Domestic and Direct Tax Updates

published on 30 October 2023 I reading time approx. 3 minutes

​Notifications and Circulars

1. Facility introduced for Non-Residents and foreign companies to register on Indian Income Tax Website without obtaining a Permanent Account Number (‘PAN’) to facilitate online filing of Form 10F

In order to avail the benefit under Double Taxation Avoidance Agreement (‘DTAA’), as applicable between India and the country of tax residency of a non-resident, certain conditions are required to be fulfilled by the non-resident in India. These include furnishing of Tax Residency Certificate (‘TRC’) issued by the local tax authorities in the resident country. In case the TRC does not contain all the required details (like tax identification number, period, address, etc.) as mandated, non-residents are also required to furnish Form 10F. 

Central Board of Direct Taxes (‘CBDT’) mandated furnishing of Form 10F electronically last year, for which the non-residents were required to register themselves on the Income Tax Portal with their Indian tax registration number i.e. PAN. Therefore, a PAN was necessarily required to be obtained by non-residents for electronic filing of Form 10F.

In a welcome and much needed move favouring non-residents and foreign companies, the Indian tax department has introduced a facility to enable non-residents and foreign companies to register on the Income Tax portal without obtaining a PAN in India. This will enable the non-residents and foreign companies to apply and obtain Form 10F without requiring to first obtain a PAN, register on the Income Tax Portal, as was the case earlier. For a detailed update on this topic, please refer our article published. Read More »

2. CBDT notifies Form 71 for facilitating withholding tax (‘TDS’) credit for income already disclosed in the Income tax return (‘ITR’) of past year

In many instances, TDS is deducted by the deductor (payer of income) in the year in which the income is actually paid to the recipient. However, following accrual method, the recipient may already disclose this income in earlier years in their ITR. This results in TDS mismatch, since the corresponding income has already been offered to tax by the recipient in earlier years, however, TDS is only being deducted much later when actual payment is being made. In such cases, the recipient cannot claim the credit of TDS in the year in which TDS is deducted since income is not offered to tax in that year. It may also not be possible to revise the ITR of past year in which the corresponding income was included since time to revise the ITR for that year may have lapsed. This results in difficulty to the recipient in claiming credit of TDS.

In order to remove the above difficulty, Finance Act 2023 inserted a new sub-section (20) in section 155 of the Income Tax Act, 1961 (‘ITA’), which is effective from 1 October 2023. The new sub-section applies where any income has been included in the ITR furnished by the assessee under section 139 of ITA for any assessment year and TDS has been deducted on such income and paid in a subsequent financial year. In such cases, the assessee can apply in prescribed form to the Assessing Officer within 2 years from the end of financial year in which such TDS was deducted. The Assessing Officer shall amend the order of assessment or any intimation, allowing the credit of such TDS in the relevant assessment year. CBDT has accordingly released Notification No. 73/2023 dated 30 August 2023, providing that the application shall be made by the Assessee in Form No. 71 and submitted to Principal Director General of Income Tax or Director General of Income Tax, who shall forward the same to the concerned Assessing Officer.

3. Directorate of Income-Tax (Systems) [“DIT(Systems)”] notifies e-procedure for Lower/Nil Withholding Tax Certificate under section 197 when payer details are unavailable

Section 197 of the ITA provides that an assessee (deductee/payee) can apply to the Assessing Officer to issue a nil or lower TDS certificate. Form No. 13 is prescribed for applying to the tax officers for the issuance of a Nil or Lower TDS certificate. Depending on the facts and nature of application under section 197, either Annexure I, II or III are required to be filed by the assessee.

Further, Rule 28AA(4) provides that certificate for lower or nil deduction of tax shall be issued directly to the person responsible for deducting the tax under advice to the person who made an application for issue of such certificate. Proviso to Rule 28AA(4) also provides that if number of persons responsible for deducting the tax is likely to exceed 100 and the details of such persons are not available with the person making such application, the certificate may be issued to the applicant authorizing him to receive income after deduction of tax at a lower rate.

Central Board of Direct Taxes (“CBDT”) had earlier notified the e-filing process for Form 13 through Notification No. 8/2018 dated 31 December 2018, wherein Annexure II was not made available for e-filing. Vide Notification No. 2/2023 dated 27 September 2023, DIT(Systems) has specified the procedure, format and standards for electronic filing of Form No. 13 with Annexure II. The process for generation of certificates through TRACES portal is also notified. The change will be applicable with effect from 1 October 2023.

Domestic Tax Rulings 

1. Dividend Distribution Tax (‘DDT’) applicable on buy-back of shares under scheme of arrangement approved by the High Court

In the case of Cognizant Technology Solutions India Pvt. Ltd, Chennai Income Tax Appellate Tribunal (‘ITAT’) has decided applicability of DDT to the buy-back of shares through a scheme sanctioned by the jurisdictional High Court prior to 1 June 2016.

ITAT, after analysing the provisions of the law and the arrangement sanctioned on 18 May 2016 by High Court, has held that said arrangement was hastily concluded as a colourable device to avoid liability under DDT. It may be noted that the section 115QA was amended to cover buy-back transaction from 1 June 2016 onwards. The ITAT rejected Cognizant’s argument that the scheme had High Court approval and it clarified that the court's power to approve the scheme did not grant immunity from tax payments under prevailing laws. The ITAT held that buyback carried out under a scheme approved by the High Court amounted to the "distribution of accumulated profits" and hence, attracted ‘deemed dividend’ under Section 2(22) of the ITA and therefore, confirmed the levy of DDT on the same.

2. Interest on Compulsorily Convertible Debentures (‘CCD’) allowable as a revenue expenditure until conversion of CCDs into equity shares, categorises CCD as debt instrument

In the case of Religare Finvest Ltd, Delhi ITAT decided multiple appeals on various issues in the favour of the taxpayer wherein, inter-alia, the Delhi ITAT treated CCD issued to its holding company as debt instruments. Accordingly, interest expense incurred on such CCDs was allowable as revenue expenditure.

The taxpayer had claimed interest cost on CCDs issued to its holding company as revenue expenditure. However, the tax authorities disallowed the interest costs considering interest on CCD akin to dividend paid on equity shares placing its reliance on a Circular issued by the Reserve Bank of India under the Foreign Direct Investment (‘FDI’) policy. Relying on various judicial precedents on this issue, the Delhi ITAT held that CCDs are to be categorised as debt till the date of conversion and interest paid on such instruments is tax deductible expenditure.

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