Tax planning with respect to amalgamation and mergers

Under Income Tax Act, 1961 Section 2(1B) of Income Tax Act defines „amalgamation‟ as
merger of one or more companies with another company or merger of two or more companies to
from one company in such a manner that:-
1. All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation.
2. All the liabilities of the amalgamating company or companies immediately before the
amalgamation becomes the liabilities of the amalgamated company by virtue of the
amalgamation
3. Shareholders holding at least three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamated company or its nominee) becomes the shareholders of the amalgamated
company by virtue of the amalgamation.
(Example: Say, X Ltd merges with Y Ltd in a scheme of amalgamation and immediately
before the amalgamation, Y Ltd held 20% of shares in X Ltd, the above mentioned
condition will be satisfied if shareholders holding not less than 75% in the value of
remaining 80% of shares in X Ltd i.e. 60% thereof, become shareholders in Y Ltd by
virtue of amalgamation)

The motive of giving this definition is that the benefits/concession under Income Tax Act, 1961
shall be available to both amalgamating company and amalgamated company only when all the
conditions, mentioned in the said section, are satisfied. „Amalgamating company‟ means
company which is merging and „amalgamated company‟ means the company with which it
merges or the company which is formed after merger.
However, acquisition of property of one company by another is not „amalgamation‟.

Income Tax Act defines „amalgamation‟ as merger of one or more companies with another
company or merger of two or more companies to from one company. Let us take an example of
X Ltd and Y Ltd. Here following situations may emerge:-

(a) X Ltd Merges with Y Ltd. Thus X Ltd goes out of existence. Here X Ltd is
Amalgamating Company and Y Ltd is Amalgamated Company.

(b) X Ltd and Y Ltd both merges and form a new company say, Z Ltd. Thus both X Ltd
and Y Ltd goes out of existence and form a new company Z Ltd. Here X Ltd and Y
Ltd are Amalgamated Company and Z Ltd is Amalgamated Company.

Tax Benefits in case of Amalgamation and merger

If an amalgamation takes place within the meaning of section 2(1B) of the Income Tax Act,
1961, the following tax reliefs and benefits shall available:-

1. Tax Relief to the Amalgamating Company:

 a) Exemption from Capital Gains Tax [Sec. 47(vi)]: Under section 47(vi) of the Income-
tax Act, capital gain arising from the transfer of assets by the amalgamating companies to
the Indian Amalgamated Company is exempt from tax as such transfer will not be
regarded as a transfer for the purpose of Capital Gain.

b) Exemption from Capital Gains Tax in case of International Restructuring [Sec.

47(via)]: Under Section 47(via), in case of amalgamation of foreign companies, transfer of
shares held in Indian company by amalgamating foreign company to amalgamated foreign
company is exempt from tax, if the following two conditions are satisfied:

c) At least twenty-five per cent of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign company, and
d) Such transfer does not attract tax on capital gains in the country, in which the
amalgamating company is incorporated

2. Tax Relief to the shareholders of an Amalgamating Company:

a. Exemption from Capital Gains Tax [Sec 47(vii)]: Under section 47(vii) of the Income-
tax Act, capital gains arising from the transfer of shares by a shareholder of the
amalgamating companies are exempt from tax as such transactions will not be regarded
as a transfer for capital gain purpose, if:
 The transfer is made in consideration of the allotment to him of shares in the
amalgamated company; and
 Amalgamated company is an Indian company.

3. Tax Relief to the Amalgamated Company:

a) Carry Forward and Set Off of Accumulated loss and unabsorbed depreciation of the
amalgamating company [Sec. 72A]: Section 72A of the Income Tax Act, 1961 deals
with the mergers of the sick companies with healthy companies and to take advantage of
the carry forward of accumulated losses and unabsorbed depreciation of the amalgamating
company. But the benefits under this section with respect to unabsorbed depreciation and
carry forward losses are available only if the followings conditions are fulfilled:-
 There should be an amalgamation of – (a) a company owning an industrial
undertaking (Note 1) or ship or a hotel with another company, or (b) a banking
company referred in section 5(c) of the Banking Regulation Act, 1949 with a
specified bankNote 2), or (c) one or more public sector company or companies
engaged in the business of operation of aircraft with one or more public sector
company or companies engaged in similar business.
 The amalgamated company should be an Indian Company.
 The amalgamating company should be engaged in the business, in which the
accumulated loss occurred or depreciation remains unabsorbed, for 3 years or more.
 The amalgamating company should held continuously as on the date of
amalgamation at least three-fourth of the book value of the fixed assets held by it
two years prior to the date of amalgamation.
  The amalgamated company holds continuously for a minimum period of five years
from the date of amalgamation at least three-fourths in the book value of fixed assets
of the amalgamating company acquired in a scheme of amalgamation
 The amalgamated company continues the business of the amalgamating company
for a minimum period of five years from the date of amalgamation.
 The amalgamated company fulfils such other conditions as may be prescribed to
ensure the revival of the business of the amalgamating company or to ensure that the
amalgamation is for genuine business purpose.

b) Expenditure on scientific research [Sec. 35(5)]: When an amalgamating company

transfers any asset represented by capital expenditure on the scientific research to the
amalgamated Indian company in a scheme of amalgamation provisions of section 35 shall
be applicable-
 Unabsorbed expenditure on scientific research of the amalgamating company will be
allowed to be carried forward and set off in the hands of the amalgamated company,
 If such asset ceases to be used in the previous year for scientific research related to
the business of amalgamated company and is sold by the amalgamated company the
sale price to the extend of cost of asset shall be treated as business income and the
excess of sale price over the cost shall be subject to the provisions of capital gain.

c) Amortization of expenditure in case of Amalgamation [Sec. 35DD]: Under Sec 35DD

for expenditure incurred in connection with the amalgamation the assessee shall be
allowed a deduction of an amount equal to one-fifth of such expenditure for each of the
five successive previous years beginning with the previous year in which the
amalgamation takes place.

d) Treatment of preliminary expenses [Sec. 35D(5)]: When and amalgamating company

merges with an amalgamated company under a scheme of amalgamation, the amount of
preliminary expenses of the amalgamating company to the extend not yet written off shall
be allowed as deduction to the amalgamated company in the same manner as would have
been allowed to the amalgamating company.

e) Expenditure for obtaining a licence to operate telecommunication services [Sec.

35ABB(6)]: Where in a scheme of amalgamation, the amalgamating company sells or
otherwise transfer its licence to the amalgamated company (Being an Indian Company),
the provisions of Section 35ABB which were applicable to the amalgamating company
shall become applicable in the same manner to the amalgamated company, consequently:
 The expenditure on acquisition on license, not yet written off, shall be allowed to the
amalgamated company in the same number of balance installments.
 Where such licence is sold by the amalgamated company, the treatment of the
deficiency/surplus will be same as would have been in the case of amalgamating
company.

f) Treatment of capital expenditure on family planning [U/S 36(1)(ix)]: If Asset

representing capital expenditure on family planning is transferred by the amalgamating
company to the amalgamated company under a scheme of amalgamation, such
 expenditure shall be allowed as deduction to the amalgamated company in the same
manner as would have been allowed to the amalgamating company.

g) Treatment of bad debts [Sec. 36(1)(vii)]: When due to amalgamation debts of the
amalgamating company has been taken over by amalgamated company, and subsequently,
such debts turn out to be bad, it shall be allowed as deduction to the amalgamated
company.

Double Taxation Treaties

To finance the welfare and the administrative expenditure, governments around the world
impose certain taxes on their subjects.

In cases, where cross country economic activity is carried out, it is a tricky affair to identify and
justify the appropriate jurisdiction of tax authorities. In order to mitigate the hardships of
multiple jurisdictions, the Governments enter into bilateral arrangements, which are commonly
denoted as “Double Taxation Avoidance Agreements”

Double Taxation Avoidance Agreements

DTAA refers to an accord between two countries, aiming at elimination of double taxation.
These are bilateral economic agreements wherein the countries concerned assess the sacrifices
and advantages which the treaty brings for each contracting nation. It would promote exchange
of goods, persons, services and investment of capital among such countries.

Indian Government is actively pushing DTAA negotiations with several countries to help its
residents in understanding their tax jurisdictions and accountability towards the appropriate
authorities. So far India has signed DTAA with 81 countries and discussion is on with many
others. The natures of DTAA‟s entered by India are greatly diverse in their nature and contents.

Objectives
DTAA treaties must help in avoiding and alleviating the burden of double taxation prevailing in
the international arena. The tax treaties must clarify the taxpayer to know with certainty of his
potential tax liability in the country, where he is carrying on economic activities. Tax Treaties
must ensure that there is no prejudice between foreign tax payers who has permanent enterprise
in the source countries and domestic tax payers of such countries. Treaties are made with the aim
of allocation of taxes between treaty nations and the prevention of tax avoidance. The treaties
must also ensure that equal and fair treatment of tax payers having different residential status,
resolving differences in taxing the income and exchange of information and other details among
treaty partners.

Classification
Double taxation avoidance agreements may be classified into comprehensive agreements and
limited agreements based on the scope of such agreements. Comprehensive Double Taxation
Avoidance Agreements provide for taxes on income, capital gains and capital investments
whereas Limited Double Taxation Avoidance Agreements denote income from shipping and air
transport or legacy and gifts. Comprehensive agreements ensure that the taxpayers in both the
countries would be treated on equitable manner in respect of the issues relating to double
taxation.

Active & Passive Income

Passive Income refers to income derived from investment in tangible / intangible assets eg.
Immovable property, dividend, interest, royalties, capital gains, pensions etc. Active income is
the income derived from carrying on active cross border business operations or by personal effort
and exertion in case of employment eg. Business profits, shipping, air transport, employment etc.

Current Scenario in India

The Indian Income Tax Act, 1961 administrates the taxation of income accrued in India. As per
Section 5 of the Income Tax Act, 1961 residents of India are liable to tax on their global income
and non-residents are taxed only on income that has its source in India. The Provisions of DTAA
override the general provisions of taxing statute of a particular country. It is now well settled that
in India the provisions of the DTAA override the provisions of the domestic statute. Moreover,
with the insertion of Sec.90 (2) in the Indian Income Tax Act, it is clear that assessee have an
option of choosing to be governed either by the provisions of particular DTAA or the provisions
of the Income Tax Act, whichever are more beneficial. Further if Income tax Act itself does not
levy any tax on some income then Tax Treaty has no power to levy any tax on such income.
Section 90(2) of the Income Tax Act recognizes this principle.

Relief to the tax payer

In order to prevent the hardship of double taxation, relief is provided to the tax payer. Such relief
is provided by two ways:

Bilateral Relief
Bilateral relief is provided in section 90 and 90A of the Indian Income Tax Act. Bilateral relief is
provided through following methods:
(i) Exemption Method
One method of avoiding double taxation is for the residence country to altogether exclude
foreign income from its tax base. The country of source is then given exclusive right to tax such
incomes. This is known as complete exemption method and is sometimes followed in respect of
profits attributable to foreign permanent establishments or income from immovable property.
Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes.
(ii) Credit Method
This method reflects the underline concept that the resident remains liable in the country of
residence on its global income, however as far the quantum of tax liabilities is concerned credit
for tax paid in the source country is given by the residence country against its domestic tax as if
the foreign tax were paid to the country of residence itself.
(iii) Tax Sparing
One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign
investment flows in India from foreign developed countries. One way to achieve this aim is to let
the investor to preserve to himself/itself benefits of tax incentives available in India for such
investments. This is done through “Tax Sparing”. Here the tax credit is allowed by the country of
its residence, not only in respect of taxes actually paid by it in India but also in respect of those
taxes India forgoes due to its fiscal incentive provisions under the Indian Income Tax Act.
Unilateral Relief
Unilateral Relief is provided in section 91 of the Income Tax Act. The aforesaid method is
depending on bilateral activity of both the countries. However, no country will have such an
agreement with every country in the world. In order to avoid double taxation in such cases,
country of residence itself may provide relief on unilateral basis.
Apart from relief to persons of a country where India has entered in Double Taxation Avoidance
Agreement, there is relief given even in cases where the Government of India has not entered
into DTA agreement with any foreign country. In such cases if any resident Indian produces
evidences to show that, he has paid any tax in any country with which the Government of India
has not entered into a DTA agreement, tax relief on that part of his income which suffered
taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax
leviable in India under the Income Tax Act on such income whichever is less shall be allowed as
deduction u/s 91 while calculating his tax liabilities on such income.

TAX PLANNING IN CASE OF FOREIGN COLLABORATIONS AND JOINT

VENTURE

There are two types of foreign collaborations:

a) Financial collaboration (foreign equity participation) where foreign equity alone is involved .
b) Technical collaboration (technology transfer) involving licensing of technology by the
foreign collaborator on due compensation. -
There are two approving authorities
1) Reserve Bank of India, and
2) Department of Industrial Development in the Ministry of Industry, Government of India.

Government Policy
The Government of India‟s policy on foreign private investment is based mainly on the
Approach adopted in 1949. The basic policy is to welcome foreign private investment on a
selective basis in areas advantageous to the Indian economy. The conditions under which foreign
capital is welcome are as follows:
a) All undertakings (Indian or foreign) have to conform to the general requirements of the
Government‟s Industrial Policy.
b) Foreign enterprises are to be treated at par with their Indian counterparts.
c) Foreign enterprises would have the freedom to remit profits and repatriate capital subject to
foreign exchange considerations.
The Industrial Policy 1991, is based on the view that while freeing Indian Industry from official
controls, opportunities for promoting foreign investments in India should also be fully exploited.
It is felt that foreign investment would bring attendant advantages of technology transfer,
marketing expertise, introduction of modern managerial techniques and new possibilities for
promotion of exports.

Areas of Foreign Collaboration

The Government of India issues from time to time a list of industries indicating where foreign
investments may be permitted. The lists so issued are illustrative only The Government of India
(Foreign Investment Promotion Board) also considers import of technology in Industries listed in
Annexure A & Annexure B of Schedule 1 of Foreign Exchange Management (Transfer or issue
of security by a person resident outside India) Regulations, 2000 subject to compliance with the
provisions of the Industrial Policy and Procedures as notified by Secretariat for Industrial
Assistance (SIA) in the Ministry of Commerce and Industry Government of India from time to
time.

Technical Collaboration
The Industrial Policy, 1991, also provides that equity collaboration need not necessarily be
accompanied with technical collaborations. The salient features of the Policy relating to Foreign
Technology Agreements are outlined below:

Paragraph 39C - Foreign Technology Agreements.

Standard Conditions Attached to Approvals for Foreign Investment & Technology

Agreements
1) The total non-resident shareholding in the undertaking should not exceed the
percentage(s) specified in the approval letter.
2) A) The royalty will be calculated on the basis of the net ex-factory sales price of the
product, exclusive of excise duties, minus the cost of the standard bought-out components
and the landed cost of imported components, irrespective of the source of procurement,
including ocean freight, insurance, customs duties, etc. The payment of royalty will be
restricted to the licensed capacity plus 25% in excess thereof for such items requiring
industrial licence or on such capacity as specified in the approval letter. This restriction
will not apply to items not requiring industrial licence. In case of production in excess of
this quantum, prior approval of Government would have to be obtained regarding the
terms of payment of royalty in respect of such excess production.
B) The royalty would not be payable beyond the period of the agreement if the orders had
not been executed during the period of agreement. However, where the orders themselves
took a long time to execute or were executed after the period of agreement, then in such
cases the royalty for an order booked during the period of agreement would be payable
only after a Chartered Accountant certifies that the orders in fact were firmly booked and
execution began during the period of agreement and the technical assistance was
available on a continuing basis even after the period of agreement.
C) No minimum guaranteed royalty would be allowed.
3) The lumpsum shall be paid in three instalments as detailed below, unless otherwise stipulated
in the approval letter:-
i. First 1/3rd after the approval for collaboration proposal is obtained from Reserve Bank of
India and collaboration agreement is filed with the Authorised Dealer in Foreign
Exchange.
ii. Second 1/3rd on delivery of know-how documentation.
iii. Third and final 1/3rd on commencement of commercial production, or four years after the
proposal is approved by Reserve Bank of India and agreement is filed with the
Authorized Dealer in Foreign Exchange, whichever is earlier. The lumpsum can be paid
in more than three instalments, subject to completion of the activities as specified above.
1) All remittances to the foreign collaborator shall be made as per the exchange rates
prevailing on the date of remittance.
 2) The applications for remittances may be made to the Authorised Dealer in Form A2 with
the undernoted documents:-
a) A No Objection certificate issued by the Income-tax authorities in the standard form or a
copy of the certificate issued by the designated bank regarding the payment of tax where
the tax has been paid at a flat rate of 30% to the designated bank.
b) A certificate from the Chartered Accountant in Form TCK/TCR (depending upon the
purpose of payment).
c) A declaration by the applicant to the effect that the proposed remittance is strictly in
accordance with the terms and conditions of the collaboration approved by
RBI/Government.
3) The agreement shall be subject to Indian Laws.
4) A copy of the foreign investment and technology transfer agreement signed by both the
parties may be furnished to the following authorities:-
a) Administrative Ministry/Department.
b) Department of Scientific and Industrial Research, New Delhi.
c) Concerned Regional Officer of Exchange Control Department, RBI.
d) Authorised Dealer designated to service the agreement.
5) All payments under the foreign investment and technology transfer agreement including
rupee payments (if any) to be made in connection with the engagement/deputation of
foreign technical personnel such as passage fare living expenses, etc. of foreign
technicians, would be liable for the levy of ces under the Research and Development
Cess Act, 1986 and the Indian Company while making such payments should pay the
cess prescribed under the Act.
6) A return (in duplicate) in Form TCD should be submitted to Regional Office of the
Reserve Bank of India in the first fortnight of January each year.

Withholding Tax for NRIs and Foreign Companies:

Withholding Tax Rates for payments made to Non-Residents are determined by the
Finance Act passed by the Parliament for various years. The current rates are:
i) Interest 20%
ii) Dividends paid by domestic companies : Nil
iii) Royalties 10%
iv) Technical Services 10%
v) Any Other Services Individuals: 30% of the income Companies: 40% of the net
income
The above rates are general and in respect of the countries with which India does not have a
Double Taxation Avoidance Agreement (DTAA).

Tax consideration in MAKE or BUY

Management decision should be based on careful consideration of all the factors, including
implication as regard to tax liability. Keeping view various tax implications that are relevant
while taking some specific management decision under different provision of Income tax Act
have dealt with:
Make or Buy:

One of the vital investment subject to the influence of tax factor is “Make or buy decision”. Most
of the companies have to decide sometimes or the other whether they should buy a part from a
market and stop making it themselves or whether they should stop buying it and start making it.
There are various consideration affecting this decision, chief of which is cost. In other words, in
making this sort of decision the various cost of making the product or part component of product
is compared with its purchase price in market. A host of other consideration such as capacity
utilization, supply position of the article to be bought, terms of purchase, ill effect of layoffs etc.
are kept in view while taking such decision. Tax planning can be helpful in decision as regards
making or buying a particular product, component etc.

The decision ‘to make or buy’ is a costing decision and is also influenced by many general
factors which are as follows:

 Availability of financial resources

 Investment required in fixed assets
 Availability of skilled and unskilled labour
 Availability of suppliers
 Existence of idle capacity in organization
 Price at which the product is available in the market
 Other miscellaneous factors

 Apart from costing considerations following factors also go in decision making

process:
 Utilization of Capacity
 Inadequacy of funds
 Latest Technology
 Dependence of Supplier
 Labor problem in the factory
 What are the cost involved in making of a part
 Fixed Cost
 Variable Cost

 What are the cost involved in buying of a part from outside agency:
 Buying cost
 Inventory cost

Comparision of both the cost shall determine which decision the company shall follow,
therefore tax saved in both the cases are same.
Tax Consideration
 Establishing a new unit: If the decision to manufacture a part or a component involves
a setting up separate industrial unit than tax incentives available u/s 10a,10b, 32, 80 IA,80
IB should be considered.
 Export: If “Make or Buy” decision is taken for exporting goods then tax incentives
available under section 80 HHC depends upon whether goods manufactured by tax player
himself are exported or goods manufactured by others are exported by tax players.
 Sale of plant and machinery: If buying is cheaper than manufacturing and the assessee
decides to buy parts or components for a long period of time, he may like sell the existing
plant and machinery. Tax implications as specified by section 50 has to be considered.
If the decision is taken to produce a part, then any other industrial unit to be established. When a
separate industrial unit is established then the company may get tax benefits and also deductions
under various sections to a company which decides to produce a part, are:

1. Deduction in respect of profits and gains from newly established small scale
undertakings in rural area (Sec 80 HHA)
A tax players deriving a profits and gains from a new small scale industries undertaking
set up in rural area will entitled to deduction of an amount equal to 20% of such profits
and gains. The deduction will be admissible for a period of 10 previous years in which
the small scale industrial undertaking commences production of any article.
2. Deduction in respect of profits and gains from industrial undertaking (Ship or Hotel
etc.): (Sec 80-1)
Under sction-80-1, a deduction will be allowed in respect of profits and gain derived
from industrial undertakings, ship or hotel established after a certain date. The deduction
will be of an amount equal to 30% of such industrial undertakings or Ship or Hotel, If its
company and 25% in categories of assesses.
3. Deduction in respect of profits and gains from newly established small scale
undertakings or Hotel business in Backward area (Sec 80 HHA)
All assesses are entitled to a deduction of 20% of the profit derived by them for new
industrial undertakings and Hotel setup in backward area. The deduction will be allowed
in respect of the ten assessment year relevant to previous year in which the industrial
undertaking begins to manufacture or produce articles.
4. Depreciation Allowance
A company which produces a part or a component will be allowed an allowance in
respect of depreciation of buildings, machinery, plant or furniture owned and used the
assesee for the purpose of business and profession.
 Two primary factors which have a decisive influence on the choice of make or buy are
the cost and availability of production capacity. Facilities are made available and other
things being equal cost consideration assumes primacy. If the cost of making an item in-
house is going to be higher than the cost of acquiring it from an outside supplier, the
 choice is to buy it. On the other hand, if the cost of making the item in ones own plant is
cheaper than buying it from the supplier, the choice is to make it. A good make-or-buy
decision, nevertheless, requires the evaluation of several less tangible factors in addition
to the two basics ones.
Considerations which favor making the parts are:
1. Cost considerations less expensive to make the part
2. Desire to integrate plan operations
3. Productive use of excess plant capacity to help absorb fixed overheads.
4. Needs to exert direct control over production and/or quality
5. Design secrecy.
6. Unreliable suppliers.
7. No suitable supplier quotation
8. Desire to maintain a stable workforce in periods of declining sales
Considerations which favor buying the part:
1. Cost considerations less expensive to buy the part
2. Suppliers research and specialized know-how
3. Small volume requirements
4. Limited production facilities
5. Desire to maintain stable workforce in periods of rising sales.
6. Desire to maintain multiple source policy.
7. Government policy favoring ancillary industries.
8. Monopoly items which are rationed by the government and on which, the buyer has no
option.

Other Factors
Some companies, by tradition, prefer to make almost every component of their products. Others
prefer to buy as much as possible from outside suppliers. In general, an aggressive company in
an industry that is expanding rapidly with many technological changes (e.g. electronics), will
prefer to buy many of its components from outside suppliers. In such industries, the company has
many opportunities to employ its capital profitably through horizontal diversification, expanding
its line of finished products.

Tax Consideration in Make or Buy decision:

If a business house/company decides to make a product/part instead of buying it and the making
of product involves setting up of new industrial undertaking then a business house should make a
detailed analysis of following tax incentives available to new industrial undertaking under
Income-Tax Act:

(a)Tax holiday u/s 10 A

(b)Tax holiday u/s 10 B
(c)Tax holiday u/s 80 1A
(d)Deduction u/s 80 1B
If the decision to buy the product or component will render the plant machinery, furniture,
land and building etc; earlier used in manufacturing the product, idle then the business house
may have to sell these assets. In such a case, before taking decision „to buy‟, the provision
related to capital gain tax should also be studied.

LEASE VS. PURCHASE

With the concept of leasing gaining immense popularity in recent times, any business
management is faced with the choice to purchase assets or to go in for leasing the asset. One
must resolve this issue on economic consideration taking into account the different tax shield
effects.

If asset is purchased, the assessee can claim depreciation. Besides interest n capital is borrowed
to finance investment in plant and machinery can also claim as deduction. If, however, asset is
obtained on lease, deductions can be claimed in respect of lease rentals and lease management
fees.

INSTALMENT VS HIRE

If an asset is purchased by instalments, then the taxpayer claim depreciation under section 32.
Besides interest payable on unpaid purchase price can also be claimed as deduction. In the case
of obtaining an asset n hire, deduction can be claimed in respect of hire charges. By comparing
present value of cash outflows a correct decision can be taken.

TRANSFER PRICING

The existence of different tax rates in different countries offers a potential incentive to
multinational enterprises to manipulate their transfer prices to recognize lower profit in countries
with higher taxes and vice versa.

In order to monitor transfer prices for goods, facilities and services, transfer pricing regulations
were introduces in the form of sections 92 and 92A to 92F.

The basic intention underlying the transfer pricing regulations is to prevent shifting out of profits
by manipulating prices charged or paid in international transactions, thereby eroding the
country‟s tax base.

Provisions relating to computation of income from international transactions – sec 92

1) Income to be computed as per arms length price
2) Section not to apply when arms length prices decreases income or increases loss.

Associated enterprise means an enterprise which participates, directly or indirectly, in

management or control or capital of other enterprise. Further, if one or more persons participate,
directly or indirectly in the management or control or capital of two enterprises those two
enterprises are associated enterprises.

Deemed associated enterprises: two enterprises are deemed to be associated enterprises. If,
at any time during the PY, -
a) One holds, directly or indirectly shares carrying 26% or more of voting power in other
enterprise.
b) Any person holds, directly or indirectly shares carrying 26% or more voting power in both
of them.
c) A loan advanced by one to the other constitutes 51% or more of BV of total assets of
other.
d) One enterprise guarantees 10% or more of the total borrowings of the other enterprise.
e) One appoints more than half of board of directors or one or more executive directors of
the other.
f) Any person appoints more than half board of directors or one or more executive directors
of both.
g) Manufacture/ processing of goods or business carried on by one is fully dependent on use
of know how, patents, copyright, etc. owned by the other, or in respect of which other has
exclusive rights.
h) 90% or more of RM required by one are supplied by the other or by persons specified by
other, and prices and other conditions relating to the supply are influenced by the other
enterprise.
i) Goods manufactured/ processed by one are sold to the other enterprise or to persons
specified by other, and the prices and other conditions relating thereto are influenced by
such other enterprise.
j) Where one enterprise is controlled by an individual/HUF, the other enterprise is also
controlled by such individual/ HUF or his relatives or jointly by such individual/HUF and
such relative.
k) One enterprise is a firm/AOP/BOI and other enterprise holds 10% or more interest in such
firm/AOP/BOI.
l) There exists between the two enterprises, any relationship of mutual interest, as may be
prescribed.

Section 92B international transaction

It means a transaction entered into between two or more associated enterprise (at least one is a
non resident) for purchase/sale/ lease of tangible/ intangible property or provision of services or
lending/ borrowing money or any other transaction (including sharing agreements for common
costs) having bearing on income and assets.
Deemed associated transaction: If an associated enterprise and a third person determine the terms
of a transaction between third person and another associated enterprise, such transaction shall be
regarded as having being entered into between two associated enterprise.

Section 92C methods under which arm’s length price is determined

1) Arms length price (ALP) means a price applicable in a uncontrolled transaction i.e. a
transaction between non associated enterprises, in uncontrolled conditions.
2) Methods for computation of arms length price: arms length price is determined by the most
appropriate of the following methods, selected as per the mode prescribed by the board –
a) Comparable uncontrolled price method
b) Resale price method
c) Cost plus method
d) Transaction net margin method
e) Profit split method
f) Other prescribed method.
3) When more than one price determined : by the most appropriate method, the arms length
price shall be taken to be the lower of the following –
a) The arithmetical mean of such prices, or,
b) A price varying up to 5% of such arithmetical mean.

ASSESSMENT PROCEDURE
Assessment of income relating to one PY starts in the succeeding financial year, which is
called AY. Assessment procedure begins when an assessee files his return of income to the income
tax department.

Filing of return [Sec 139 (1)]

A person has to file return of income in the prescribed form within the specified time limit if
his total income exceeds the maximum non-taxable limit.
As per section 139(1), it is compulsory for companies and firms to file a return of income for
every previous Year.
Filing of return of income is mandatory for certain category of assessees. Incidental provisions for
accompaniments to the return of income, error correction, belated returns have been made. Now
filing of the return electronically has been made mandatory for certain category of assessees.
Return of income is the format in which the assessee has to furnish information as to his total
income and tax payable. The format for filing of returns by different assessees is notified by the
CBDT.

‘Due date’ means -

(a) 30th September of the assessment year, where the assessee is -
(i) a company; or
 (ii) a person (other than a company) whose accounts are required to be audited under the
Income-tax Act, 1961 or any other law in force; or
(iii) a working partner of a firm whose accounts are required to be audited under the Income-
tax Act, 1961 or any other law for the time being in force.

RETURN BY WHOM TO BE SIGNED [Section 140]

Managing director or where for any unavoidable reason managing director is not able to sign or
where there is no managing director, by any director thereof. Exceptions :
(a) where the company is being wound up : by the liquidator
(b) where the management of the company has been taken over by the Government : the principal
officer thereof
(c) company is not resident in India : a person who holds a valid power of attorney

Return of loss [Sec 139 (3)]

Return can also be filed in the prescribed form in respect of loss suffered by the assessee. It
is not compulsory to file a return of loss, but certain losses can be carried forward only on filing
return of loss

Belated return [Sec 139(4)]

If the return is not furnished within the time, the person may furnish the return of any PY at
any time before the end of one year form the end of the relevant AY or before making assessment
whichever is earlier. An assessee who files belated return are liable for penal interest

Revised return [Sec 139(5)]

If after filing a return of income or in pursuance of a notice the assessee discovers any
omission or wrong statement in return originally filed, he can file a revised return. It should be filed
within one year from the AY or before the completion of assessment whichever is earlier.

Defective return [Sec 139(9)]

Where the AO finds that the return filed by an assessee is defective he should intimate the
assessee about the defect and give him an opportunity to rectify the defects within 15 days from the
date of intimation or within such further extended time as the AO may allow. If the defect is not
rectified within the time allowed, the return will be treated as invalid and it will be deemed that no
return has been filed by the assessee attracting penal interest

TYPES OF ASSESSMENT
1. Self assessment [Sec 140A]
When a return is furnished the assessee will have to pay tax, if any payable on the basis of
return. He has also to pay interest up to the date of filing the return along with self-assessment of
tax. The return of income is to be accompanied by proof of payment of both tax and interest.
Assessing officer may make an enquiry for getting full information in respect of assesse’s income.
The assessee shall be given an opportunity of being heard in respect of any material gathered on
the basis of any enquiry so made. The assessing authority may also direct the assessee to get his
accounts audited by an accountant nominated by chief commissioner, even if the accounts of the
assessee have been audited under nay other provision.
2. Summery assessment [Sec 143(1)]
If on the basis of return filed, any tax or interest is due the A.O shall send intimation to the
assessee specifying the sum so payable. If any refund is due on the basis of such return it shall be
granted to the assessee. Such intimation shall be deemed to be a notice of demand. Such an
intimation should be send before the expiry of 2 years from the end of the AY in which income was
first assessable
3. Assessment in response to an order [Sec 143(2)]
Assessment of income after receiving a notice from income tax authorities is called
assessment in response to an order. A.O can send notice if he considers it necessary to ensure that
the assessee has not understated the income or has not underpaid tax. After hearing such evidence
as the assessee may produce in response to the notice and after taking into account all relevant
materials, which the A.O has gathered, he shall pass an assessment order in writing determining the
total income of the assessee and the sum payable or refund due to the assessee on the basis of such
assessment order.
4. Best Judgment Assessment [Sec 144]
In the following situation the A.O can make a best judgment assessment after considering all
relevant materials, which he has gathered.
a. if the assessee has not filed a return or a belated return or a revised return
b. if he fails to comply with the terms of the notice or fails to comply with the direction to get
his account audited
c. if he fails to comply with the terms of the notice requiring the presence or production of
evidence and documents
d. if the A.O is not satisfied with the correctness or completeness of the accounts of the
assessee
The best judgment assessment can be made only after giving the assessee a reasonable
opportunity of being heard. Assessee has a right to file an appeal or to make an application
for revision to the commissioner.

5. Income escaping assessment or reassessment [Sec 147]

If the AO has reason to believe that any income chargeable to tax has escaped assessment for
any AY he may assess or re assess such income. If an assessee has not furnished a return of
income although total income is above the taxable limit or where a return of income has been
made but assessee is found to have understated his income where an assessment is made but
income chargeable to tax has been under assessed, reassessment can be made.

Rectification of mistakes [Sec 154]

The AO may amend any order passed by it or amend nay intimation sent by it if he finds that
a mistake apparent from record is made. This is called rectification of mistake. Where a rectification
has the effect of enhancing tax liability or reducing the refund, the AO is required to issue a notice of
its intention to do so the assessee and give the assessee a reasonable opportunity of being heard.
Rectification of mistakes may be made either on its own motion or on the application of the
assessee. Rectification can be made only within 4 years from the end of financial year in which the
order sought to be rectified was passed.

Tax Deduction at source (TDS)

The provisions of the Income Tax Act relating to “Tax Deduction at source (TDS)” are of very
important in the present scenario when TDS collections contribute almost 39% of total collection
of Direct Taxes. The Income Tax Act also provides for penalty & prosecution for any default in
respect of deduction of tax at source or deposit of the deducted amount in the Government
account. Thus, the Tax Deductors need to be well conversant with the provisions relating to Tax
Deduction at Source as provided in sections 192 to 198 of the Income Tax Act.
The Indian Income Tax Act provides for chargeability of tax on the total income of a person on
an annual basis. The quantum of tax determined as per the statutory provisions is payable as:

a) Advance Tax
b) Self Assessment Tax
c) Tax Deducted at Source (TDS)
d) Tax Collected at Source (TCS)

Tax deducted at source (TDS), as name imply aims at collection of revenue at the very source of
income. It is an indirect method of collecting tax with the concepts of “collect as it is being
earned.” Its significance to the government lies in the fact that it pre-pones the collection of tax
& to ensures a regular source of revenue.

The concept of TDS requires that the person, on whom responsibility has been cast, is to deduct
tax at the appropriate rates, from payments of specific nature which are being made to a specified
recipient. The deducted sum is required to be deposited to the credit of the Central Government.
The recipient from whose income, tax has been deducted at source, gets the credit of the amount
deducted in his personal assessment.

TDS RATES FOR THE A.Y. 2012-13 (IN %)

Nature of Payment Made To Residents Threshold Company / Firm / Individual / If No /

(Rs.) Co-operative HUF Invalid
Society / Local PAN
Authority
Section - Description Rate (%) Rate (%) Rate (%)
192 - Salaries - NA Average rates 30
as applicable
193 - Interest on securities - 10 10 20
194 - Dividends - 10 10 20
194A - Interest other than interest on securities - 5000 10 10 20
Others
194A - Banks 10000 10 10 20
194B - Winning from Lotteries 10000 30 30 30
194BB - Winnings from Horse Race 5000 30 30 30
194 C - Payment to Contractors - - - -
- Payment to Contractor - Single Transaction 30000 2 1 20
- Payment to Contractor - Aggregate During the 75000 2 1 20
F.Y.
- Contract - Transporter who has provided valid - - - 20
PAN
194D - Insurance Commission 20000 10 10 20
194E - Payment to Non-Resident Sportsmen or - - - -
Sports Association
- Applicable up to June 30, 2012 - 10 10 20
- Applicable from July 1, 2012 - 20 20 20
194EE - Payments out of deposits under NSS 2500 20 - 20
194F - Repurchase Units by MFs 1000 20 20 20
194G - Commission - Lottery 1000 10 10 20
194H - Commission / Brokerage 5000 10 10 20
194I - Rent - Land and Building 180000 10 10 20
194I - Rent - Plant / Machinery 180000 2 2 20
194J - Professional Fees 30000 10 10 20
194LA - Immovable Property 100000 10 10 20
194LB - Income by way of interest from - 5 5 20
infrastructure debt fund (non-resident)
Sec 194 LC - Income by way of interest by an - 5 5 20
Indian specified company to a non-resident /
foreign company on foreign currency approved
loan / long-term infrastructure bonds from outside
India (applicable from July 1, 2012)
195 - Other Sums - Average rates as - 30
applicable
196B - Income from units 10 10 20
196C-Income from foreign currency bonds or - 10 10 20
GDR (including long-term capital gains on
transfer of such bonds) (not being dividend)
196D - Income of FIIs from securities 20 20 20 20