In this issue

Spotlight 2

Legal Updates 4

Tax Talk 6

Compliance Calendar 7

Corporate Tax Myth 7

Contact Us 8

TAX TRENDSVolume 1 Issue 1 | Apr–Jun 2015

It gives us immense pleasure to present the first edition of SKP Tax Trends, our quarterly

newsletter that aims to provide insights into key direct tax developments in India. Our first issue

covers developments in the field of direct taxation from April to June 2015.

Direct taxes have been one of the primary concerns of investors in India. The law itself is over 50

years old and is continuously evolving. Currently, we are witnessing a strong thrust from the Modi

government towards electronic data submission and processing. The government has also

announced its intent to introduce a series of measures for increased stability in tax laws. Greater

emphasis is being laid on voluntary compliance and reporting by the taxpayer. Against this

backdrop, the government has introduced The Black Money (Undisclosed Foreign Income and

Assets) and Imposition of Tax Act, 2015 to bring back black money stashed abroad, with a limited

compliance window of three months starting from 1 July 2015. Overall, these are interesting times

and taxpayers can expect concrete developments in the field of direct taxation in the near future.

In this issue, under Spotlight, we discuss the burning issue of the implementation of the Income

Computation and Disclosure Standards (ICDS) that were issued by the Central Board of Direct

Taxes (CBDT), made effective from 1 April 2015. In Legal Updates, we provide brief information on

the key tax rulings in the past quarter. Under Tax Talk, we highlight certain statements made by

government officials that indicate the direction in which policies and initiatives are headed,

demonstrating the quick pace at which the Indian tax environment is evolving. Our Compliance

Calendar will keep you informed about the direct tax compliances due in the quarter of July–

September 2015. Lastly, we reveal a Corporate Tax Myth that has the potential of having

significant tax implications.

We hope you find our newsletter useful and look forward to your feedback. You can write to us at

skptax@skpgroup.com.

Warm regards,

The SKP Tax Team

2

Income Computation and Disclosure Standards and their impact on computing taxable income

The Central Board of Direct Taxes

(CBDT) notified the Income

Computation and Disclosure

Standards (ICDS) effective from 1

April 2015. The ICDS, as the name

suggests, are a set of mandatory

directions issued by the CBDT to

compute taxable income. Until now,

10 such ICDS have been notified and

more could be notified in due course.

It is for the first time that the CBDT

has issued specific directions for

computing taxable income on such a

scale. The ICDS are expected to result

in a paradigm shift in the

computation of taxable income and

could result in the advancement of

taxable income or bring certain

additional items to tax.

The ICDS will apply to all taxpayers

irrespective of their size, nature and

scale of operations since they do not

provide for any minimum turnover or

income criteria. They are applicable

for computing income under the

head ‘Profits and Gains of Business or

Profession’ and ‘Income from Other

Sources’ and to taxpayers who follow

the mercantile system of accounting.

The ICDS will be applicable for

computing taxable income from

financial year (FY) 2015-16, including

calculations of advance tax to be paid

during FY 2015-16.

The drafting style of the ICDS seems

to be similar to the existing

Accounting Standards issued by the

Institute of Chartered Accountants of

India (ICAI). Yet, the ICDS contain a

number of subtle yet potentially

significant variations as compared to

the Accounting Standards. These

variations are brought about through

modifications in the language of the

Accounting Standards or by omitting

certain items specifically provided by

the Accounting Standards. Hence, a

taxpayer has to not only look at what

the ICDS expressly provide but also

take into account what the ICDS do

not provide.

The ICDS are to be followed only for

income tax purposes and will not

affect the taxpayer’s books of

accounts. Therefore, the ICDS will

result in substantial data gathering

and calculations outside the books of

accounts in order to calculate the tax

liability. Though not expressly

clarified, it appears that the ICDS

would not apply to computing ‘book

profits’ under the Minimum Alternate

Tax (MAT) provisions.

The ICDS would have a far-reaching

impact on the computation of taxable

income. Taxpayers will have to

carefully analyse the impact on their

business operations and tax

positions, and could be required to

change certain tax positions taken in

the past. We have discussed some

illustrations on the impact of the

ICDS in the table on the following

page.

Taxpayers should carry out a detailed

analysis of the impact of the ICDS on

their business operations and tax

outflow. For areas where the ICDS

take a divergent view from the

Accounting Standards and/or the

legal position under the Income Tax

Act, including court judgments, a

conscious decision will have to be

taken by the taxpayers about the tax

position to be adopted. Any such

position should also be evaluated in

terms of monetary impact on tax

outflow, approach of the tax

authorities, disclosure requirements,

and potential penalty implications at

the time of a Revenue Audit (Scrutiny

Assessment).

The ICDS would also require the

maintenance of strong and robust

documentation to support

calculations made under its

provisions. In addition, appropriate

reconciliation will have to be

maintained between accounting

profits and taxable income. The ICDS

will also significantly impact deferred

tax calculations and could delay the

year-end audit closure activity.

SPOTLIGHT

3

Requirement of ICDS Issues/Impact What taxpayers should do

The ICDS do not override the

provisions of the ITA

It is uncertain whether court judgments would

prevail in case of a conflict between the ICDS

and a court judgment, particularly judgments

based on accounting principles.

Examine the tax positions taken in

the past to determine whether they

can be continued in the future.

Concept of ‘prudence’ is absent

Provisions for expected expenses/losses may

not be deductible, whereas expected income

could become taxable, though not recorded as

revenue under the accounting principles.

Evaluate revenue recognition and

expense accrual policies from a tax

perspective to analyse the impact

of the ICDS on their tax outflow.

Concept of ‘materiality’ is absent

Recording individual assets of smaller value as

revenue expenditure would not be permitted.

Such items will not be tax deductible, though

depreciation would be allowed over the years.

Develop a system to accumulate

information about smaller assets

being recorded in the Profit and

Loss Account.

Valuation of inventory required

for service providers

Cost of inventory for contracts in progress to

be offered to tax. The taxable income for

service entities would increase in FY 2015-16.

Valuation of inventory would be a

cumbersome exercise.

Improve the Business Information

Systems and Accounting Systems to

identify and value service inventory.

Maintain detailed calculations of

how the inventory was valued.

Revenue from construction

contracts and all service

contracts must be recognised by

a percentage completion

method

The taxable income for FY 2015-16 will

increase since service entities generally follow

the completed contract method.

Improve their Business Information

Systems to scientifically determine

the percentage of work completed

on service contracts and offer the

pro-rata revenue to tax.

All kinds of government grants

would now become taxable,

either upfront, or by way of

reduced depreciation

Grants received under the Packaged Scheme

of Incentives will become taxable and would

drastically alter business and pricing

decisions.

Re-analyse the Incentive Schemes

to examine if there is any possibility

of claiming a tax exemption for

grants received under the ICDS

regime.

Borrowing costs must be

capitalised according to a

special formula provided by the

ICDS. Capitalisation would be

made on all fixed assets.

This formula is different from AS 16 and

requires detailed calculations. The formula

provided by the ICDS is complex and almost

always results in an increase in taxable

income.

Maintain robust calculations of

capitalisation of borrowing costs.

The formula provided by the ICDS

will have to be carefully interpreted

and applied. Substantial disclosures

expected to be made in the

Return of Income and/or the

Tax Audit Report

The disclosures made under the ICDS could be

used against the taxpayer during a Revenue

Audit (Scrutiny Assessment).

Dedicate additional time and effort

to analyse the disclosures and to

ensure that the disclosures made

are correct and complete.

Some illustrations of the impact of ICDS

4

LEGAL UPDATES

Sharing costs of a facility,

which does not have human

involvement, is not fees for

technical services and is not

liable to tax in India, holds

Bombay High Court

Director of Income Tax vs A P

Moller Maersk A/S (ITA No.

1306/2013)

The taxpayer was a tax resident of

Denmark and was engaged in the

shipping business. It carried out its

activity in India through independent

agents who would book cargo and act

as clearing agents. In order to help

them in this business, the assessee

had procured and maintained a

global telecommunication facility,

which the agents would operate. The

cost incurred by the taxpayer was

billed to the agents on a pro-rata

basis. The question before the

Bombay High Court was whether the

pro-rata costs billed to the agents

were taxable in India in the hands of

the taxpayer as fees for technical

services.

The High Court observed that the

agents were using the facility to

coordinate the shipping business. It

was merely an automated system

using advanced technology and there

was no human involvement in terms

of ‘rendering of services’ by the

taxpayer. Furthermore, the tax

authorities did not have any record to

demonstrate that the taxpayer had

earned profit from the payments

made by the agents. The High Court

hence held that this is a cost-sharing

arrangement and the taxpayer was

not providing any technical services

to the agents. Accordingly, it was held

that the costs recovered from the

agents were not taxable in India.

PE for installation projects

should be considered as per

the specific Article of the

DTAA and not the generic

Service PE Article, holds

Mumbai Tribunal.

Furthermore, the date of

execution of contract is not

relevant in calculating the

number of days under the PE

Article and each project

should be considered on a

standalone basis

Kreuz Subsea Pte Ltd vs Deputy

Director of Income Tax (ITA No.

1876/Mum/2014)

The taxpayer was a tax resident of

Singapore and was engaged in the

business of installation and

construction of integrated subsea

installations. It carried out different

projects in India during the year.

Under Article 5(3) of the India-

Singapore Double Tax Avoidance

Agreement (DTAA), a taxpayer

engaged in a construction, installation

or assembly project in India would

constitute a Permanent

Establishment (PE) if such activities

continue for more than 183 days.

Article 5(6) of the DTAA provides that

a taxpayer would constitute a Service

PE in India if it renders services in

India for a period of more than 90

days.

For one of the projects, the duration

between the date of execution of the

contract and the date of completion

of work exceeded 183 days. The

duration of other projects was more

than 90 days but less than 183 days.

The question before the Tribunal was

whether the taxpayer constituted a PE

in India and whether the duration of

different projects needed to be

aggregated to calculate the duration

of 183 days.

The Tribunal held that the taxpayer is

engaged in installation activities.

Article 5(3) deals with installation

projects while Article 5(6) deals with

services in general. Since the DTAA

contains a specific Article on

installation projects, the existence of

a PE should be determined with

reference to Article 5(3) and not

Article 5(6).

The Tribunal further held that in

calculating the number of days, the

date of signing of contract merely

signifies that the parties have agreed

to the terms and conditions for

carrying out the work. The actual date

should be reckoned from the

preparatory activities letting to the

performance of the contract of the

core business activity i.e. the

installation activity in the present

case. Hence, the calculation of the

number of days from the date of

signing the contract is incorrect.

Regarding the aggregation of time

5

spent on different projects, the

Tribunal held that each project of the

assessee must be viewed on a

standalone basis.

Sale of software embedded in

the hardware is not taxable as

royalty, holds Delhi Tribunal

Aspect Software Inc vs Assistant

Director of Income Tax (ITA No.

1124, 1125/Del/2014)

The taxpayer was a tax resident of

USA and was engaged in the business

of provision of hardware, software

and other services regarding the

management of customer

interactions. It sold certain contact

solutions to its clients in India which

involved the sale of hardware and

embedded software. In certain cases,

it only licensed the software to the

end users without the hardware. The

taxpayer retained all the intellectual

property rights in the software and

the end user was provided with a

limited right to use the licensed

product. The question before the

Delhi Tribunal was whether the

payment made towards the software

embedded in the hardware was

taxable in India as royalty.

The Tribunal, relying on certain

decisions of the Delhi High Court, held

that the transaction under

consideration involved only the

transfer of a copyrighted article and

represents the purchase price of the

article. There was no transfer of any

copyright. Hence, the payments made

were not in the nature of royalty.

Payment of arranger’s fees to

a third party for arranging a

loan is not in the nature of

interest or fees for technical

services, holds Mumbai

Tribunal

Idea Cellular Limited vs Assistant

Director of Income Tax (ITA No.

1619/Mum/2011)

The taxpayer was a tax resident of

India who had obtained a loan from a

foreign lender. For this purpose, it had

engaged a non-resident entity to act

as an arranger of the loan. The role of

the arranger was to liaise between the

taxpayer and the lender and procure

the loan for the taxpayer. The

question before the Tribunal was

whether the arranger’s fees were in

the nature of interest or fees for

technical services and therefore

required tax withholding in India.

The Tribunal held that according to

the definition of interest under the tax

laws, interest is payable by the

borrower to the lender. The arranger

is not the lender. The fees paid to the

arranger are not in the nature of

compensation by the borrower to the

lender for taking a loan. Accordingly,

the Tribunal held that the payment of

the arranger’s fee is not in the nature

of interest.

The term ‘fees for technical services’

includes fees for managerial,

consultancy or technical services. The

term ‘managerial’ essentially implies

control, administration and guidance

for business, day-to-day functioning.

The payment is not for ‘consultancy

services’ since the arranger did not

provide any advisory or counselling

services. The Tribunal also referred to

certain Tribunal judgments and held

that the arranger’s fees cannot be

considered as fees for technical

services and accordingly decided the

matter in favour of the taxpayer.

6

Companies to get a lower

corporate tax rate but fewer tax

benefits

(Excerpts from an article published in

The Financial Express, dated 23 June

2015)

While the government intends to

reduce the corporate tax rate from

the existing 30% to 25%, reportedly,

certain tax benefits would be

simultaneously withdrawn. Incentives

such as accelerated depreciation and

weighted deduction for research and

development expenses will be among

the first tax sops to be withdrawn.

Individual tax officers do not have

the power to select a case for

Revenue Audit, clarifies CBDT chief

(Excerpts from an article published in

Business Standard, dated 24 June

2015)

CBDT Chairperson, Anita Kapur,

stated that “no AO (Assessing Officer)

can, at his choice, select a case for

scrutiny (Revenue Audit). There are

certain mandatory criteria and if you

fall within that you will get selected,

which is done by our electronic

platform called the Computer

Assisted Scrutiny System (CASS).” She

added that there was no discretion

involved on the part of the taxman.

There are certain risk parameters (fed

in the CASS system). You hit a flag,

you get selected. You don’t hit a flag,

you don’t get selected”.

India to sign an agreement with

USA to implement the Foreign

Account Tax Compliance Act (Excerpts from an article published

on moneycontrol.com, dated 24 June

2015)

Finance Minister, Arun Jaitley, stated

that India will sign an agreement with

USA to implement the Foreign

Account Tax Compliance Act (FATCA),

which would facilitate automatic

transmission of information and

would help counter the scourge of

black money.

Simplifying compliance for

taxpayers

(Excerpts from an article published in

Mint, dated 25 June 2015)

Anita Kapur, chairperson of the

Central Board of Direct Taxes (CBDT),

has stated that the apex policy-

making body of the Income Tax

department wishes to usher in

measures and policies that make tax

compliance a very easy and smooth

affair. She stated that the effort of the

department is to “make the process

of paying taxes so simple that at least

the cost of compliance and also the

hassle of paying taxes is eliminated

totally”. She also mentioned that they

were working towards a goal where

“99% of taxpayers need not see our

offices” at any point of time as

taxpayers would be able to file their

returns electronically.

TAX TALK

7

Corporate Tax Myth The presence of an employee of a foreign company in India does not attract any tax liability for the company if it does not earn any income from India. If you would like us to help you understand the implications, please write to skptax@skpgroup.com.

Compliance Calendar (July–September 2015)

Month Due Date Compliances

July 30 Issuance of TDS certificates for the quarter of April to June 2015

August 7 TDS payment for TDS deducted in July 2015

August 31 Return of Income for the financial year (FY) 2014-15 for taxpayers not subject to Tax Audit

September 7 TDS payment for TDS deducted in August 2015

September 15 Advance tax for second instalment for corporate taxpayers (45% of estimated tax liability to be deposited on a cumulative basis)

September 15 Advance tax for first instalment for non-corporate taxpayers (30% of estimated tax liability to be deposited)

September 30 Tax Audit/other audits under the Income Tax Act, 1961 for FY 2014-15 for taxpayers not subject to transfer pricing provisions

September 30 Return of Income for FY 2014-15 for taxpayers not subject to transfer pricing provisions

8

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ABOUT THIS NEWSLETTER This newsletter contains general information existing at the time of its preparation only. It is intended as a news update and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or opinion or services. This newsletter is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional adviser and also refer to the source pronouncement/documents on which this newsletter is based. It is also expressly clarified that this newsletter is not a solicitation or an invitation of any sort whatsoever or a source of advertising from SKP Group or any of its entities to create any adviser-client relationship.

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