pre-filling consultation involving bilateral or multilateral agreement The pre-filing consultation includes the following things:

Determine the scope of the agreement
Identify the transfer pricing issues
Determine the suitability of international transaction for the agreement
Discuss broad terms of the agreement

The taxpayer who desires to enter into an Advance Pricing Agreement has to furnish an application in a prescribed format along with the requisite fee. The request for renewal of Advance Pricing Agreement can be made by the taxpayer using the same procedure as outlined above

Cancellation of the APA

An Advance Pricing Agreement can be cancelled on account of the following:

Failure to comply with terms of APA
Failure to file an annual compliance report
Material errors in an annual compliance report
No consensus on the terms of the revised Advance Pricing Agreement
The effect cannot be given to rollback provision of an APA due to failure on the part of the applicant

Important points to be considered:

Each year Annual Compliance Report in Form No. 3CEF needs to be filed before DGIT (IT)

The APA can be cancelled/revised if critical assumptions are violated or conditions are not met
If the Compliance Audit results in a finding that the assessee has failed to comply with the terms of the agreement, the agreement can be cancelled
Non filing of Compliance Report or the report contains material errors, it may result in cancellation of the agreement

15 DecAllCompliance

Determining a Company’s Tax Residency Through Place of Effective Management [PoEM]

Determining a Company's Tax Residency Through Place of Effective Management [PoEM]

The Place of Effective Management (PoEM) is a crucial factor in determining the residential status of companies established in foreign jurisdictions, particularly in the context of tax treaties involving India. This criterion holds significant importance and serves as a pivotal element in preventing occurrences of double taxation.

According to section 6(3) of the Income-tax Act, 1961, a company is deemed a resident of India if it meets either of the following conditions:

a) It qualifies as an Indian company.
b) Its place of effective management is situated in India.

In essence, PoEM acts as a decisive factor in delineating the tax obligations of foreign-based companies, ensuring clarity and fairness in the global taxation landscape.

The term “Place of Effective Management” (PoEM) refers to the pivotal location where crucial management and commercial decisions essential for the overall functioning of an entity are made.

Commercial decisions encompass significant choices such as:

a) Initiating a major manufacturing facility
b) Ceasing a substantial product line.

For Income Tax purposes, the determination of residential status must be conducted annually, necessitating the assessment of PoEM on a yearly basis. However, it’s noteworthy that these PoEM provisions do not extend to companies with a turnover or gross receipts of Rs 50 crore or less in a financial year.

The guiding principles for establishing PoEM include:

Active Business Outside India (ABOI) Test
Key Management Test
Head Office Test
Miscellaneous

These principles collectively aid in pinpointing the precise location where decisions crucial to the entity’s operations are formulated.

1) Active Business Outside India (ABOI) test

The Active Business Outside India (ABOI) test determines the Place of Effective Management (PoEM) of a company. If a company engages in active business outside India, its PoEM is presumed to be outside India when the majority of its board meetings are conducted abroad. For a company to qualify as having ABOI, it must meet the following criteria:

a) Passive Income Threshold:

The company’s passive income, comprising income from the exchange of goods with associated enterprises and earnings from royalty, dividend, capital gains, interest, or rental income, should not exceed 50% of its total income.

b) Asset Location:

Less than 50% of its total assets should be situated in India. For depreciable assets, the value is calculated as the average of the Written Down Value (WDV) at the beginning and end of the financial year. If asset valuation is not required for tax purposes, the value will be based on the company’s books of account.

c) Employee Distribution:

Less than 50% of its total number of employees should be located in India or be residents of India. The total number of employees is determined by averaging the count at the beginning and end of each year.

d) Payroll Expenses:

The payroll expenses incurred on these employees should be less than 50% of the company’s total payroll expenditure. The term ‘payroll’ encompasses salaries, wages, bonuses, and all other employer-paid employee costs.

Note: These ratios are to be evaluated based on the average of the data from the previous year, with consideration given to the two years preceding it.

2) Key Management Test

The assessment of Place of Effective Management (PoEM) for companies within India involves a two-stage evaluation when the Active Business Outside India (ABOI) is not a factor:

i) Identification of individuals responsible for pivotal management and commercial decisions encompassing the entire company,
ii) Determination of the location where these decisions are formulated.
It is crucial to note that, in determining a company’s PoEM, the emphasis lies more on the place where commercial decisions are made rather than where they are executed.
The critical decisions steering the company can emanate from:
(i) The board of directors,
(ii) An executive committee duly authorized by the board, or
(iii) Senior management acting within the bounds of board authorization.

3) Head Office Test

The assessment of a company’s Place of Effective Management (PoEM) hinges significantly on the strategic positioning of its Head Office. Several key considerations come into play when determining the location of a company’s head office:

i) In cases where the senior management and support staff are centralized in a single location, that specific place becomes the designated head office of the company.
ii) For companies adopting a more decentralized structure, where senior management members are dispersed across various locations, the head office is identified as the primary location where these senior executives are based. This could also be the place they habitually return to after traveling or where they convene to make pivotal decisions crucial to the company’s operations.
iii) If the senior management is spread across different locations but engages in meetings through remote means such as telephone or video conferencing, the head office is then determined to be the location where the highest echelon of management, such as the Managing Director or Financial Director, is situated.
iv) In instances where a company’s decentralization is so extensive that pinpointing a specific head office becomes impractical, the location of the head office becomes irrelevant in determining the PoEM.

It’s important to note that while a company may have multiple places of management, there can only be one effective place of management in any given case. The determination of PoEM remains contingent upon the unique facts and circumstances of each situation.

4) Miscellaneous Considerations

In cases where the factors mentioned earlier do not distinctly establish the Place of Effective Management (POEM), additional secondary factors come into play. These include:

i) Location where the primary activities of the company are conducted; or
ii) Location where the company’s accounting records are maintained.

These supplementary criteria contribute to a comprehensive assessment, offering further insights into determining the POEM when the primary factors may not yield a clear conclusion.

Example 1:

IQL INC., a sourcing entity for a leading Indian multinational group, is incorporated in the United States as a 100% subsidiary of VQL Ltd, an Indian company. The sole assets of the company are warehouses located in the USA, and all employees are based in the country. Over the past three years, the company’s total income can be categorized as follows:

i) 30% of income originates from transactions where purchases are made from non-associated enterprises and subsequently sold to associated enterprises.
ii) Another 30% of income is derived from transactions involving purchases from associated enterprises and subsequent sales to associated enterprises.
iii) An additional 30% of income is generated through transactions where purchases are made from associated enterprises and sold to non-associated enterprises.
iv) The remaining 10% of income is in the form of interest.

Interpretation:

In this scenario, passive income constitutes 40% of the company’s total income. This passive income is comprised of:

i) 30% from transactions where both the purchase and sale involve associated enterprises.
ii) 10% from interest. IQL INC. fulfills the initial requirement of the active business test outside India. Given that neither assets nor employees of IQL INC. are situated in India, the company satisfies the other criteria of the test. Therefore, it can be concluded that the company is actively engaged in business outside India.

Example 2:

In the context of IQL INC, we revisit the scenario presented in Example 1, but with a distinctive element. IQL INC boasts a workforce of 50 employees, with the majority—47 employees—dedicated to managing the company’s warehouse, storekeeping, and accounts, all stationed in the USA. Meanwhile, the key leadership roles, including the Managing Director (MD), Chief Executive Officer (CEO), and sales head, are based in India. The overall annual payroll expenditure for these 50 employees amounts to INR 5 crore, with INR 3 crore specifically allocated to the MD, CEO, and sales head.

Interpretation:

Upon analysis, it is evident that the initial condition of the active business test is met, given that only 40% of IQL INC’s total income is passive. Moreover, over 50% of the workforce operates outside India, and all company assets are situated abroad. However, a critical point arises as the payroll expenditure related to the MD, CEO, and sales head—who are Indian residents—surpasses 50% of the total payroll expenditure. This specific factor leads to the conclusion that, despite satisfying certain criteria, IQL INC cannot be deemed as actively engaged in business outside India.

Example 3:

The fundamental details align with those in Example 1. Adding to these, it’s noteworthy that every director at IQL INC is a resident of India. In the pertinent previous year, the Board of Directors convened for 5 meetings, with two in India and three abroad—specifically, two in the USA and one in the UK.

Interpretation:

Scrutinizing the facts as laid out in Example 1, it is evident that IQL INC actively conducts business beyond the borders of India. The preponderance of board meetings transpiring outside India implies that the Presumptive Place of Effective Management (POEM) for IQL INC is to be considered as being outside India.

Example 4:

The circumstances mirror those outlined in Example 3, with the additional revelation that the Assessing Officer has confirmed a crucial aspect: while the senior management team at IQL INC signs all contracts, decisions on contracts exceeding INR 10 lakh require a recommendation from IQL INC to be submitted to VQL Ltd. It is VQL Ltd that ultimately decides whether to accept or reject these contracts. Notably, more than 99% of contracts during the previous year exceeded the INR 10 lakh threshold, and this pattern has persisted over several years.

Interpretation:

These details strongly indicate a substantial influence from the parent company, VQL Ltd, over the effective management of IQL INC. Consequently, even though IQL INC actively conducts business outside India and conducts a majority of its board meetings abroad, it is suggested that the Place of Effective Management (POEM) for IQL INC should not be presumed to be outside India in such instances. The preeminent role played by VQL Ltd in decision-making implies a significant influence that shapes the POEM considerations for IQL INC.

Example 5:

An Indian multinational conglomerate operates through its local holding company, A Co., situated in country X. A Co. oversees 100% downstream subsidiaries, namely B Co. and C Co. in country X, and D Co. in country Y. A Co.’s income is derived exclusively from dividends and interest generated by investments in its subsidiaries. The Place of Effective Management (POEM) for A Co. is located in India and is administered by the ultimate parent company of the group. Notably, subsidiaries B Co., C Co., and D Co. are actively involved in business operations beyond India, with board meetings conducted in country X and Y for B Co. and D Co., respectively.

Interpretation:

Merely having the POEM of an intermediate holding company in India does not automatically imply that the POEM of its subsidiaries shares the same jurisdiction. It is imperative to individually assess each subsidiary. In the presented scenario, despite A Co.’s POEM being in India, the subsidiaries B Co., C Co., and D Co. operate independently, engaging in active businesses outside India. The majority of their board meetings also take place beyond India. Consequently, the presumption is that the POEM of B Co., C Co., and D Co. lies outside the borders of In

Example 6:

VDKS Inc., a Swedish company with its headquarters in Stockholm, lacks a permanent establishment in India. However, it established a liaison office in Mumbai in April 2023, adhering to RBI guidelines. The purpose of this office is to oversee day-to-day business operations in India, promote awareness about the company’s products, and explore potential opportunities. The liaison office is involved in making decisions related to routine operations and handles support functions that are preparatory and auxiliary. Nonetheless, significant management and commercial decisions remain the prerogative of the Board of Directors in Sweden.

Interpretation:

In this scenario, VDKS Inc. being a foreign company would be considered a resident in India for the Previous Year (P.Y.) 2023-24 only if its place of effective management in that year is in India. Despite having a liaison office in India, the location where decisions pertaining to day-to-day operations and preparatory or auxiliary support functions are made does not impact the determination of the place of effective management. Consequently, VDKS Inc., as a foreign company, maintains its non-resident status for the Assessment Year (A.Y.) 2024-25, given that its place of effective management remains outside India in the P.Y. 2023-24.

15 DecAllTaxation

NRI Income Tax: A Comprehensive Guide for Non-Resident Indians

The classification of residential status plays a crucial role in determining the income tax liabilities of Non-Resident Indians (NRIs) in India. The tax implications vary depending on whether an individual is categorized as a ‘resident’ or an ‘NRI.’ Residents are subject to taxation on their global income in India, whereas NRIs are only taxed on income earned or accrued within the country.

However, significant changes were introduced by the Finance Act of 2020 to the residency provisions, particularly impacting Indian Citizens/Persons of Indian Origin visiting India. This amendment introduced the concept of ‘Resident but Not Ordinarily Resident’ (RNOR), contingent upon specific conditions:

Income Threshold: Total income, excluding foreign income, must be Rs 15 lakh or more.
Stay Duration: The individual should have stayed in India for more than 120 days but less than 182 days in the previous year.
Four-Year Criterion: The person must have stayed in India for 365 days or more in the four years preceding the previous year.

Prior to this amendment, such individuals were categorized as non-residents. The change to RNOR status may result in the loss of benefits under Double Taxation Avoidance Agreements (DTAA), an expanded scope of total income for taxability, and the forfeiture of various exemptions.

It’s crucial to note that under this amendment, an individual staying for more than 182 days is deemed a resident, irrespective of the income level in the previous year. This modification has far-reaching implications, requiring careful consideration of the potential loss of DTAA benefits, increased taxable income scope, and the elimination of previously granted exemptions.

Deemed Residency Status Introduced in Finance Act 2020

The Finance Act of 2020 ushered in a significant paradigm shift with the introduction of the ‘Deemed Residency’ status. Under this provision, individuals who are citizens of India and earn more than Rs 15 lakh from sources within the country will be considered residents of India. This classification applies specifically to those individuals who are not obligated to pay taxes in any other nation.

Effective from the financial year 2020-21, individuals falling under the category of deemed residents will be designated as “Resident but Not Ordinarily Resident” (RNOR). This legislative amendment was implemented to address the tax implications of Indian citizens whose income is not subject to taxation in any foreign jurisdiction.

Example 1:

Napoleon, an American tourist, embarks on his first journey to India on June 17, 2023, creating a scenario for assessing his residential status during the subsequent assessment year.

Residential Status Overview:

To ascertain Napoleon’s residential status for the assessment year 2024-25, we delve into his presence in India during the preceding years, a crucial determinant according to tax regulations.

Previous Years Analysis:

2023-24: Napoleon’s stay in India during this period spans 105 days, failing to meet the basic conditions for residency.
2022-23: Nil presence in India.
2021-22, 2020-21, 2019-20: Absence in India during these years.

Residential Status Determination:

Given his limited stay in India in the previous year 2023-24, Napoleon falls under the non-resident category for the assessment year 2024-25. The foundational residency conditions remain unmet.

Consideration for Indian Origin and Income:

Even if Napoleon is a person of Indian origin and earns INR 16 lakhs from Indian sources, the non-resident status persists. To transition to a resident but not ordinarily resident, a minimum stay of 120 days in the previous year and 365 days in the four immediately preceding years is required. As Napoleon’s stay in India during the P.Y. 2023-24 falls short of the 120-day threshold, his non-resident status for A.Y. 2024-25 remains unchanged.

Conclusion:

In conclusion, Napoleon’s residential status for the assessment year 2024-25 remains non-resident, as the criteria for residency, including the requisite stay duration, are not met.

Example 2:

Miss Vaishnavi made a payment of 6000 USD to Mr. Kailesh, a seasoned management consultant practicing in Texas, specializing in project financing. Notably, Mr. Kailesh is a nonresident, and the consultancy services pertain to a project in India.

Taxability of Non-Resident's Income:

According to taxation norms, a non-resident individual is liable for taxation in India only if the income is received outside India and accrues, arises, or is deemed to accrue or arise within the Indian territory.

Deemed Accrual of Income in India:

Under section 9, income deemed to accrue or arise in India encompasses various categories, including fees for technical services. This category broadly includes compensation for providing managerial, technical, or consultancy services. Consequently, the payment made to a management consultant for project financing falls under the umbrella of “fees for technical services.”

Applicability to the Case:

In the present scenario, given that the consultancy services were utilized for a project situated in India, the payment received by Mr. Kailesh, despite being a non-resident located in Texas, is subject to taxation in India. This is because the income is deemed to accrue or arise within the Indian jurisdiction.

Conclusion:

In conclusion, the payment made to Mr. Kailesh is chargeable to tax in India as per the provisions outlined in section 9. The geographical location of the recipient does not exempt the income from taxation when the services are utilized within the Indian territory. The taxation framework ensures that income generated from services contributing to Indian projects is appropriately subject to taxation in India, even if the recipient is a non-resident.

Special Provisions for Investment Income

Taxation for NRIs on Certain Indian Assets

When Non-Resident Indians (NRIs) choose to invest in specific Indian assets, they are subject to a tax rate of 20% on the income generated from these investments.
Exemption for NRIs with Only Special Investment Income
In cases where an NRI has earned income exclusively from special investments during the financial year and Tax Deducted at Source (TDS) has already been deducted, filing an Income Tax Return (ITR) is not mandatory for such individuals.
Qualified Investments for Special Treatment
The special treatment applies to income originating from Indian assets acquired in foreign currency. This encompasses a range of investments that are eligible for the unique taxation rate of 20% on the generated income.

NOTE:

Please note that no deductions under Section 80 are applicable when calculating investment income.
A special provision concerning Long-Term Capital Gains (LTCG) stipulates that, in the case of gains arising from the sale or transfer of foreign assets, the benefits of indexation and deductions under Section 80 are not applicable.
However, there exists an opportunity for exemption under Section 115F if the profit generated is reinvested into specific categories of assets referred to as “Special Assets.” These include:

Shares of an Indian company
Debentures of an Indian public company
Deposits with banks and Indian public companies
Central Government securities
National Savings Certificate (NSC) VI and VII issues

By reinvesting the profit into any of these designated Special Assets, one can qualify for an exemption, offering a strategic approach to managing Long-Term Capital Gains in the context of foreign asset transactions.

22 NovAllCorporate Law

SIGNIFICANT BENEFICIAL OWNER (SBO): A Comprehensive Overview

Governing Laws:

Section 90 of the Companies Act, 2013
Companies (Significant Beneficial Owners) Rules 2018
Companies (Significant Beneficial Owners) Second Amendment Rules, 2019

Overview of Section 90:

Section 90 and associated Rules were notified on June 13, 2018.
Individuals must file a Declaration of SBO (Form BEN-1) within 90 days of Rule commencement (by September 12, 2018).
Companies must file the return of SBO (Form BEN-2) within 30 days of Form BEN-1 declaration (by October 12, 2018).
E-form BEN-2 deployment on July 1, 2019, with filing deadline on July 31, 2019.

Criteria for Significant Beneficial Owner (SBO) under Section 90:

An individual, acting alone or together, directly or indirectly, must meet one of the following criteria in a reporting company:

Holds not less than 10% of shares.
Holds not less than 10% of voting rights.
Has the right to receive or participate in not less than 10% of total distributable dividends.
Has the right to exercise or actually exercises significant influence or control (at least 20% of total share capital or business decisions).

Direct Holding:

Individual’s name appears in the Register of Members.
Declaration in Form MGT-5 must be made to the reporting company.

Indirect Holding:

Individual’s name is not in the Register of Members.
Criteria for indirect holding include:
- Holding majority stake in a corporate member.
- Being the Karta of a Hindu Undivided Family.
- Being a partner or holding majority stake in a partner entity for partnership members.
- Being a trustee, beneficiary, or author/settlor for trust members.
- Holding specific positions for Pooled Investment Vehicle members.

2. Hindu Undivided Family (HUF) Structure:

If the Member of the Reporting Company is a Hindu Undivided Family (HUF) represented by its Karta, the individual serving as the Karta of the HUF falls under the ambit of Significant Beneficial Owner (SBO).

3. Partnership Entity Involvement:

In scenarios where the Member of the Reporting Company is a Partnership Entity, the individual is considered an SBO if they:

Are a partner in the partnership.
Hold a majority stake in the body corporate, which is a partner within the partnership entity.
Possess a majority stake in the ultimate holding company of the body corporate, which is a partner within the partnership entity.

4. Trust Structure Considerations:

For cases where the Member of the Reporting Company is a Trust, the individual is classified as an SBO based on their role in the trust:

If the individual is a trustee, in the case of a Discretionary Trust or a Charitable Trust.
If the individual is a beneficiary, in the case of a Specific Trust.
If the individual is the author or settlor, in the case of a Revocable Trust.

These provisions ensure that individuals holding key roles in various organizational structures, such as HUFs, partnership entities, and trusts, are identified and treated as Significant Beneficial Owners in accordance with Section 90 of the Companies Act, 2013.

5. Involvement with Pooled Investment Vehicles:

If the Member of the Reporting Company is either:

A Pooled Investment Vehicle (e.g., Mutual Fund, Venture Capital Fund), or
An Entity Controlled by the Pooled Investment Vehicle,

and it is based in a member state of the Financial Action Task Force (FATF) on Money Laundering, with the regulator of the securities market in that member state being a member of the International Organization of Securities Commissions (IOSCO), then certain individuals are identified as Significant Beneficial Owners (SBOs). For individuals related to the Pooled Investment Vehicle:

If the individual serves as a General Partner,
If the individual is designated as an Investment Manager,
If the individual holds the position of CEO when the Investment Manager of the pooled vehicle is a Body Corporate or a Partnership Entity.

Reporting Company Definition:

A Reporting Company, as per section 2(20) of the Companies Act, 2013, is a company obligated to comply with the provisions of Section 90 and identify Significant Beneficial Owners. This includes causing compliance with the relevant provisions related to SBOs.

Significant Influence Clarification:

Significant Influence, in this context, refers to the power to participate, either directly or indirectly, in the financial and operating policy decisions of the reporting company. It is distinct from control or joint control of these policies. Note: Provisions of Significant Beneficial Owner (SBO) are triggered only by Indirect holding or a combination of Direct and Indirect holding.

PROCEDURAL REQUIREMENTS FOR SIGNIFICANT BENEFICIAL OWNER (SBO) UNDER SECTION 90 & RULES:

Every company is obligated to take necessary measures to identify individuals deemed as Significant Beneficial Owners (SBOs) in relation to the company. The company must then compel these identified individuals to submit a declaration in Form BEN-1 to the reporting Company.

The SBO is required to submit Form BEN-1 within 90 days from the initiation of the Companies (Significant Beneficial Owners) Second Amendment Rules, 2019. Additionally, if an individual attains SBO status subsequently, they must file the Form within 30 days of acquiring such ownership or any relevant changes.

Upon receiving the aforementioned declaration, the reporting company must expeditiously file a return in Form No. BEN-2 with the Registrar within 30 days, accompanied by the requisite fees. Simultaneously, the company is mandated to maintain a comprehensive register of Significant Beneficial Owners (SBO) in Form No. BEN-3.

Without prejudicing the overall procedural framework outlined above, each reporting company must issue notices, specifically in Form No. BEN-4, to any individual (regardless of their membership status within the company) in cases where the company believes or has reasonable cause to believe:

The individual is a Significant Beneficial Owner (SBO) of the company.
The individual possesses knowledge of the identity of an SBO or another person likely to have such knowledge.
The individual has been an SBO of the company at any time during the immediately preceding last three years from the date the notice is issued.

Additionally, should the individual in question not be enlisted as a Significant Beneficial Owner with the company, as stipulated in section 90, they are obligated to provide the necessary details within 30 days upon receiving the notice from the reporting company. Adhering to these procedural measures and utilizing the prescribed forms is essential for companies and Limited Liability Partnerships (LLPs) to guarantee conformity with the regulations delineated in Section 90 and the corresponding rules.

S.No	Particulars	Company	LLP	Due Date
01	Declaration by individual	Form BEN-1	LLP-BEN-1	Within 30 days of acquiring such significant vebeficial ownership or any chnage therein
02	Return to the Registrar in respect of declaration under section 90	Form BEN-2	LLP-BEN-2	30 days from the date of receipt of such declaraion
03	Register of significant beneficial owners (SBO)	Form BEN-3	LLP-BEN-3	--
04	Notice by the Company	Form BEN-4	LLP-BEN-4	--