The series of retrospective amendments explaining ‘property', ‘transfer' and ‘through' in effect challenges the decision of the Supreme Court in the case of Vodafone and brings back the ghost ‘indirect equity transfers'.
It means that Vodafone and like transactions of indirect transfer of shares which have derived value substantially from assets located in India are taxable in India from April 1, 1962.
While retrospective amendments are within the powers of the Legislature, this may have wider and far reaching implications than Vodafone fighting yet another legal war.
Spat of tax demands and high cost of litigation are likely to be the immediate fallouts of the amendments. In a time of slowing growth, this is likely to shake the confidence of the already uncertain foreign investor.
An amendment in respect of indirect equity transfers was anticipated by everyone, but it being retrospective has left most dumbstruck.
APA — New kid on the block
Advance Pricing Agreement is an agreement between a taxpayer and the revenue authority for determining the arm's length price or specifying the manner in which the arm's length price is to be determined in relation to an international transaction for a fixed period of time.
The arm's length price in respect of the transaction for which APA has been entered may be determined using the methods prescribed under the Income Tax act (‘act') or any other method with such adjustment or variation as may be required.
The APA is valid for a period not exceeding five consecutive previous years.
The agreement shall be binding on the assessee, the jurisdictional commissionaire and transaction in respect of which the APA is entered.
Introduction of the APA is a welcome move as it will bring certainty on the taxability of the international transaction and thereby avoidance of double taxation.
Confusion over software payments
Characterisation of software payments as “Royalty” or “Business Profits” has been a contentious issue in India.
There seems to be a lack of consensus even between the different High Courts with conflicting views by the Karnataka HC and the Delhi HC on the payment for standardised software.
In view of the above, the Finance Bill 2012 proposes to make an amendment with retrospective effect from June 1, 1967 to clarify that the term ‘Royalty' will be deemed to include consideration for any or all rights in connection with the right to use computer software.
While it provides clarity on the issue, the same marks a clear departure from the principles set down by the Organisation of Economic Cooperation and Development (‘OECD').
Only time will tell the impact of departing from the principles accepted the world over and the reaction of the Technology industries to such departure.
Transfer pricing for domestic transactions
The Supreme Court in CIT Vs Glaxo SmithKline Asia had emphasised the need for applicability of transfer pricing regulation to domestic related party transaction.
Treading on the direction given by the Supreme Court, the Centre, through the Finance Bill 2012, extended the scope and application of the transfer pricing provisions to certain domestic transaction between resident related parties.
The objectivity of the provision is to determine the reasonableness of the income or expenditure or fair market value arising out of the transaction between the related resident parties.
The provision is applicable when the aggregate value of the domestic transaction between the related resident parties exceeds Rs 5 crore in a year.
Introduction of the domestic transfer pricing is likely to increase the compliance burdened of the taxpayer and any legitimate tax planning between the related parties might face increased scrutiny from tax authority and may become litigation prone.