Tax News of the week!

Nifty BSE | NSE 09/02/12 Are Mutual Funds betting on Nifty?

The Authority for Advance Rulings ends a long standing dilemma for the software industry. The income tax tribunal reinforces transfer pricing norms and the Central Board of Direct Taxes (CBDT) provides clarity on the dispute resolution front. Lot of acronyms means there has been lots of developments in the world of tax. It is a mixed bag of good news and bad reports CNBC-TV18's Isha Dalal .

Three important pieces of news came in this week. Let us start with the bad news first... that is, interest free loans to overseas subsidiaries may no longer be permitted thanks to a ruling by the Delhi Income Tax Appellate Tribunal
 
The case involved Perot Systems, which was giving interest free loans to its associate companies in Bermuda & Hungary for further acquisitions
The ITAT held that such loans could not be interest free because
� Borrowing or lending between Associated Enterprises has to be subject to Transfer Pricing provision and hence at Arms Length Price
� In fact, since Bermuda is a tax haven, not charging interest for a loan extended to a company in Bermuda reduces the taxpayer's effective taxable income in India

The ruling means bad news for most of India INC which funds acquisitions through overseas subsidiaries. 
 
Sudhir Kapadia, Partner, E&Y says, "Indian companies will be better off if they plan their acquisitions in a manner that they do not give interest free loans to their overseas entity for the purpose of acquisition. What can you do as an alternative? For example, if you have an overseas company that already has a war-chest or a cash surplus, that overseas company can go and acquire further companies downstream. That's one scenario- you keep it away from transfer pricing regulations in India. The other scenario would be if the Indian company would finance the overseas company by way of equity rather than a loan so the question of attribution of interest does not arise. Whenever the company makes profits, it can choose to declare dividends back in India. The third scenario is using a mix of internal and external funds because external funds are by definition third party and would not warrant TP attribution."
 
Meanwhile there's good news on the dispute resolution front

In last year's budget, Finance Minister Pranab Mukherjee proposed speedier tax dispute resolution through Dispute Resolution Panels or DRPs-panels that promise an order within 9 months and no upfront payment of tax by the assessee
 
Now this week, the Central Board of Direct Taxes has clarified that the regular appellate process, which involves appeal to a single tax commissioner, is still available in addition to the DRP route. A clarification that gives taxpayers more flexibility.
 
Nitin Karve, ED, PwC says, "The level of preparation required in the application before the DRP today involves giving all arguments all factual statements and all sorts of preparation even at the stage of filing itself. Sometimes what happens is the commissioner has already decided the same issue either in your case or in someone else's case; the issue is relatively simple and can be disposed off with relatively limited arguments. In such a case a person will find it is much more informal to sit before one commissioner, briefly explain why the facts are the same as the previous case decided by him and virtually the commissioner will pass a one line or one page order saying the facts are the same as the taxpayers earlier order and the case gets disposed in a way much faster than the DRP mechanism."
 
From dispute resolution to income characterization-there's good news for software companies!

Japan-based software manufacturer Dassault systems was licensing software to end users in India through non-exclusive resellers
It approached the Authority for Advance Rulings or AAR with two questions:

#1: can income from the sale of software products be treated as royalty and hence be subject to 10% withholding tax?

#2, can this income be held taxable as business income in India?

The AAR ruled:
� Dassault was selling a copyrighted article and not the copyright itself, as per the provisions of the Indian Copyright Act. Hence the payment could not be characterized as royalty
� In addition, since the resellers were non-exclusive distributors, they were not controlled by Dassault and could not be deemed permanent establishments. Therefore, the income couldn't be taxable as business income either
 
Mukesh Butani, Partner, BMR Advisors says, "This has two impacts. It has an impact on the software industry on the presumption that the software industry imports software from non-resident software providers. But this is important to anyone outside the software industry as well. So today if I, as a professional services firm, import software from a non resident services provider, it's equally applicable to me as well."
 
So remember-loans to overseas subsidiaries can't be interest free, there's now more flexibility on tax dispute resolution and income in respect of copyrighted software cannot be classified as royalty.