Introduction of specific anti-avoidance measures in respect of transactions with persons located in notified jurisdictional area [Section 94A] :
The objective of anti-avoidance measures is to discourage assessees from entering into transactions with persons located in countries or territories which do not have effective information exchange mechanism with India. The following are the anti-avoidance measures introduced –
(i) The Central Government empowered to notify any such country or territory outside India as a NJA (Notified Jurisdictional Area), having regard to the lack of effective exchange of information with such country or territory. So far, the Central Government has specified “Cyprus” as a Notified Jurisdictional Area (NJA) under section 94A.
(ii) A transaction where one of the parties thereto is a person located in a NJA would be deemed to be an international transaction and all parties to the transaction t o be deemed as associated enterprises, and accordingly, all the provisions of transfer pricing to be attracted in case of such a transaction. However, the benefit of permissible variation between the ALP and the transfer price [provided for in the second proviso to section 92C(2)] based on the rate notified by the Central Government would not be available in respect of such transaction.
(iii) Such transaction may be in the nature of –
(1) purchase, sale or lease of tangible or intangible property or
(2) provision of service or
(3) lending or borrowing money or
(4) any other transaction having a bearing on the profits, income, losses or assets of the assessee.
It may include a mutual agreement or arrangement for allocation or apportionment of, or contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided by or to the assessee.
(iv) Person located in a NJA shall include a person who is a resident of the NJA and a person, not being an individual, which is established in the NJA. It would also include a permanent establishment of any other person in the NJA.
(v) Payments made to any financial institution located in a NJA would not be allowed as deduction unless the assessee authorizes the CBDT or any other income-tax authority acting on its behalf to seek relevant information from the financial institution on behalf of the assessee.
(vi) No deduction in respect of any other expenditure or allowance, including depreciation, arising from the transaction with a person located in a NJA would be allowed unless the assessee maintains the relevant documents and furnishes the prescribed information.
(vii) Any sum credited or received from a person located in a NJA to be deemed to be the income of the recipient-assessee if he does not explain satisfactorily the source of such money in the hands of such person or in the hands of the beneficial owner, if such person is not the beneficial owner.
(viii) The rate of TDS in respect of any payment made to a person located in the NJA, on which tax is deductible at source, will be the higher of the following rates –
(1) rates specified in the relevant provision of the Income-tax Act, 1961; or
(2) rate or rates in force; or
(3) 30%.
Examples
(1) A Ltd., an Indian company, provides technical services to a company, XYZ Inc., located in a NJA for a consideration of Rs 40 lakhs in October, 2015. It charges Rs 42 lakhs for similar services rendered to PQR Inc., which is not located in a NJA. PQR Inc. is not an associated enterprise of A Ltd.
Discuss the tax implications under section 94A read with section 92C in respect of the above transaction of provision of technical services by A Ltd. to XYZ Inc.
Answer
Since XYZ Inc. is located in a NJA, the transaction of provision of technical services by the Indian company, A Ltd., would be deemed to be an international transaction and XYZ Inc. and A Ltd. would be deemed to be associated enterprises. Therefore, the provisions
of transfer pricing would be attracted in this case.
The price of Rs 42 lakhs charged for similar services from PQR Inc, being an independent entity located in a non-NJA country, can be taken into consideration for determining the arm’s length price (ALP) under Comparable Uncontrolled Price (CUP) Method.
Since the ALP is more than the transfer price, the ALP of Rs 42 lakhs would be considered as the income arising from the international transaction between A Ltd. and XYZ Inc.
(2) Mr. X, a non-resident individual, is due to receive interest of Rs 5 lakhs during March 2016 from a notified infrastructure debt fund eligible for exemption under section 10(47). He incurred expenditure amounting to Rs 10,000 for earning such income. Assuming that Mr. X is a resident of a NJA, discuss the tax implications under section 94A, read with sections 115A and 194LB.
Answer
The interest income received by Mr. X, a non-resident, from a notified infrastructure debt fund would be subject to a concessional tax rate of 5% under section 115A on the gross amount of such interest income. Therefore, the tax liability of Mr. X in respect of such income would be Rs 25,750 (being 5% of Rs 5 lakhs plus education cess@2% and SHEC@1%).
Under section 194LB, tax is deductible @5% on interest paid by such fund to a non – resident. However, since X is a resident of a NJA, tax would be deductible@30% as per section 94A, and not @ 5% specified under section 194LB. This is on account of the provisions of section 94A(5), which provides that “Notwithstanding anything contained in any other provision of this Act, where a person located in a NJA is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB, the tax shall be deducted at the highest of the following rates, namely –
(a) at the rate or rates in force;
(b) at the rate specified in the relevant provision of the Act;
(c) at the rate of thirty per cent.
Mr. X can, however, claim refund of excess tax deducted along with interest.