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GIFT City: An Overview and Tax Benefits

by InCorp Advisory

Reading Time: 5 minutes

Every year the government of India introduces various measures to strengthen the regulatory framework in Gift city. In the Union Budget, specific tax benefits were introduced by the finance minister for units in the International Financial Service Centre (IFSC) to attract foreign investors and encourage offshore funds to relocate to India’s smart city.

This article helps you understand GIFT city’s tax benefits, structure, permissible services, and budget highlights.

What Is The GIFT City?

The Gujarat International Finance Tec (GIFT) City consists of 2 zones:

An SEZ (Special economic zone) A Domestic tariff area (DTA)

To make GIFT City a global hub for financial services and the government of India has been working along with various regulators. It is a developed area with state-of-the-art infrastructure, including power, water supply, transport, and housing. It is an ideal environment for you to set up your business.

What Is Gift City SEZ?

  • SEZ is an area designated in Gift city where you may set up units to carry specific manufacturing and trading activities and provide certain services.
  • The formation of a Special Economic Zone (SEZ), is governed by the Special Economic Zone Act, 2005 in India.
  • It is considered a foreign territory which means that you need to treat the goods and services going into SEZ as exports and goods and services coming from the SEZ as imports.
  • An SEZ aims to boost the economy by exporting certain goods and services.

What Is Gift City IFSC?

International Financial Service Centre (IFSC) is a multi-service SEZ in Gift city. IFSC is India’s first Offshore financial center. Currently, there are more than 125 licensed financial entities in IFSC. The key institutions permitted to set up an IFSC unit are the Banking sector, Insurance sector, and Capital Markets.

Features of IFSC are as follows:

  • An IFSC is a jurisdiction providing financial services to both residents and non-residents, in foreign currency. It is considered as a person resident outside India for exchange control purposes.
  • Such centers deal with flows of finance, financial products, and services across borders.
  • It is a global financial platform aimed at providing easy access to the Indian economy, which is amongst the world’s largest and fastest-growing economies.
  • In January 2017, Prime Minister of India, Narendra Modi inaugurated India’s first international exchange in IFSC. This exchange includes trading across all asset classes such as equities, currencies, commodities, and fixed-income securities.
  • Further, in December 2020 regulations have been made to enable the setting up of India’s first International Bullion Spot Exchange.
  • IFSC provides the very competitive cost of operations with various tax benefits, single-window clearance, relief under various company law provisions, international arbitration center with overall facilitation of doing business.

What Is The International Financial Services Centres Authority (IFSCA)?

International Financial Services Centres Authority was established in April 2020 under the International Financial Services Centres Authority Act passed by the Indian Parliament.

For the first time, the regulatory powers of four financial services regulators in India, namely:

  • Reserve Bank of India (RBI),
  • Securities & Exchange Board of India (SEBI),
  • Insurance Regulatory Development Authority of India (IRDAI),
  • Pension Fund Regulatory Development Authority of India (PFRDAI),

have been vested in IFSCA with respect to regulation of financial institutions, financial services and financial products in the IFSC, making it a unified regulator for the International Financial Services Centre in India.
In 2021, International Financial Services Centres Authority (IFSCA) became an associate member of the International Organization of Securities Commissions (IOSCO).

What are the services rendered in GIFT city?

Prime Minister Narendra Modi’s vision is to attract foreign business through GIF City. So, there’s an array of services that companies can indulge in. Gift city SEZs are specifically defined areas where you may set up your business unit for specified purposes of manufacturing, trading as well as rendering services. 

You can also provide warehousing facility services for specific goods. You can import and export services or carry on import-export activities of certain goods (subject to authorized operations).

Further, as SEZ is a foreign territory, the supply of goods or services by an Export Oriented Unit (“EOU”) or Software Technology Parks of India (“STPI”) unit is regarded as export. Foreign Trade Policy (“FTP”) regards supplies to SEZ as export of goods or services.

Gift city was established to facilitate business in the banking and insurance sector as well as capital markets. The following services are rendered:

  • To raise funds for individuals, corporations, and governments.
  • Asset management and global portfolio diversification are undertaken by pension funds, insurance companies, and mutual funds.
  • Global tax management.
  • Corporate treasury management operations.
  • Risk management operations such as insurance and reinsurance.
  • Merger and acquisition activities among multinational corporations.

On 10th February 2021, IFSCA has introduced a new framework to enable ancillary services. Based on this circular, the following ancillary services are permissible:

Legal, Compliance and Secretarial; Auditing, Accounting, Bookkeeping and Taxation Services;
Professional & Management Consulting Services; Administration, Assets Management Support Services and Trusteeship Services;
Any other services as approved by IFSCA from time to time.

If you are a service provider you can also provide services to entities set up in the IFSC.

What are the tax benefits in GIFT city?

What are the tax benefits in GIFT city?

You can also enjoy the following tax benefits:

  • Stamp Duty exemption
  • Goods & Service Tax (GST) exemption
  • No withholding tax (TDS) on interest payable to a non-resident by an IFSC unit on overseas borrowings
  • 4 % withholding tax (excluding surcharge and cess) on interest on overseas borrowings. (Borrowings such as – long-term bond or rupee denominated bond listed on an IFSC stock exchange)
  • The government has further granted various tax incentives to AIF (Alternative Investment Funds) setup in Gift City. The AIF’s may invest through the FDI (Foreign Direct Investment) or Foreign Venture Capital Investor (FVCI) route. Earlier AIF’s could only invest through the FPI (Foreign Portfolio Investor) route
  • Tax incentives have been provided to non-residents investors investing in such AIF located in IFSC

What Were The Key Highlights Regarding GIFT City In Budget 2021?

The government aims to make GIFT city a global financial hub. The following reforms were announced in the budget:

  • The finance minister Nirmala Sitharaman announced that a world-class fintech hub is under development in Gujarat’s smart city. This development will promote fintech firms and help them expand globally. It will also generate employment opportunities.
  • The government has facilitated debt financing of REIT (Real estate Investment Trusts) and InvIT (Infrastructure Investment Trusts) by Foreign portfolio Investment (FPI)
  • The budget mentioned special tax incentives for relocating foreign funds in the IFSC and exemption of dividends on REIT and InvIT
  • In 2020, the aircraft financing and leasing business as a financial product under IFSCA. The finance minister mentioned that India is the world’s third-largest domestic aviation market. The budget introduced the following tax benefits to promote the aircraft finance and leasing industry in IFSC:
    • Capital gains exemption on income arising from aircraft leasing
    • Aircraft lease rentals paid to foreign lessors are tax exempt

The announcements mentioned above would help attract global players in the Fund business, aircraft leasing & financing business to set up their base in GIFT IFSC.

Conclusion

IFSC reinforces India’s strategic position as a global business hub for financial services. GIFT city has a lot of economic and fiscal benefits. It has been meticulously planned and structured to lure foreign investors and institutions. 

The government has introduced various reforms in every budget over the last few years to boost GIFT city. The aim is to be on par with other leading financial centers such as Dubai, Singapore, and London.

Why Choose Incorp?

At Incorp, we have the expertise and skills to guide you through the entire nuance of processes to avail the Gift city benefits. We are here to ensure peace of mind, from setting up your company in Gift City to staying compliant and managing your taxes on time with ease.

Need help with navigating the rules and regulations in Gift City?

Get In Touch With Us Today

New Rules For Re-Registration Of Charitable Organizations W.E.F. 01st April 2021

by InCorp Advisory

Reading Time: 3 minutes

As we are all aware that, Charitable Organisations registered with the Income Tax Department must take fresh registration in accordance with the provisions of section 12AB, which was introduced by our Finance Minister in the Budget presented in 2020.

However, because of the prevailing circumstances it was deferred and was ultimately made effective from 01st April 2021. The rules framed for registration have been notified by the Central Board of Direct Taxes on 26th March 2021.

Let Us Take A Look At The Brief Summary Of The Said Rules Which Are As Under:

  • The Application must be filed online in Form 10A/ 10AB along with supporting documents which are as under:
    • Copy of Charitable Organisation Deed/ Registration Certificate (Other than Trust)
    • Self-Certified copy of Certificate signifying the Authority under which the entity is registered.
    • Self-Certified copy of Certificate under Foreign Contribution (Regulation) Act (FCRA)
    • Self-Certified copy of existing Registration certificate under Income Tax
    • Copy of Audited Annual Accounts of Last 3 Years (FY 2017-18, 2018-19 and FY 2019-20). We must also keep Provisional Accounts for FY 2020-2021 ready.
    • Self-Certified copy of Modification or addition to objects of the Organisation.
    • Brief Note on Activities carried out by Charitable Organisation.
  • The Pr.Commissioner shall pass an order in Form 10AC and issue a sixteen-digit alphanumeric Unique Registration Number (URN).
  • If the Application is made on or after 01st April 2021 the same shall be effective for FY 2021-2022.

What Are The New Provisions Related To The Filing Returns Pertaining To Donations Received By Charitable Organisations?

With regards to the issue of a certificate to the Donor by Charitable Organisation and filing of return pertaining to a donation received is concerned, new provisions were introduced. They can be summarised as under:

  • New Return of All Donations received by Charitable Organisations shall have to be furnished in Form 10BD.
  • The Information shall have to be furnished in a Consolidated manner, with respect to each of the Donors. Hence, total donations received from a particular Donor in a year will have to be furnished.
    For instance, suppose there are multiple branches and a person makes a donation at 4 separate branches, twice a year then in such a case, all the donations will have to be aggregated and the total amount received from such donor will have to be reported in Form 10BD.
  • Accordingly, only one certificate shall have to be issued by Charitable Organisations to Donor in Form 10 BE specifying the amount received during the Financial year (multiple certificates are not required to be issued).
  • Return under Form 10BD and Certificate of Donation under Form 10BE shall be furnished on or before 31st May, following the financial year in which the donation is received.
  • Following details of Donor will have to Mandatorily be collected:
    • Either PAN Card or Aadhar Card.
    • If the same is not available, then Tax Identification Number issued by Country of Residence/Passport Number/Electors Photo Identity/Driving License Number/Ration Card Number.
    • Type of Donation – Corpus/ Other than Corpus.
    • Mode of Receipt – Cash/Kind/ Electronic Mode/ Others.

Since the change is effective from 01st April 2021 it is essential that all the care is taken while accepting donations from Donors and all the details as required to be uploaded in Form 10BD are collected from the Donor.

What Are The Timelines For Completing The Process Of Re-registration?

The Time- Lines for completing the above process of re-registration, as prescribed under the Act can be summarized as under:

charitable organisationExisting Charitable Organisation (Making First Time Application under 12AB) –
  • Application to be made: Within a period of 3 months beginning from 01st April 2021.
  • Order to be passed: Within a period of three months.
  • Validity: For a period of 5 years.
New Charitable OrganisationNew Charitable Organisation Incorporated
  • Application to be made: On or Before 28th February preceding 01st April from which we intend to get the Exemption.
  • Order to be passed: within a period of 1 month.
  • Validity: For a period of 3 years
    (As per Rules framed it has been stated that, registration shall be effective from the year in which application is made, which is a welcome move (even though the act does not provide for it). Thus in our view, the benefit shall be granted to new Charitable Organisation from the year in which application is made)
Re-Registration/SwitchRe-Registration/Switch from 10(23C) to 12AB or Modification of Objects –
  • Application to be made: Within Six months before the expiry of the period.
  • Order to be passed: within a period of six months.
  • Validity: For a period of 5 years.

Why Choose Incorp?

The above-mentioned rules framed for registration have been notified by the Central Board of Direct Taxes on 26th March 2021. Re-registration of Charitable Organisations based on these new provisions is in effect from 1 April 2021. At Incorp, we have the expertise and skills to guide you through the entire process and thus maximizing outcomes for all the stakeholders.

Need Help With Navigating A Charitable Organisation’s Tax System And Regulations?

We are here to guide you and ensure peace of mind from setting up your Charitable Organization, to staying compliant and managing your taxes on time with ease.

Get in touch with us today

Everything You Need to Know About Slump Sale

by InCorp Advisory

Reading Time: 5 minutes

Slump sale is an effective and maybe the quickest strategy to undertake business transfer with assets and liabilities. Slump sale is considered to be one of the most preferred ways of carrying out mergers & acquisitions deals. Compared to the other types of mergers/acquisition strategies, slum sale has the least complex yet well-defined tax implications along with other allied law procedures that are simple and time-efficient.

What is a Slump sale?

  • Slump Sale means the transfer of one or more undertakings  against a lump sum consideration without values being allocated to the individual assets and liabilities.
  • The consideration for a slump sale should be settled in lump sum only which can be in cash, exchange of shares, debentures, bonds etc. The scope of slump sale is wide and it covers situations like exchange, barter etc.

Objectives of Slump Sale

Slump sale is intended to accomplish the following purposes:

  • To strengthen the performance of the business with efficient management strategies
  • To target and remove negative synergy and distinction between core and non-core operations
  • To attain tax and regulatory benefits

Slump Sale Infographic

Compliances under Companies Act 2013

  • Companies Act 2013 has a unique and extended definition of undertaking by defining threshold limit.
  • ‘Undertaking’ is defined as a unit/undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income.
  • In case of a slump sale, provisions of section 180 shall get attracted to any company other than a private company. Special resolution (with 75% approval) needs to be passed / approved in the general meeting of the company for undertaking the slump sale transaction.
  • On passing the resolution successfully the board may authorize any person to finalise and execute on necessary documents including definitive agreements, business transfer agreements, deeds of assignment /conveyance and other ancillary documents.
  • Form MGT-14 along with resolution and notice given under section 102 must be filed with the ROC within 30 days along with the prescribed fees based on share capital.
  • If the above undertaking criteria is not satisfied, then there is no need of passing special resolution.

Compliances under Income Tax Act, 1961

  • Transaction of slump sale is taxable as capital gain as per provisions of section 50B of Income Tax Act ,1961.
  • The gain or loss resulting out of a slump sale shall be considered as capital gain/loss under the Income Tax Act in the manner prescribed below:
Particulars Amount
Full value of consideration XXX
Less: Expenses in relation to transfer XX
Net Consideration XXX
Less: Net worth of the undertaking XX
Short / Long term capital gain/loss XXX

 

In computing the net worth of the entity, following points need to be considered:

  • Value of net worth should not take into account any revalued figures of asset and liability.
  • The written down value of assets shall be considered in case of depreciable assets under the Income Tax Act.
  • The value of assets will not be considered on which 100% deduction has been allowed u/s 35AD (specified businesses).
  • The value as appearing in the books of accounts shall be considered in case of any other asset.

After considering the above points; the cost of acquisition shall be taken as Nil for the purpose of computation of capital gains, in case the resulting net worth is negative.

  • Where the undertaking is owned and held by the transferor for 36 months or less immediately preceding the date of transfer, the undertaking would be regarded as short-term capital asset and the gains will be taxed at applicable rate.
  • If the undertaking is owned and held for more than 36 months before the date of transfer, then the gains shall be treated as long-term capital gain and it will be taxed @ 20%. No indexation in case of long-term capital gain computation.
  • A report by a Chartered Accountant in Form 3CEA certifying that the net worth of the undertaking has been correctly arrived at in accordance with the provisions of section 50B of the Income Tax Act,1961.
  • Transferor shall be allowed to carry forward the unabsorbed losses and depreciation with respect to transferred undertaking in future years. In other words, in case of a slump sale, the transferee entity will not get benefits of tax losses of the transferor. Also, the credit in respect of minimum alternate taxes is retained in case of corporate assessee with the transferor company.

Proposed Amendment in Union Budget 2021

  • With effect from 1st April 2021, it is proposed to widen the scope of slump sale u/s 2(42C) to include the transfer of one or more undertakings by any means’ for lump sum consideration.
  • The above amendment also clarifies tax on ‘slump exchange’ of an undertaking which includes exchange, barter, relinquishment, extinguishment, etc as capital gains.
  • Implication: Business transfer by any mode of the settlement would attract tax under capital gain.

Compliances under GST Act 2017:

  • The transfer of an undertaking on a going-concern basis, as a whole or an independent part thereof, has been exempted from GST vide Notification No. 12/2017-Central Tax.
  • Further, on slump sale of an undertaking, the transferee is eligible to transfer unutilized Input Tax Credits lying in the electronic credit ledger of the transferor in pursuance to change in the constitution due to sale, merger, demerger, amalgamation, transfer of business etc., subject to conditions by filing of Form ITC-02.
  • Apart from the above-mentioned points, legacy of ambiguity continues as no clarity on reversal of credit claimed in past years.

Difference between Individual asset sale and slump sale:

Slump Sale Individual Asset Sale
The transferee ends up buying the whole of the business undertaking. The transferee can cherry pick the assets it wants to acquire.
Valuation is not done for individual component or assets but is done only for the whole of the business undertaking/asset. Valuation is done for individual component or assets
The rights & liabilities of the assets are transferred to the transferee. The rights and liabilities of the assets may or may not be transferred to the transferee as per the mutual agreement.
The tax incentives/ tax holidays and benefits of the existing business can be transferred to the new owner. The tax incentives and benefits of the existing business cannot be transferred to the new owner.
GST will not be applicable if transferred on going concern basis. GST will be applicable.
Transfer of any depreciable asset under slump sale can attract long term capital gain of 20% if undertaking is more than 3 years. Transfer of any depreciable asset under Individual Asset Sale would attract short term capital gain of applicable rate to the entity.
Provisions of section 50C as regard to stamp duty value in case of land & building does not apply. Provisions of section 50C as regard to stamp duty value in case of land & building does apply.
Provision of gift tax u/s 56(2) does not arise for slump sale transaction. Provision of gift tax u/s 56(2) arises provided for transfer specified assets u/s 56(2) are acquired as capital asset.

How Can InCorp Help You?

At In.Corp, our team will offer you assistance on various services involved in a slump sale transaction. Our Direct tax team can assist you in ascertaining your Income-tax liability on Slump sale. On the other hand, our Indirect tax team can assist you in ascertaining your GST liability on the sale. Also, avail assistance on compliance & documentation with ROC /MCA under Companies Act along with assistance in valuation and computation of net worth of the undertaking.

Need tax consultation with an expert?

Get in touch with us today!

E-Invoicing Under GST – A Faster Way of GST Filing

by InCorp Advisory

Reading Time: 3 minutes

E-Invoicing under GST is an authentication mechanism just like the E-way Bill system. However, the mechanism is different, wherein it involves submitting already generated invoices on the common e-invoice platform before issuing the same to the customer.

What is E-Invoicing Under GST?

It is a system in which Business to Business (B2B) invoices are authenticated digitally by GSTN. All the invoices uploaded on the e-invoice platform will be automatically transferred to the GSTN portal and E-way bill portal in real-time. So, with an e-invoice for GST, there will be no need to manually enter GSTR-1 return or to generate E-Way bills. 

Invoice Registration Portal (IRP) will issue a QR code and unique document identification number for every invoice generated which will be called Invoice Reference Number (IRN). IRN is a 64 digit character created by combination of GSTIN, Financial Year and Invoice Number. It is mandatory to print a QR Code on the digital Invoice. A dedicated mobile app to scan and verify validity of e-invoice QR Code is provided on the portal.

This blog post will help you understand the criterias for e-invoicing applicability and the benefits for opting for it.

What is the applicability under E-Invoicing?

  • E-invoicing GST has been made applicable from 1st October 2020. Businesses exceeding aggregate turnover of Rs. 500 crore in any preceding financial years from 2017-18 to 2019-20 can opt for digital invoice of GST.

When will E-Invoicing be non-applicable?

Sending an e-invoice of GST will not be allowed to the following registered persons even if the aggregate turnover exceeds the specified limits:

E-Invoicing under GST - When will E-Invoicing be non-applicable?

What are the benefits of E-Invoicing?

Businesses that are applicable to send out an e-invoice will have the following benefits:

  • Faster availability of ITC
  • Real-time tracking of invoices
  • No need to separately upload invoices on GSTN portal and E-Way bill portal
  • Faster data reconciliation which will lead to a reduction of mismatches
  • Invoices generated in multiple software can be integrated on GSTN
  • Faster return filing process as invoices are already auto-populated

What are the benefits of E-Invoicing?

Process flow for E-Invoice generation

E-Invoicing under GST - Process flow for E-Invoice generation

What are the contents of the E-Invoice?

E-Invoice will mandatorily contain the following fields:

E-Invoicing under GST - When will E-Invoicing be non-applicable?

What was the need for making E-invoice available for GST?

  • Tax authorities will have access to transactions as they occur in real-time since the e-invoice will have to be compulsorily generated through the E-Invoice portal.
  • Less scope for the manipulation of invoices since the invoice gets generated before carrying out a transaction.
  • It will reduce the chances of fake GST invoices and the only genuine input tax credit can be claimed. Since the input credit can be matched with output tax details, it becomes easier for GSTN to track fake tax credit claims.
  • This mechanism will help in overall reduction of tax evasion.

Buyer’s perspective on E-Invoice

  • In order to claim ITC, it is mandatory that the buyer must be having a valid tax invoice.
  • In terms of Rule 48(5) of the CGST Rules, if the invoice is generated without complying with the E-Invoicing requirement, it shall not be treated as invoice for GST purposes.
  • The buyers must ensure that their vendors are compliant with this new requirement if it applies to them. Otherwise, there would be issues on claiming ITC.
  • In this regard, the buyers must take confirmation from their suppliers regarding their E-Invoicing applicability. In case of non-compliance, the buyer has to agree on the implications.

How can InCorp help you?

We provide comprehensive advice and assistance on various indirect tax levies including Goods and Services Tax (GST) and Customs Duty. Our experts can help you with the following:

  • Assisting entities to understand the impact on business operations due to the implementation of E-invoicing
  • Assisting to configure the existing accounting ERP for compliance
  • Assist in solving any problems faced by the entities in the E-Invoice environment.

FAQs

Want to know more E-invoice of GST?

Talk to our GST Experts

Everything You Need To Know About Transfer Pricing

by InCorp Advisory

Reading Time: 8 minutes

A transfer price arises for accounting and taxation purposes when related parties, such as divisions within a company or a company and its subsidiary, report their own profits. When these related parties are required to transact with each other, a transfer price is used to determine costs. Transfer prices generally do not differ much from the market price.

Transfer price is a price that represents the value of goods or services between independently operating units of an organization whereas “transfer pricing” refers to prices of transactions between associated enterprises that may take place under conditions differing from those taking place between independent enterprises.

Transfer pricing generally refers to the price at which goods or services are transferred between associated enterprises. These transactions can include sales of products, provision of services, lending of money, and use of (intangible) assets. Thus, the effect of transfer pricing is that the parent company or a specific subsidiary tends to produce insufficient taxable income or excessive loss on a transaction. For instance, profits accruing to the parent can be increased by setting high transfer prices to siphon profits from subsidiaries domiciled in high tax countries, and low transfer prices to move profits to subsidiaries located in a lower tax jurisdiction.

To simplify, the prices and conditions applied between related parties under the transfer pricing policy should be appropriately within the range of prices and conditions charged between independent companies.

What is the objective behind Transfer Pricing?

infographic

“Associated Enterprise” means an enterprise that participates or in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in the management, control, or capital of the other enterprise.

“Arm’s Length Price” refers to the price that should have been charged between related parties had those parties been not related to each other.

“Constituent Entity” means:

  • Any entity of the international group that is included in consolidated financial statements for financial reporting purpose or included if equity share of any entity of the group were to be listed; or
  • Any entity of the group which is excluded from consolidated financial statements on the basis of size or materiality; or
  • Any permanent establishment of an entity of the group if separate financial statements are prepared for financial reporting, regulatory, tax reporting, or internal management control purposes.

Part 1: Applicability and Scope of Transfer Pricing

1. On which transactions transfer pricing is applicable?

Question 1

2. Which transactions are covered under transfer pricing?

Following transactions are covered under Transfer Pricing:

International Transactions Specified Domestic Transactions
• Sale of finished goods • Purchase of raw material or fixed assets
• Sale or purchase of machinery or intangibles •  Reimbursement of expenses paid/received
• IT enabled services • Support services
• Software development services • Technical service fees
• Management fees • Royalty fee
• Corporate guarantee fees • Loan received or paid
• Any expenditure with respect to which deduction is claimed while computing income like rent, interest paid, technical fees paid, etc. • Any transaction related to businesses eligible for profit-linked tax incentives, for example, infrastructure facilities and SEZ units
• Transfer of goods from the eligible business of assessee to the non-eligible business of assessee or to a person related to assessee

3. What are the various types of deemed Associated Enterprise (AE)? 

In the case of A Ltd., the following will be associated enterprise if:

    • A Ltd. holds => 26% voting power in B Ltd. Further, B Ltd. holds => 26% voting power in C Ltd.
    • A Ltd. gives loan to B Ltd. => 51% of the book value of total assets of B Ltd.
    • A Ltd. guarantees => 10% of the total borrowings of B Ltd.
    • B Ltd. appoints > 50% of directors/members of the governing board or one or more executive directors of A Ltd.
      Further, C Ltd. appoints > 50% of directors/ members of the governing board or one or more executive directors of B Ltd.
    • Manufacturing of goods of A Ltd. is wholly reliant on intangible assets of B Ltd.
    • B Ltd. supplies > 90% of raw materials to A Ltd. for manufacturing where the price is influenced by B Ltd.
    • A Ltd. sells goods to B Ltd. at the price decided by B Ltd.
    • A Ltd. and B Ltd have a mutual interest.
    • A Ltd. is controlled by Mr. X/HUF and B Ltd. Is controlled by Mr. X/HUF or relatives of Mr. X/HUF.
    • A (firm/AOP/BOI) =>10% of interest in B

For example,

Everything you need to know about transfer pricing 1

Everything you need to know about transfer pricing 2

Part 2: Methods for Computing Arm’s Length Price

1. What are the methods to compute Arm’s Length Price?

The various methods for computing Arm’s Length Price are as follows:

Question 2

Transfer Pricing Question 2.2

2. What will be the ALP when more than one price is determined from the methods?

Pricing Question 2.3

Note: If the variation of arm’s length price does not exceed 1% in case of wholesale trading and 3% in other cases, such transfer price will be deemed to be arm’s length price as per Rule 10CA of Income Tax Rules.

Wholesale trading means the transaction of trading in goods where purchase cost is 80% or more of the total cost and average monthly closing inventory is 10% or less of the sale of such goods.

Illustration:

X Ltd. manufactures engineering goods, Y Ltd. (unrelated party) also manufactures similar grader as compared to that of X Ltd. Z Ltd. is the associated enterprise of X Ltd.

Determine the best suitable method and the arm’s length price of X Ltd for the following transactions.

Sr. No. Nature of Transaction Method Applicable Arm’s Length Price
1 X Ltd. sold the grader to Z Ltd. and either X Ltd. or Y Ltd. sold the grader to a third party. CUPM • Internal CUPM- Price charged by X Ltd. to the third party

• External CUPM- Price charged by Y Ltd. to the third party
2 X Ltd. had purchased the grader from Z Ltd. and sold the grader to the third party. RPM The purchase price derived after considering the resale price margin of the transaction with the third party
3 X Ltd. sold grader to Z Ltd. and mark-up on the cost charged by Y Ltd. on the transaction with a third party is determined. CPM The price after adding the markup percentage applied by Y Ltd. on the cost base.
4 X Ltd. sold grader to Z Ltd. and the net profit margin charged by Y Ltd. is available. TNMM The price after applying the same net profit margin applied by Y Ltd.

 
5 X Ltd. and Z Ltd. are into a joint venture for manufacturing graders. PSM Split the profit on the basis of profit divided between Y Ltd. and the third party.

Part 3: Documentation and Compliance

1. What is the documentation structure under transfer pricing?

Question 3

2. What are the documents required to be maintained?

Information and documents to be maintained as per Rule 10D of Income Tax Rules

Basic Documents Supporting Documents
• Details of ownership structure of the enterprise

• Profile of the group in which the enterprise is a part

• Business overview of the taxpayer and associated enterprises

• Details of the transaction (name of the associated enterprise, nature, terms, quantity, value)

• Description of functions performed, risk assumed, assets employed

• Record of relevant financial forecasts/ estimates made, economic analysis and budgets

• Details of the uncontrolled transaction (nature, terms, conditions, analysis to evaluate comparability)

• Details of the method selected for determining the arm’s length price

• Record of actual working, assumptions, policies for determining arm’s length price

• Details of adjustments, if any, made to the transfer price

 • Government’s publications, reports, databases and studies

• Reports of market research studies and technical publications

• Price publications including stock exchange and commodity market quotations

• Published accounts and financial statements of the associated enterprises

• Agreements and contracts entered into with associated enterprises or with unrelated enterprises

• Letters and other correspondence documenting any terms negotiated with the associated enterprise

• Documents normally issued in connection with various transactions under the accounting practices followed

3. What is Safe Harbour and discuss its applicability?

  • “Safe Harbour” means circumstances under which the Income Tax Authorities shall accept the transfer pricing declared by the assessee.
  • Safe Harbour Rules were applicable from AY 2013-14 and the rules were revised from AY 2017-18.
  • Eligible transactions to apply under safe harbour rules are:
International Transactions Specified Domestic Transactions
• Provision of software development services

• IT services

• Knowledge process outsourcing services

• Provision of intragroup loans

• Provision of corporate guarantees

• Manufacture and export of auto components

• Receipt of low-value intragroup services

• Provision of contract R&D services relating to software development or generic pharmaceutical drugs

 • Supply of electricity

• Transmission of electricity

• Wheeling of electricity

• Purchase of milk or milk products by a co-operative society from its members

4. Which forms are required to be filed under transfer pricing?

Forms Particulars Applicability Timeline
Local file
3CEB Report from the accountant relating to the transaction Every entity having international or specified domestic transaction By 31st October of the assessment year
– Transfer Pricing Study Report Every entity having international transaction where the value exceeds INR 1 crore and eligible specified domestic transactions By 31st October of the assessment year
Master file
3CEAA

(Part A)

 Basic details of the international group and constituent entity by constituent entity Every constituent entity having international transaction By 30th November of the assessment year
3CEAA

(Part B)

 Master file information that provides an overview of the international group’s business operations and transfers pricing policies by  constituent entity Consolidated revenue of international group exceeds INR 500 crores; and

The aggregate value of the international transaction exceeds INR 50 crores, or Aggregate value of international transaction pertaining to intangible property exceeds INR 10 crores

 By 30th November of the assessment year
3CEAB (Intimation) Intimation for filing Form 3CEAA by constituent entity In case, multiple constituent entities resident in India. By 31st October of the assessment year
Country by Country reporting
3CEAC Intimation of details of parent entity/alternate reporting entity not resident in India by Constituent entity Consolidated revenue of international group exceeds INR 5,500 crores

 

 By 31st January of the assessment year
3CEAD Report by a parent entity or the alternate reporting entity resident in India 12 months from the end of the reporting accounting period
3CEAE

 

 Intimation on behalf of the international group – no agreement for the exchange of CbCR by Constituent entity By 31st January of the assessment year
Safe Harbour rules
3CEFA/ 3CEFB Application for opting for safe harbour in  respect of international transaction/ specified domestic transaction Every entity having eligible international transaction under safe harbour rules By 30th November of the assessment year

5. What are the penalties in case of non-compliance?

Particulars Section Penalty
Under-reporting of income 270A(7) 50% of the tax payable on under-reported income
Misreporting of Income 270A(8) 200% of the tax payable on misreported income
Failure to maintain transfer pricing documents or furnishing incorrect information or document 271AA(1) 2% of the value of the transaction
Failure to furnish master file

(Form 3CEAA, 3CEAB)

 271AA(2) INR 5,00,000
Failure to furnish the Accountant’s Report

(Form  3CEB)

 271BA INR 1,00,000
Failure to furnish transfer pricing documentation to the Transfer Pricing Officer 271G 2% of the value of the transaction
Failure to furnish CbCR report (Form 3CEAC, 3CEAD, 3CEAE) 271GB Up to 1 month- INR 5,000 per day
> 1 month- INR 15,000 per day

Part 4: Frequently Asked Questions (FAQs)

A Ltd., B Pte. Ltd., and C Ltd. are companies under the group of ACE Pte. Ltd. A Ltd. and C Ltd. are domestic companies and B Pte. Ltd. is a foreign company. The consolidated revenue of ACE Pte. Ltd. is INR 950 crores for AY 2020-21. A Ltd. holds 49% of voting rights in B Pte. Ltd. and also C Ltd. appointed three executive directors of A Ltd.

A Ltd. and B Pte. Ltd. had an agreement to provide an IT service worth INR 80 crores to an entity, where A Ltd. invested INR 41 crores and B Pte. Ltd. invested INR 39 crores and the profit earned would be distributed on an equal basis. The profit earned from the transaction is INR 8 crores. A similar agreement exists between P Ltd. and Q Ltd.(unrelated parties) where profit is split on the basis of the amount of investment made.

C Ltd. advanced a loan of INR 220 crores to A Ltd @ 11.9% per annum and also advanced loan of INR 220 crores to XY Ltd.(unrelated party) @12% per annum. Express your views with respect to the transfer pricing provision.

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TCS On Sale Of Goods

by InCorp Advisory

Reading Time: 4 minutes

The government of India has introduced Section 206C(1H) of the Income Tax Act, 1961 with regards to Tax Collection at Source on receipt of sale consideration for sale of any other goods. It is applicable to all sellers of goods whose turnover for the preceding Financial Year exceeds INR 10 crores w.e.f. 01.10.2020. This provision is not applicable where other TCS & TDS provisions is applicable.

Key points to be noted:

  • Every seller who has received any amount as consideration on sale of any other goods above INR 50 lakhs are liable to collect an additional 0.1% of the bill amount, collect PAN and pay/deposit such amount as TCS every month.
  • Even though the TCS amount is debited to the buyer, the liability does not arise until the time the amount is collected/received.
  • TCS returns have to be filed like TDS returns and compliances like issuance of certificate etc. are to be followed.

Action point:

  • We advise all assessee to complete accounting for half year till 30.09.2020 and divide all parties to whom sales are made in two parts, one where receipts from April to September has exceeded Rs. 50 Lacs and other where the limit has not been breached. with parties whereas sale and corresponding receipts of Rs. 50 lakhs are made.
  • In the case of first set of parties, From every sale after 01.10.2020 to such parties, assessee would be liable to levy 0.1% (0.075% till 31st March, 2021) TCS in every bill and keep record of the same, as tax is payable at the time of receipt from such sale.
  • In the case of second set of parties, from every sale that takes place after the receipt of Rs. 50 Lacs is breached, TCS is to be levied in every bill.
  • Accordingly, sellers will need to add 0.1% to the bill value and deposit with the government on receipt of the payment from buyers.
  • Also in a case where sales were made before 01.10.2020 and TCS was not levied on such bill but receipt after 01.10.2020 exceeds Rs.50 Lacs in such a case debit note will have to be raised for collecting TCS On receipt exceeding Rs. 50 Lacs.

Flow Chart of TCS applicability:

Due date* for TCS Payment, Return filing, and issue of TCS certificate

Collection Month Quarter Ending Due date of Payment Due Date of filing return (in Form 27EQ) The date for generating TCS certificates (in Form 27D)
April 30th June 7th May 15th July 31st July
May 7th June
June 7th July
July 30th September 7th August 15th October 31st October
August 7th September
September 7th October
October 31st December 7th November 15th January 31st January
November 7th December
December 7th January
January 31st March 7th February 15th May 31st May
February 7th March
March 7th April

*subject to extensions as provided by CBDT due to COVID19/lockdown.
» Read our Income Tax Rate Blog to know about TDS, TCS and the rates applicable

Illustrations:

1. If Sales consideration is INR 80 lakhs, and since the threshold limit for applicability of TCS u/s 206C(1H) is INR 50 lakhs per customer, whether TCS u/s 206C(1H) has to be collected on INR 80 lakhs or on INR 30 lakhs?
ANS: TCS must be collected on INR 30 lakhs.

2. Goods are sold to a customer viz. AMO Pvt Ltd. for INR 65 Lakhs in September 2020 and sales consideration received upto 30th September 2020 is INR 45 Lakhs. For the period beginning from 1st October 2020, the receipt of outstanding consideration is INR 20 lakhs. Whether the seller is liable for collecting TCS u/s 206C(1H)?
ANS: The provisions of section 206C(1H) came into effect on and from 1st October 2020. For sales billed in September 2020 and consideration is received on or after 1st October 2020, TCS would be applicable (as per clarification issued by CBDT). TCS would be applicable on amount of Rs. 15 Lacs (Rs. 65 Lacs (Total Receipts) – Rs. 50 Lacs (Exemption Limit))

3. If goods are sold to a customer viz. AMO Pvt Ltd for INR 65 Lakhs in September 2020 and sales consideration received on 5th October 2020 is INR 65 lakhs, whether the seller is liable for collecting TCS u/s 206C(1H)?
ANS: Liability to collect TCS on sales consideration of INR 15 lakhs (65 lakhs – 50 lakhs) which is received on or after 1st October 2020.

4. If goods are sold to a customer viz. MAB Pvt Ltd for INR 90 lakhs in September 2020 and for INR 45 lakhs in October 2020, on what amount is the seller liable to collect TCS u/s 206C(1H) if full amount is received in October 2020?
ANS: The applicability of Section 206C(1H) is triggered when sales consideration received to a customer where it exceeds INR 50 lakhs in aggregate during a financial year. Sale consideration received before 1st October 2020 has also to be considered for computing INR 50 lakhs. In the given example, amount received in a financial year is INR 125 lakhs which is above INR 50 lakhs, hence the applicability of Section 206C(1H) is triggered.

Sales up to September 2020 INR 90 Lakhs
Sales in October 2020 INR 45 Lakhs
Total sales for FY 2020-21 INR 125 Lakhs
Amount received on or after 01st Oct 2020 INR 125 Lakhs
Amount liable to TCS u/s 206C(1H) INR 75 Lakhs
(INR 125 Lakhs – 50 lakhs)

5. If goods are sold to a customer viz. AMO Pvt Ltd for INR 35 lakhs in September 2020 and for INR 25 lakhs in October 2020, on what amount is the seller liable to collect TCS u/s 206C(1H)?
ANS: The seller will be liable to collect TCS on INR 10 Lakhs (as and when the amount is received from the customer) which is the sales in the period from which the provisions of section 206C(1H) have become applicable i.e. from 1st October 2020.

Sales up to September 2020 INR 25 Lakhs
Sales in October 2020 INR 35 Lakhs
Total Sales in FY 2020-21 INR 60 Lakhs
Less: Threshold Limit u/s 206C(1H) INR 50 Lakhs
Amount liable to TCS u/s 206C(1H) @ 0.075% INR 10 Lakhs
[INR 60 Lakhs-50 Lakhs]

Clarification required from CBDT:

  • What is export as per the provision of TCS? Does that include High sea sales, sale to deemed exports like SEZ/ EOU etc.?
  • What is the applicability of TCS on barter transactions?
  • What is the definition of Goods?
  • What is TCS liability on Bad debts recovery?
  • How to resolve the mismatch between books and Form 26AS?

How can Incorp help?

Our experts can help you in the following-

  • Obtain Lower TCS certificates for the assessee.
  • Determination of parties on which TCS provision is applicable as on 30th Sept 2020.
  • Assistance on monthly TCS compliance assistance.

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