F. No. 137/12/2006-CX.4
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs
New Delhi, dated 29th January 2009
Subject: Imposition of service tax on Builders - regarding
Construction of residential complex was brought under service tax w.e.f.01.06.2005. Doubts have arisen regarding the applicability of service tax in a case where developer / builder/promoter enters into an agreement, with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. The ‘Construction of Complex’ service has been defined under Section 65 (105)(zzzh) of the Finance Act as “any service provided or to be provided to any person, by any other person, in relation to construction of a complex”. The ‘Construction of Complex’ includes construction of a ‘new residential complex’. For this purpose, ‘residential complex’ means any complex of a building or buildings, having more than twelve residential units. A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.
2. A view has been expressed that once an agreement of sale is entered into with the buyer for a unit in a residential complex, he becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit is a service of ‘construction of residential complex’ to the customer and hence service tax would be applicable to it. A contrary view has been expressed arguing that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit, the transaction of sale is completed only after complete construction of the residential unit. Till the completion of the construction activity, the property belongs to the builder or promoter and any service provided by him towards construction is in the nature of self service. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of ‘residential complex’ as defined for the purposes of levy of service tax and hence construction of it would not attract service tax.
3. The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.
4. All pending cases may be disposed of accordingly. Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.
(Gautam Bhattacharya)
Commissioner (Service Tax)
Regards,
Praveen Boda
Tuesday, February 3, 2009
Saturday, January 31, 2009
Proof of travel not required for claiming LTA: SC
IN THE SUPREME COURT OF INDIA
Civil Appeal No. 993 OF 2005 With Civil Appeal No. 992 OF 2005
COMMISSIONER OF INCOME TAX Vs M/s LARSEN & TOUBRO LTD
A short question which arises for determination in these Civil Appeal(s) is - whether the assessee(s) was under statutory obligation under Income Tax Act, 1961, and/or the Rules to collect evidence to show that its employee(s) had actually utilized the amount(s) paid towards Leave Travel Concession(s)/Conveyance Allowance?
It may be noted that the beneficiary of exemption under Section 10(5) is an individual employee. There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the Declaration to be submitted by an employee(s). For the above reasons there is no merit in the Civil Appeals and the same are dismissed with no order as to costs.
Here goes my opinion on this...
Though Sec-192 doesn't cast any "OBLIGATION" on the employer, but as a DDO (Disbursement Officer), he has the authority to collect en examine the supporting evidence.
The same rule applies for HRA, Medical Reimbursement & 80C investments as well...If you refer to the Circular on "TDS on Salaries" no where it is mentioned about collecting proofs. But as a DO, it is the employer's responsibility to ensure that the deductions he is giving to employees from his income are based on genuine proofs and not mere declarations from employees.
Though the final obligation lies on the employees, employer need to ensure that he has proper basis for the providing exemptions/deductions under various sections viz., Sec-10, 80C etc.
Just a snippet, why complicate our salary structure, can't we have everything as LTC and just a mere declaration that I have incurred my entire salary on LTC !!! What say??
Thursday, January 29, 2009
Family Settlements and tax planning
Tax Planning
Tax planning as a concept had at a point of time suffered degradation and for a while seemed to be a euphemism for tax evasion. This was the fall¬out of some observations in McDowell’s case, [154 ITR 148 (SC)] especially in the separate opinion of Justice Chinnappa Reddy. But the libel did not stay too long. Sabyasachi Mukherjee, Justice of the Supreme Court salvaged its respectability by observing tax avoidance by genuine transactions is not evil. It is any subterfuge or simulation of a transaction or rather a hoax of a make-believe transaction which is despicable and cannot be countenanced. In Playworld Electronics, he observed [184 ITR 308 (SC)] : “It is true that tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is also true that, in order to create an atmosphere of tax compliance, taxes must be reasonably collected and when collected, should be utilised for proper expenditure and not wasted. (See the observations in CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC), it is not necessary, in the facts of this case, to notice the change in the trend of judicial approach in English (Sherdeley vs. Sherdeley (1987) 2 All ER 54 (HL). While it is true, as observed by Chinnappa Reddy J., in McDowell and Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) that it would be too much to expect the Legislature to intervene and take care of every device and scheme to avoid taxation and it is up to the court sometimes to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the device for what they really are and to refuse to give judicial benediction, it is necessary to remember, as observed by Lord Reid in Greenberg vs. IRC (1971) 47 TC 240 (HL), that one must find out the true nature of the transaction, it is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law”.
So tax planning is now rehabilitated as a normative phenomenon. It stands on its ethical plane without diminution in respectability.
Now I turn to address to the subjects assigned me.
Will in tax planning
This special favour unwittingly done by the legislature caused a proliferation of discretionary trusts under section 164 for the advantage of softer tax treatment. There had been a spate of discretionary trusts for tax avoiding advantage. This taxation of discretionary trust as an ordinary association of person came as a relaxation under the new Act because under the repealed Act of 1922, the tax rate for discretionary trust was the maximum slab rate of tax applicable to the association of persons. The error of relaxing the old provision through want of circumspection dawned on the legislature after at least a decade.
Though borrowed from English jurisprudence, the idea of the will was not wholly unknown to ancient Indian society. The idea of the will i.e. the distribution of the estate of the deceased person according to his wish and desire expressed in his Will was quite appreciated in ancient Indian society. But its actual use was scarce. Its existence in the present form can be traced back at least a century and its development was accelerated by British influence. So it can be said that, in effect though not in form, testamentary instruments have for long come into operation after the death of the maker of the instrument before the Raj days. In fact, in Bengal in the 18th Century, the testaments got recognition as part of the law of inheritance which the Courts recognised. Anyway, the history of Will as a subject does not belong here.
By now Will as a means of disposition of property by a person which takes effect after his death is widely used as part of the law of inheritance. As such, it becomes quite popular for the purpose of disposition of property in general and particularly, for its use in arrangement of property and more particularly, for it advantages in taxation and tax planning through testamentary disposition.
Its general popularity is for the reason that the owner of properties in old age, while commanding influence over and respect of younger generation and their attention, apart from bond of love, for the magnetic power of wealth, can retain the property during lifetime and at the same time leave his estate as the legacy according to his wish and desire for the near and dear ones.
The efficacy of Will for tax saving, however, has somewhat lessened after the abolition of Gift tax. From tax point of view, during the regime of Gift tax as an added tax, the old people would prefer Will to making in his life time gift to avoid gift tax which was a substantial levy, almost prohibitive of making gifts. But that cause for use of Will as a tax-saving device is no more after the legislature had done away with the gift tax.
But that does not mean that Wills have lost their use from the tax point of view. It assumed a new dimension and special importance after the amendment to the law relating to taxation of private trusts in 1970.
It requires a short introduction of the law relating to taxation of private Trusts. The private trusts for the purpose of Income-tax Act fall under two classes – specific trusts and discretionary trusts. The specific trusts are trusts where the beneficiary is known and definite and if the beneficiaries are more than one, each beneficiary’s share is known, definite and specified. For such trust, the taxation scheme is that the value of the benefit from the trust availing to a beneficiary shall be a component of his total income and he shall be taxed according to the total income that comprises his share of benefit from the trust.
Discretionary Trust in contrast is one where the beneficiary is not known and determinate or when known, in the case of multiple known beneficiaries, the share of each beneficiary amongst multiple beneficiaries is not determinate and depends on the discretion of the trustee. Thus, the discretionary trust is one where the trust income is not specific for any known person or in other event the shares of beneficiaries are not known and determinate. So for income tax the test of discretionary trust lies in the manner of conferment of the benefit on the beneficiary than in the amount of discretion permitted to be exercised by the trustees. Indefiniteness or uncertainty of the beneficiary or his share in the trust income is the hallmark of a discretionary trust under the Income tax law.
The Income-tax Act when re-enacted in 1961 repealing the old act of 1922, ordained that such a discretionary trust should be taxed in the manner an ordinary association of persons is taxed at the progressive rates prescribed by the Finance Act. This had the effect of giving a premium for discretionary trust because the rates for taxation as an association of persons would be less for the trust income than in the case of a specific trust where the trust income goes to swell the other income of a beneficiary of a specific trust.
Another interesting controversy has arisen with regard to testamentary discretionary trust. The controversy is with regard to the treatment of the income arising from monies received by a testamentary trust from outsiders. The question is whether in regard to such donations, the punitive rate of maximum tax rate shall apply with regard to the income attributable to such donations.
This special favour unwittingly done by the legislature caused a proliferation of discretionary trusts under section 164 for the advantage of softer tax treatment. There had been a spate of discretionary trusts for tax avoiding advantage. This taxation of discretionary trust as an ordinary association of person came as a relaxation under the new Act because under the repealed Act of 1922, the tax rate for discretionary trust was the maximum slab rate of tax applicable to the association of persons. The error of relaxing the old provision through want of circumspection dawned on the legislature after at least a decade. In 1970, section 164 was amended enjoining that discretionary trust shall be taxed as an association of persons at a flat rate of 65%. It can be said to be a punitive taxation measure to counteract the tax payers’ spur in creating discretionary trusts to bring their corpus as discretionary trust fund for lure of lower taxation.
Here, the Wills come in as a means of averting this punitive taxation of discretionary trusts. The amendment gives a concession for testamentary trust in taking effect from assessment year 1971-72 whereby a trust of discretionary nature is subjected to an ordinary rate applicable to an association of persons both for income tax and wealth tax. The punitive rate of discretionary trust does not operate where it is created by a will. The reason is obvious. Where the transfer is by a will which takes effect only after the death of transferor, no advantage can conceivably be derived from such transfer by the transferor. The efficacy of the Will as a means of tax planning thus survives.
Where the beneficiary of a testamentary trust has income from their own sources, he will not be hit hard if he derives benefit from a discretionary trust created by a will because the trust income allocated to him by the trustee in his discretion shall not be assessed at the maximum marginal rate or any punitive rate. The trust income is not to be included in his individual income but to be assessed separately as that of an association of persons. The income of such a testamentary discretionary trust shall be treated as income of any ordinary association of persons at its usual rate. This benefit results in lower taxation. Even if no beneficiary is ascertained or no income is distributed among the beneficiaries the taxation shall be on the trust income in the status of an ordinary association of persons. As a matter of fact, in recent times, the trend creating discretionary trust under a will has caught on. This position has come to stay for over four decades. But for this relaxation, one important condition is that the trust created by the will must be one. If the testator makes more than one trust, the trusts forfeit the benefit.
A more generous plan of testamentary trust may be conceived. When the will creates a number of trusts, each trust deriving income below the taxable limit, it may virtually give to the beneficiaries total tax holiday for all times to come. The attempt at creating such multiple-trusts, will or testament is no more unprecedented.
Another interesting controversy has arisen with regard to testamentary discretionary trust. The controversy is with regard to the treatment of the income arising from monies received by a testamentary trust from outsiders. The question is whether in regard to such donations, the punitive rate of maximum tax rate shall apply with regard to the income attributable to such donations. The donations to a testamentary trust by themselves is in the nature of trust. With regard to the donations, the trust ceases to be testamentary. It is non-testamentary and the exception admissible for a testamentary trust under the amended provision of section 164 shall not be available. This interpretation is almost irresistible. Therefore, the punitive rate of taxation shall apply with regard to the property so donated to an existing testimony trust.
A few words can be said about the mode of executing a will. It does not require any stamp paper. It can be executed by simply signifying the intention on the document signed by the testator himself with two witnesses. All the persons – the testator and the two witnesses shall sign in presence of each other. Registration is optional. Therefore, the execution of a will virtually costs nothing; though obtaining a probate involves more agony than cost for tardy process of obtaining probate. Anyway, the abolition of gift tax does not take away all the winds from the sails of will as a means of tax planning.
Family Settlement or family arrangement and Tax planning
Family settlement or family arrangement is a transaction effecting distribution of family assets. This has fortuitous effect of division of a family’s assets and income resulting therefrom. But it is a misnomer to describe family settlement or arrangement.
As a means of tax planning because the object of such settlement or arrangement is resolving the actual dispute or the potential threat of a dispute striking or threatening to strike at unity and dignity of the family and bringing it to disrepute through public exposure.
Paradoxically, though the family ties are nowhere as strong as they are in the Indian society, the concept of so resolving a family dispute through internal amicable settlement has travelled from England to India. It followed the flag.
The sanctity of a family and its preservation caused the evolution of it as a manner of realignment of family properties for family peace, the motto being that the society must have self-respecting and self-adjusted families, at peace with itself.
That way, the concept of family settlement had its voyage from England and has had a good harbour in the law of this land. Though upholding the family dignity is not a matter alien to Indian genius, the idea of settlement as a form of legal transaction was not there. So we are indebted to the English jurisprudence. Halsbury defines the settlement in the following words :
A family agreement between members of the same family intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving honour. The agreement may be implied from a long course of dealing. But it is more useful to embody or to effectuate the agreement in a deed to which the term family agreement is applied.
It is an agreement for the division of the family property by way of compromise to avoid family quarrel or litigation.
The arrangement results in dividing family property.
It becomes an agreement among the members of a family to share equitably whatever they obtained.
It is an agreement between co-heirs dividing the property between them to conduce to the family peace.
It quite often emerges as an agreement between the heirs and the person supposed to be entitled under a lost will.
In India this mode of transfer is recognized by the Supreme Court in Sahoo Madhab Das vs. Mukand Ram AIR 1955 SC 481. According to this decision, the dispute need not be a present dispute, even the threat of it to erupt imminently is also considered a good cause for such settlement. What would be the test of existence of a dispute will depend on the circumstances of each individual case. No strait jacket formula is possible. There must be some circumstances indicating some forms of controversy threatening the family unity. Another test may be that whether the settlement really removes the cause of discord and makes the family more secure and happier.
That apprehended conflict can also be a ground for such settlement draws support from the decision of Calcutta High Court AIR 1932 Cal 600, AIR 1932 Cal 664. Even the parties to family settlement need not belong to the same family. The word ‘family’ in this context is quite flexible. The family is not to be taken in its rigid connotation in common parlance. It is enough if the parties are relations. Even collaterals having a remote common ancestor may join in an arrangement and can have relinquished or altered even their interest in expectancy. In this connection, reference may be made to Krishna Baharilal vs. Gulab Chand & Ors. AIR 1971 SC 104. The court, in that case, encountered by the question whether the want of direct family bond amongst the parties to the settlement detracts from the family character of the settlement. The answer is in the negative. Even though the parties were nothing but mere relations and not members of the same family, the dispute between the parties was in respect of certain property which was originally owned by their common ancestors, that was considered sufficient for a family settlement or arrangement. Thus, the family for the purpose of such settlement has a broad sense to embrace parties not belonging to the family.
But the most important aspect for such settlement is that the parties to the family settlement or arrangement must have same antecedent title, claim or interest, even a possible claim in the property. The meaning of antecedent title taken out from the dictionary means existing or occurring before any time or order often with consequential effects. Thus, it refers to some prior right or pre-existing right but it is not to be understood in the sense too pat on the dictionary meaning. In the context of Lord Halsbury’s definition, it means not only existing or prior right but also presumptive right. So a family arrangement cannot be denounced or struck down on the plea that the parties or anyone of the parties did not have pre-existing right at the time of settlement. This view is vindicated by the decision of the Supreme Court in Kale vs. Deputy Director – AIR 1976 SC 807. It says that even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all his claims or title in favour of such party and acknowledges him to be the sole owner, the antecedent title could be said to be there residing in such party.
Antecedent title according to the decision must be assumed in such a situation and the family arrangement was upheld.
The last important view is that the family settlement is not a transfer because here property goes to parties who had antecedent rights. The Supreme Court observed in Sahoo Madodas vs. Mokand Ram (supra) that a compromise or family arrangement is based on the assumption that there is an antecedent title of some sort in the parties and the agreement acknowledges what the title is, each party relinquishing all claims to properties other than his share under the agreement and recognizing right of the others to the portion allotted to them respectively. The court has widened the concept of antecedent title by holding that antecedent title would be assumed in a person who may not have any title but who has been allotted a particular property by the other party to the family arrangement by relinquishing his claim in favour of such a donee. In such a case the party in whose favour the relinquishment is made would be assumed to have an antecedent title.
Thus, the family arrangement being a realignment of title among parties having antecedent rights and interest does not lead to any transfer. It is akin to distribution of properties under a partition of a HUF and needs no conveyance.
Now, the terms of a family arrangement may have tax saving effect because the property is deconcentrated and divided. So is income yield of the property. This would certainly go to minimize taxation if the distribution of income resulting therefrom comes in for taxation at lower slab rate as a result of such diffusion. It is also equally true about Wealth Tax. It also used to save gift tax when gift tax had been in vogue.
But family arrangement or settlement cannot have as its object that of saving tax. It then becomes a fraud. The sole object of family arrangement is preservation of family dignity, unity and peace. So if one targets family settlement or arrangement as the tax saving device, that would certainly cast a cloud on the bona fides of the whole transaction. It would be a subterfuge to hoodwink the revenue.
So in the genuine settlement, tax avoidance comes merely as providential or fortuitous side effect.
[Reproduced with permission from the Paper presented at AIFTP's Two Day National Tax Conference held on 13th and 14th December, 2008 at Kolkata.]
Author: S. Bagchi Advocate
The author deals with the ever – popular topic of tax planning in the context of family arrangements. He warns that while in a genuine settlement, tax avoidance comes merely as a providential or fortuitous side effect, if one targets family settlement as a tax saving device that may cast a cloud on the bona fides of the whole transaction and may be regarded as a subterfuge to hoodwink the revenue
Tax planning as a concept had at a point of time suffered degradation and for a while seemed to be a euphemism for tax evasion. This was the fall¬out of some observations in McDowell’s case, [154 ITR 148 (SC)] especially in the separate opinion of Justice Chinnappa Reddy. But the libel did not stay too long. Sabyasachi Mukherjee, Justice of the Supreme Court salvaged its respectability by observing tax avoidance by genuine transactions is not evil. It is any subterfuge or simulation of a transaction or rather a hoax of a make-believe transaction which is despicable and cannot be countenanced. In Playworld Electronics, he observed [184 ITR 308 (SC)] : “It is true that tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is also true that, in order to create an atmosphere of tax compliance, taxes must be reasonably collected and when collected, should be utilised for proper expenditure and not wasted. (See the observations in CWT vs. Arvind Narottam (1988) 173 ITR 479 (SC), it is not necessary, in the facts of this case, to notice the change in the trend of judicial approach in English (Sherdeley vs. Sherdeley (1987) 2 All ER 54 (HL). While it is true, as observed by Chinnappa Reddy J., in McDowell and Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) that it would be too much to expect the Legislature to intervene and take care of every device and scheme to avoid taxation and it is up to the court sometimes to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the device for what they really are and to refuse to give judicial benediction, it is necessary to remember, as observed by Lord Reid in Greenberg vs. IRC (1971) 47 TC 240 (HL), that one must find out the true nature of the transaction, it is unsafe to make bad laws out of hard facts and one should avoid subverting the rule of law”.
So tax planning is now rehabilitated as a normative phenomenon. It stands on its ethical plane without diminution in respectability.
Now I turn to address to the subjects assigned me.
Will in tax planning
This special favour unwittingly done by the legislature caused a proliferation of discretionary trusts under section 164 for the advantage of softer tax treatment. There had been a spate of discretionary trusts for tax avoiding advantage. This taxation of discretionary trust as an ordinary association of person came as a relaxation under the new Act because under the repealed Act of 1922, the tax rate for discretionary trust was the maximum slab rate of tax applicable to the association of persons. The error of relaxing the old provision through want of circumspection dawned on the legislature after at least a decade.
Though borrowed from English jurisprudence, the idea of the will was not wholly unknown to ancient Indian society. The idea of the will i.e. the distribution of the estate of the deceased person according to his wish and desire expressed in his Will was quite appreciated in ancient Indian society. But its actual use was scarce. Its existence in the present form can be traced back at least a century and its development was accelerated by British influence. So it can be said that, in effect though not in form, testamentary instruments have for long come into operation after the death of the maker of the instrument before the Raj days. In fact, in Bengal in the 18th Century, the testaments got recognition as part of the law of inheritance which the Courts recognised. Anyway, the history of Will as a subject does not belong here.
By now Will as a means of disposition of property by a person which takes effect after his death is widely used as part of the law of inheritance. As such, it becomes quite popular for the purpose of disposition of property in general and particularly, for its use in arrangement of property and more particularly, for it advantages in taxation and tax planning through testamentary disposition.
Its general popularity is for the reason that the owner of properties in old age, while commanding influence over and respect of younger generation and their attention, apart from bond of love, for the magnetic power of wealth, can retain the property during lifetime and at the same time leave his estate as the legacy according to his wish and desire for the near and dear ones.
The efficacy of Will for tax saving, however, has somewhat lessened after the abolition of Gift tax. From tax point of view, during the regime of Gift tax as an added tax, the old people would prefer Will to making in his life time gift to avoid gift tax which was a substantial levy, almost prohibitive of making gifts. But that cause for use of Will as a tax-saving device is no more after the legislature had done away with the gift tax.
But that does not mean that Wills have lost their use from the tax point of view. It assumed a new dimension and special importance after the amendment to the law relating to taxation of private trusts in 1970.
It requires a short introduction of the law relating to taxation of private Trusts. The private trusts for the purpose of Income-tax Act fall under two classes – specific trusts and discretionary trusts. The specific trusts are trusts where the beneficiary is known and definite and if the beneficiaries are more than one, each beneficiary’s share is known, definite and specified. For such trust, the taxation scheme is that the value of the benefit from the trust availing to a beneficiary shall be a component of his total income and he shall be taxed according to the total income that comprises his share of benefit from the trust.
Discretionary Trust in contrast is one where the beneficiary is not known and determinate or when known, in the case of multiple known beneficiaries, the share of each beneficiary amongst multiple beneficiaries is not determinate and depends on the discretion of the trustee. Thus, the discretionary trust is one where the trust income is not specific for any known person or in other event the shares of beneficiaries are not known and determinate. So for income tax the test of discretionary trust lies in the manner of conferment of the benefit on the beneficiary than in the amount of discretion permitted to be exercised by the trustees. Indefiniteness or uncertainty of the beneficiary or his share in the trust income is the hallmark of a discretionary trust under the Income tax law.
The Income-tax Act when re-enacted in 1961 repealing the old act of 1922, ordained that such a discretionary trust should be taxed in the manner an ordinary association of persons is taxed at the progressive rates prescribed by the Finance Act. This had the effect of giving a premium for discretionary trust because the rates for taxation as an association of persons would be less for the trust income than in the case of a specific trust where the trust income goes to swell the other income of a beneficiary of a specific trust.
Another interesting controversy has arisen with regard to testamentary discretionary trust. The controversy is with regard to the treatment of the income arising from monies received by a testamentary trust from outsiders. The question is whether in regard to such donations, the punitive rate of maximum tax rate shall apply with regard to the income attributable to such donations.
This special favour unwittingly done by the legislature caused a proliferation of discretionary trusts under section 164 for the advantage of softer tax treatment. There had been a spate of discretionary trusts for tax avoiding advantage. This taxation of discretionary trust as an ordinary association of person came as a relaxation under the new Act because under the repealed Act of 1922, the tax rate for discretionary trust was the maximum slab rate of tax applicable to the association of persons. The error of relaxing the old provision through want of circumspection dawned on the legislature after at least a decade. In 1970, section 164 was amended enjoining that discretionary trust shall be taxed as an association of persons at a flat rate of 65%. It can be said to be a punitive taxation measure to counteract the tax payers’ spur in creating discretionary trusts to bring their corpus as discretionary trust fund for lure of lower taxation.
Here, the Wills come in as a means of averting this punitive taxation of discretionary trusts. The amendment gives a concession for testamentary trust in taking effect from assessment year 1971-72 whereby a trust of discretionary nature is subjected to an ordinary rate applicable to an association of persons both for income tax and wealth tax. The punitive rate of discretionary trust does not operate where it is created by a will. The reason is obvious. Where the transfer is by a will which takes effect only after the death of transferor, no advantage can conceivably be derived from such transfer by the transferor. The efficacy of the Will as a means of tax planning thus survives.
Where the beneficiary of a testamentary trust has income from their own sources, he will not be hit hard if he derives benefit from a discretionary trust created by a will because the trust income allocated to him by the trustee in his discretion shall not be assessed at the maximum marginal rate or any punitive rate. The trust income is not to be included in his individual income but to be assessed separately as that of an association of persons. The income of such a testamentary discretionary trust shall be treated as income of any ordinary association of persons at its usual rate. This benefit results in lower taxation. Even if no beneficiary is ascertained or no income is distributed among the beneficiaries the taxation shall be on the trust income in the status of an ordinary association of persons. As a matter of fact, in recent times, the trend creating discretionary trust under a will has caught on. This position has come to stay for over four decades. But for this relaxation, one important condition is that the trust created by the will must be one. If the testator makes more than one trust, the trusts forfeit the benefit.
A more generous plan of testamentary trust may be conceived. When the will creates a number of trusts, each trust deriving income below the taxable limit, it may virtually give to the beneficiaries total tax holiday for all times to come. The attempt at creating such multiple-trusts, will or testament is no more unprecedented.
Another interesting controversy has arisen with regard to testamentary discretionary trust. The controversy is with regard to the treatment of the income arising from monies received by a testamentary trust from outsiders. The question is whether in regard to such donations, the punitive rate of maximum tax rate shall apply with regard to the income attributable to such donations. The donations to a testamentary trust by themselves is in the nature of trust. With regard to the donations, the trust ceases to be testamentary. It is non-testamentary and the exception admissible for a testamentary trust under the amended provision of section 164 shall not be available. This interpretation is almost irresistible. Therefore, the punitive rate of taxation shall apply with regard to the property so donated to an existing testimony trust.
A few words can be said about the mode of executing a will. It does not require any stamp paper. It can be executed by simply signifying the intention on the document signed by the testator himself with two witnesses. All the persons – the testator and the two witnesses shall sign in presence of each other. Registration is optional. Therefore, the execution of a will virtually costs nothing; though obtaining a probate involves more agony than cost for tardy process of obtaining probate. Anyway, the abolition of gift tax does not take away all the winds from the sails of will as a means of tax planning.
Family Settlement or family arrangement and Tax planning
Family settlement or family arrangement is a transaction effecting distribution of family assets. This has fortuitous effect of division of a family’s assets and income resulting therefrom. But it is a misnomer to describe family settlement or arrangement.
As a means of tax planning because the object of such settlement or arrangement is resolving the actual dispute or the potential threat of a dispute striking or threatening to strike at unity and dignity of the family and bringing it to disrepute through public exposure.
Paradoxically, though the family ties are nowhere as strong as they are in the Indian society, the concept of so resolving a family dispute through internal amicable settlement has travelled from England to India. It followed the flag.
The sanctity of a family and its preservation caused the evolution of it as a manner of realignment of family properties for family peace, the motto being that the society must have self-respecting and self-adjusted families, at peace with itself.
That way, the concept of family settlement had its voyage from England and has had a good harbour in the law of this land. Though upholding the family dignity is not a matter alien to Indian genius, the idea of settlement as a form of legal transaction was not there. So we are indebted to the English jurisprudence. Halsbury defines the settlement in the following words :
A family agreement between members of the same family intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving honour. The agreement may be implied from a long course of dealing. But it is more useful to embody or to effectuate the agreement in a deed to which the term family agreement is applied.
It is an agreement for the division of the family property by way of compromise to avoid family quarrel or litigation.
The arrangement results in dividing family property.
It becomes an agreement among the members of a family to share equitably whatever they obtained.
It is an agreement between co-heirs dividing the property between them to conduce to the family peace.
It quite often emerges as an agreement between the heirs and the person supposed to be entitled under a lost will.
In India this mode of transfer is recognized by the Supreme Court in Sahoo Madhab Das vs. Mukand Ram AIR 1955 SC 481. According to this decision, the dispute need not be a present dispute, even the threat of it to erupt imminently is also considered a good cause for such settlement. What would be the test of existence of a dispute will depend on the circumstances of each individual case. No strait jacket formula is possible. There must be some circumstances indicating some forms of controversy threatening the family unity. Another test may be that whether the settlement really removes the cause of discord and makes the family more secure and happier.
That apprehended conflict can also be a ground for such settlement draws support from the decision of Calcutta High Court AIR 1932 Cal 600, AIR 1932 Cal 664. Even the parties to family settlement need not belong to the same family. The word ‘family’ in this context is quite flexible. The family is not to be taken in its rigid connotation in common parlance. It is enough if the parties are relations. Even collaterals having a remote common ancestor may join in an arrangement and can have relinquished or altered even their interest in expectancy. In this connection, reference may be made to Krishna Baharilal vs. Gulab Chand & Ors. AIR 1971 SC 104. The court, in that case, encountered by the question whether the want of direct family bond amongst the parties to the settlement detracts from the family character of the settlement. The answer is in the negative. Even though the parties were nothing but mere relations and not members of the same family, the dispute between the parties was in respect of certain property which was originally owned by their common ancestors, that was considered sufficient for a family settlement or arrangement. Thus, the family for the purpose of such settlement has a broad sense to embrace parties not belonging to the family.
But the most important aspect for such settlement is that the parties to the family settlement or arrangement must have same antecedent title, claim or interest, even a possible claim in the property. The meaning of antecedent title taken out from the dictionary means existing or occurring before any time or order often with consequential effects. Thus, it refers to some prior right or pre-existing right but it is not to be understood in the sense too pat on the dictionary meaning. In the context of Lord Halsbury’s definition, it means not only existing or prior right but also presumptive right. So a family arrangement cannot be denounced or struck down on the plea that the parties or anyone of the parties did not have pre-existing right at the time of settlement. This view is vindicated by the decision of the Supreme Court in Kale vs. Deputy Director – AIR 1976 SC 807. It says that even if one of the parties to the settlement has no title but under the arrangement the other party relinquishes all his claims or title in favour of such party and acknowledges him to be the sole owner, the antecedent title could be said to be there residing in such party.
Antecedent title according to the decision must be assumed in such a situation and the family arrangement was upheld.
The last important view is that the family settlement is not a transfer because here property goes to parties who had antecedent rights. The Supreme Court observed in Sahoo Madodas vs. Mokand Ram (supra) that a compromise or family arrangement is based on the assumption that there is an antecedent title of some sort in the parties and the agreement acknowledges what the title is, each party relinquishing all claims to properties other than his share under the agreement and recognizing right of the others to the portion allotted to them respectively. The court has widened the concept of antecedent title by holding that antecedent title would be assumed in a person who may not have any title but who has been allotted a particular property by the other party to the family arrangement by relinquishing his claim in favour of such a donee. In such a case the party in whose favour the relinquishment is made would be assumed to have an antecedent title.
Thus, the family arrangement being a realignment of title among parties having antecedent rights and interest does not lead to any transfer. It is akin to distribution of properties under a partition of a HUF and needs no conveyance.
Now, the terms of a family arrangement may have tax saving effect because the property is deconcentrated and divided. So is income yield of the property. This would certainly go to minimize taxation if the distribution of income resulting therefrom comes in for taxation at lower slab rate as a result of such diffusion. It is also equally true about Wealth Tax. It also used to save gift tax when gift tax had been in vogue.
But family arrangement or settlement cannot have as its object that of saving tax. It then becomes a fraud. The sole object of family arrangement is preservation of family dignity, unity and peace. So if one targets family settlement or arrangement as the tax saving device, that would certainly cast a cloud on the bona fides of the whole transaction. It would be a subterfuge to hoodwink the revenue.
So in the genuine settlement, tax avoidance comes merely as providential or fortuitous side effect.
[Reproduced with permission from the Paper presented at AIFTP's Two Day National Tax Conference held on 13th and 14th December, 2008 at Kolkata.]
Author: S. Bagchi Advocate
The author deals with the ever – popular topic of tax planning in the context of family arrangements. He warns that while in a genuine settlement, tax avoidance comes merely as a providential or fortuitous side effect, if one targets family settlement as a tax saving device that may cast a cloud on the bona fides of the whole transaction and may be regarded as a subterfuge to hoodwink the revenue
Friday, January 23, 2009
Form 27Q Filing Date Changed--E-TDS Related
Filing date changed from "14 days" from end of quarter to "15 days" from end of quarter to align with the Form 24/26Q E-TDS Filings.
NOTIFICATION NO 11/2009, Dated: January 21, 2009
In exercise of the powers conferred by Section 295 read with sub-section (3) of section 200 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-
1. (1) These rules may be called the Income-tax (Fourth Amendment) Rules, 2009.
(2) They shall come into force with effect from the 1st day of April, 2009.
2. In the Income-tax Rules, 1962, in rule 37A-
(a) for the words “shall send within fourteen days from the end of the quarter”, the words “shall send on or before the 15th July, the 15th October, the 15th January in respect of the first three quarters of the financial year and on or before the 15th June following the last quarter of the financial year” shall be substituted.
(b) the proviso shall omitted.
F.No.142/01/2008-TPL
(V. Vizay Babu)Under Secy. (TPL-III)
Note:- The principal rules were published vide notification No. S.O. 969(E), dated the 26th March, 1962 and last amended by Income-tax (3rd Amendment) Rules, 2009 vide Notification No. S.O. 197(E) dated the 19th January, 2009.
Tuesday, January 20, 2009
Liability Partnership Act, 2008
Limited Liability Partnership Bill has received the accent of Honourable President of India and has now become a legislation and is to be called as 'Limited Liability Partnership Act, 2008'
Click here to download: http://mca.gov.in/MinistryWebsite/dca/actsbills/pdf/LLP_Act_2008_15jan2009.pdf
Click here to download: http://mca.gov.in/MinistryWebsite/dca/actsbills/pdf/LLP_Act_2008_15jan2009.pdf
Monday, January 19, 2009
Provident Fund on "International Workers"
The government of India had made certain fundamental changes vide a notification dated 1 October 2008 in the Employee Provident Fund Scheme, 1952 and the Employee Pension Scheme, 1995 (collectively referred to as Indian social security schemes). This has significant impact on the expatriates and the employers with whom they work in India .
The Additional Central Provident Fund Commissioner (ACPFC) has issued certain clarifications with respect to these amendments vide his letter dated 7 January 2009 (No. Acturial/7(9)2008/ 75683) to all Regional Provident Fund Commissioners. Also, the ministry of labour has posted certain FAQs on their website (www.epfindia.com) clarifying the position relating to the International Worker (IW)
FAQ on International Workers:
1) Who is an International worker?
An International worker may be an Indian worker or a foreign national.
This means an Indian worker who has divided his/her career between India and another country with whom India has entered into a bilateral Social Security agreement or a foreign national working in India. (Para 2 ff)
2) Who is an ‘excluded employee’ under these provisions?
A ‘detached worker’ posted in an establishment in India but contributing to the social security programme of the source country in terms of the bilateral Social Security agreement signed between that country and India shall be an ‘excluded employee’ under these provisions. (Para 2 f)
3) Who is a ‘detached worker’?
An International worker, being not an Indian employee, contributing to the social security programme of the source country in terms of the bilateral Social Security agreement signed between that country and India and exempt from making any contribution to the Indian system for the period and terms as set out in such an agreement is a ‘detached worker’ for the purpose of compliance under the Indian system. (Para 2 f)
4) What does the term ‘Indian employee’ mean?
An employee, holding or entitled to hold an Indian passport and employed by an establishment covered under the EPF and MP Act, 1952 is an Indian employee under the Special provisions in respect of International workers. [Para 2 ff (a) ]
5) Who all shall become the members of the fund?
a) Every International worker, other than an ‘excluded employee’ – from 1st Nov.2008.
b) Every excluded employee, on ceasing the status, - from the beginning of the month following that in which he/she losses the status. (Para 26)
6) Which category of establishments shall take cognizance of these provisions?
All such establishments covered/coverable under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 that employ ‘International workers’ either in India or abroad shall take cognizance of these provisions. (Para 26)
7) Whether PF rules will apply to an employee if his salary is paid outside India?
Yes, the provisions will apply irrespective of where the salary is paid. (Para 30)
8) Whether PF will be payable only on the part of salary paid in India in case of split payroll?
In case of split payroll the contribution shall be paid on the total salary earned by the employee. (Para 29)
9) ‘Monthly Pay’ for calculating contributions to be paid under the Act?
The monthly pay shall be the pay as specified under Para 29 of the EPF Scheme, 1952, which covers:
• Basic wages (all emoluments paid or payable in cash while on duty or on leave / holiday except Dearness allowance, House rent allowance, overtime allowance, bonus, commission or any other similar allowance payable in respect of employment and any presents made by the employer)
• Dearness allowance (all cash payments by whatever name called paid to an employee on account of a rise in the cost of living)
• Retaining allowance
• Cash value of any food concession
10) What portion of salary on which PF would be payable in case an individual has multiple country responsibilities and spends some part of his time outside India?
Contribution is payable on the total salary payable on account of the employment of the employee employed for wages by establishment covered in India even for responsibility outside India also.[Section 2 (b)]
11) Is there a minimum period of days of stay in India which the employee can work in India without triggering PF compliance?
No, there is no any minimum period of employment in India is required to be eligible for membership. Every eligible International worker has to be enrolled from the first date of his employment in India.
12) What constitutes the Pensionable service?
The service for which contributions are received and/or receivable as also the period of service rendered and considered as eligible under a Social Security Agreement that may cover an International worker. (Para 10 of EPS)
13) How is Pensionable service determined?
While the period of service for which contributions are received under the EPS will decide the quantum of pension admissible, the period of service rendered under a relevant social security agreement shall be taken into account only for the purpose mentioned under such agreement. (Para 10 of EPS)
14) Is there a cap on the salary up to which the contribution has to be made by both the employer as well as an employee?
No, there is no cap on the salary up to which the contribution has to be made by both the employer as well as an employee.
15) Is there a cap on the salary up to which the employer’s share of contribution has to be diverted to EPS?
Yes, the cap on the salary up to which the employer’s share of contribution has to be diverted to EPS remains at Rs.6500. (Para 3 of EPS)
16) What is a social security agreement (SSA)?
A social security agreement is a bi-lateral instrument to protect the interests of the workers in the host country. It being a reciprocal arrangement generally provides for avoidance of no coverage or double coverage and equality of treatment with the host country workers
17) What are the provisions covered in a social security agreement?
Generally a social security agreement covers 3 provisions. They are:
a) Detachment
Applies to employees sent on posting in the host country, provided he/she is complying under the social security system of the home country.
b) Exportability of Pension
Provision for payment of pension benefits to the beneficiary choosing to reside in the territory of the home country directly with out any reduction as also to a beneficiary choosing to reside in the territory of a third country.
c) Provision for totalisation of Benefits
The period of service rendered by an employee in the host country to be counted for the “eligibility” purpose and the payment may be restricted to the length of service, on pro-rata basis.
18) What is the status of the SSAs?
As of today, Social security agreements have been signed with Belgium, France and Germany. But the date of entry into force is yet to be notified. Negotiations are at various stages with The Netherlands, Czech Republic, Hungary, Norway, Switzerland, Sweden, Luxembourg, USA and Australia. Government level talks are on with many other countries where sizable numbers of Indian workers are employed. Although not a formal agreement, there is a reciprocal arrangement between India and Korea to settle the claims of the employees on completion of employment in the host country
19) Should the eligible employees from Belgium, France and Germany contribute under the Special provisions till such time the ‘date of effect’ is notified?
Yes, the International workers from Belgium, France and Germany shall be enrolled as members of EPF till such time the ‘date of effect’ is notified by the Government of India and after such workers obtaining a ‘detachment certificate’ from the appropriate authority in their countries, respectively. Till the ‘date of effect’ is notified no Indian employee posted to these countries and none of the employees from these countries working in India shall be eligible for detachment status.
20) Indian employees working abroad and contributing to Social Security Scheme of that country with whom India has social security agreement. Should they be covered for PF in India or should be treated as excluded employee?
As of today the date of effect of the SSAs is yet to be notified. Therefore, a posted employee, whose name is retained in the pay bill maintained by the employer in India, shall be covered under EPF. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the host country legislations.
21) Could the term "Indian employee" mean any foreign national who is directly employed by an Indian establishment i.e. a person who is in India not under a secondment arrangement or any deputation from a foreign employer but hired directly by the Indian establishment under local terms and service conditions?
The term Indian employee shall mean only such of those employees as explained under Q.No 4. No foreign national can be termed an Indian employee.
22) Whether a Third Country(C) National domiciled in a country (B) with which India (A) has a social security agreement is eligible for benefit under the social security agreement between India and that country?
Normally social security agreements are signed to cover the ‘Nationals’ of the respective countries. Therefore, the above employee may be eligible for the benefit provided that the Third country (C) has signed an enabling agreement with both India (A) as well as the Second country (B).
23) Indian employees working abroad and contributing to Social Security Scheme of that country with whom India DOES NOT have social security agreement. Should they be covered for PF in India or should be treated as excluded employee?
A posted employee, who is drawing wages from the employer in India, shall be covered under EPF. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the host country legislations.
24) Foreign nationals who are employed in India and being paid in foreign currency, whether to be covered or not?
Yes, International workers drawing salary in any currency and in any manner are to be covered. (Section 2 f).
25) Foreigners who are employed directly as an employee by an Indian establishment abroad to be covered or not?
The local employees of an Indian establishment engaged abroad shall be covered by the local legislations
26) Considering that in most countries issuance of work permit to an individual is a trigger for social security compliance, whether the purpose and type of visa i.e. business/ employment will be a determinant for a person to be considered as an International Worker?
The purpose of the visit of an individual is the main determinant for social security compliance. The type of visa may help in determining the purpose of visit. For example – a foreign national coming in to India under an employment visa is working in India.
27) Whether benefit of reciprocity can be extended to an International Worker if his home country provides for exemption from social security to Indian nationals going to work in that country under its domestic law even though there is no social security agreement with India?
In the absence of a formal agreement the benefit of reciprocity is available at the time of withdrawal of the pension claim and not at the time of coverage. (Para 14 of EPS)
28) Where will the survivor benefits be delivered in case of a covered employee holding a passport, being other than an Indian passport, issued by a country with which India is not having a SSA?
In the absence of a SSA, the survivor benefits such as widow/widower pension, children /orphan pension, nominee/parent pension, etc. as the case may be, shall be payable to a bank account of the eligible beneficiary in India. (Para 14 of EPS)
29) What is the criterion for receiving the withdrawal benefit for the services of less than 10 years under EPS, 1995?
In respect of employees hailing from the countries with which India has signed a SSA, the withdrawal benefit shall be paid or accounted for as per the provisions of the SSA. In all other cases, it shall be guided by the principle of reciprocity with reference to the entitlement available to Indian employees in the other country. (Para 14 of EPS)
30) How long an Indian employee retains the status of “International worker”?
An Indian employee attains the status of “International worker” only on account of his employment in a country with which India has signed a SSA. He shall remain in that status till the time he avails the benefits under a social security programme covered under that SSA. (Para 2 f)
31) Under what condition the contributions received in the PF account are payable along with interest?
The full amount standing to the credit of a member’s account is payable if any one of the circumstances mentioned under Para 69 of the EPF Scheme, 1952 is fulfilled
32) Is there a cap on the salary up to which the contribution has to be made to EDLI Scheme by both the employer?
Yes, the cap on the salary up to which contribution has to be made to EDLI Scheme remains unchanged at Rs.6500.
The Additional Central Provident Fund Commissioner (ACPFC) has issued certain clarifications with respect to these amendments vide his letter dated 7 January 2009 (No. Acturial/7(9)2008/ 75683) to all Regional Provident Fund Commissioners. Also, the ministry of labour has posted certain FAQs on their website (www.epfindia.com) clarifying the position relating to the International Worker (IW)
FAQ on International Workers:
1) Who is an International worker?
An International worker may be an Indian worker or a foreign national.
This means an Indian worker who has divided his/her career between India and another country with whom India has entered into a bilateral Social Security agreement or a foreign national working in India. (Para 2 ff)
2) Who is an ‘excluded employee’ under these provisions?
A ‘detached worker’ posted in an establishment in India but contributing to the social security programme of the source country in terms of the bilateral Social Security agreement signed between that country and India shall be an ‘excluded employee’ under these provisions. (Para 2 f)
3) Who is a ‘detached worker’?
An International worker, being not an Indian employee, contributing to the social security programme of the source country in terms of the bilateral Social Security agreement signed between that country and India and exempt from making any contribution to the Indian system for the period and terms as set out in such an agreement is a ‘detached worker’ for the purpose of compliance under the Indian system. (Para 2 f)
4) What does the term ‘Indian employee’ mean?
An employee, holding or entitled to hold an Indian passport and employed by an establishment covered under the EPF and MP Act, 1952 is an Indian employee under the Special provisions in respect of International workers. [Para 2 ff (a) ]
5) Who all shall become the members of the fund?
a) Every International worker, other than an ‘excluded employee’ – from 1st Nov.2008.
b) Every excluded employee, on ceasing the status, - from the beginning of the month following that in which he/she losses the status. (Para 26)
6) Which category of establishments shall take cognizance of these provisions?
All such establishments covered/coverable under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 that employ ‘International workers’ either in India or abroad shall take cognizance of these provisions. (Para 26)
7) Whether PF rules will apply to an employee if his salary is paid outside India?
Yes, the provisions will apply irrespective of where the salary is paid. (Para 30)
8) Whether PF will be payable only on the part of salary paid in India in case of split payroll?
In case of split payroll the contribution shall be paid on the total salary earned by the employee. (Para 29)
9) ‘Monthly Pay’ for calculating contributions to be paid under the Act?
The monthly pay shall be the pay as specified under Para 29 of the EPF Scheme, 1952, which covers:
• Basic wages (all emoluments paid or payable in cash while on duty or on leave / holiday except Dearness allowance, House rent allowance, overtime allowance, bonus, commission or any other similar allowance payable in respect of employment and any presents made by the employer)
• Dearness allowance (all cash payments by whatever name called paid to an employee on account of a rise in the cost of living)
• Retaining allowance
• Cash value of any food concession
10) What portion of salary on which PF would be payable in case an individual has multiple country responsibilities and spends some part of his time outside India?
Contribution is payable on the total salary payable on account of the employment of the employee employed for wages by establishment covered in India even for responsibility outside India also.[Section 2 (b)]
11) Is there a minimum period of days of stay in India which the employee can work in India without triggering PF compliance?
No, there is no any minimum period of employment in India is required to be eligible for membership. Every eligible International worker has to be enrolled from the first date of his employment in India.
12) What constitutes the Pensionable service?
The service for which contributions are received and/or receivable as also the period of service rendered and considered as eligible under a Social Security Agreement that may cover an International worker. (Para 10 of EPS)
13) How is Pensionable service determined?
While the period of service for which contributions are received under the EPS will decide the quantum of pension admissible, the period of service rendered under a relevant social security agreement shall be taken into account only for the purpose mentioned under such agreement. (Para 10 of EPS)
14) Is there a cap on the salary up to which the contribution has to be made by both the employer as well as an employee?
No, there is no cap on the salary up to which the contribution has to be made by both the employer as well as an employee.
15) Is there a cap on the salary up to which the employer’s share of contribution has to be diverted to EPS?
Yes, the cap on the salary up to which the employer’s share of contribution has to be diverted to EPS remains at Rs.6500. (Para 3 of EPS)
16) What is a social security agreement (SSA)?
A social security agreement is a bi-lateral instrument to protect the interests of the workers in the host country. It being a reciprocal arrangement generally provides for avoidance of no coverage or double coverage and equality of treatment with the host country workers
17) What are the provisions covered in a social security agreement?
Generally a social security agreement covers 3 provisions. They are:
a) Detachment
Applies to employees sent on posting in the host country, provided he/she is complying under the social security system of the home country.
b) Exportability of Pension
Provision for payment of pension benefits to the beneficiary choosing to reside in the territory of the home country directly with out any reduction as also to a beneficiary choosing to reside in the territory of a third country.
c) Provision for totalisation of Benefits
The period of service rendered by an employee in the host country to be counted for the “eligibility” purpose and the payment may be restricted to the length of service, on pro-rata basis.
18) What is the status of the SSAs?
As of today, Social security agreements have been signed with Belgium, France and Germany. But the date of entry into force is yet to be notified. Negotiations are at various stages with The Netherlands, Czech Republic, Hungary, Norway, Switzerland, Sweden, Luxembourg, USA and Australia. Government level talks are on with many other countries where sizable numbers of Indian workers are employed. Although not a formal agreement, there is a reciprocal arrangement between India and Korea to settle the claims of the employees on completion of employment in the host country
19) Should the eligible employees from Belgium, France and Germany contribute under the Special provisions till such time the ‘date of effect’ is notified?
Yes, the International workers from Belgium, France and Germany shall be enrolled as members of EPF till such time the ‘date of effect’ is notified by the Government of India and after such workers obtaining a ‘detachment certificate’ from the appropriate authority in their countries, respectively. Till the ‘date of effect’ is notified no Indian employee posted to these countries and none of the employees from these countries working in India shall be eligible for detachment status.
20) Indian employees working abroad and contributing to Social Security Scheme of that country with whom India has social security agreement. Should they be covered for PF in India or should be treated as excluded employee?
As of today the date of effect of the SSAs is yet to be notified. Therefore, a posted employee, whose name is retained in the pay bill maintained by the employer in India, shall be covered under EPF. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the host country legislations.
21) Could the term "Indian employee" mean any foreign national who is directly employed by an Indian establishment i.e. a person who is in India not under a secondment arrangement or any deputation from a foreign employer but hired directly by the Indian establishment under local terms and service conditions?
The term Indian employee shall mean only such of those employees as explained under Q.No 4. No foreign national can be termed an Indian employee.
22) Whether a Third Country(C) National domiciled in a country (B) with which India (A) has a social security agreement is eligible for benefit under the social security agreement between India and that country?
Normally social security agreements are signed to cover the ‘Nationals’ of the respective countries. Therefore, the above employee may be eligible for the benefit provided that the Third country (C) has signed an enabling agreement with both India (A) as well as the Second country (B).
23) Indian employees working abroad and contributing to Social Security Scheme of that country with whom India DOES NOT have social security agreement. Should they be covered for PF in India or should be treated as excluded employee?
A posted employee, who is drawing wages from the employer in India, shall be covered under EPF. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the host country legislations.
24) Foreign nationals who are employed in India and being paid in foreign currency, whether to be covered or not?
Yes, International workers drawing salary in any currency and in any manner are to be covered. (Section 2 f).
25) Foreigners who are employed directly as an employee by an Indian establishment abroad to be covered or not?
The local employees of an Indian establishment engaged abroad shall be covered by the local legislations
26) Considering that in most countries issuance of work permit to an individual is a trigger for social security compliance, whether the purpose and type of visa i.e. business/ employment will be a determinant for a person to be considered as an International Worker?
The purpose of the visit of an individual is the main determinant for social security compliance. The type of visa may help in determining the purpose of visit. For example – a foreign national coming in to India under an employment visa is working in India.
27) Whether benefit of reciprocity can be extended to an International Worker if his home country provides for exemption from social security to Indian nationals going to work in that country under its domestic law even though there is no social security agreement with India?
In the absence of a formal agreement the benefit of reciprocity is available at the time of withdrawal of the pension claim and not at the time of coverage. (Para 14 of EPS)
28) Where will the survivor benefits be delivered in case of a covered employee holding a passport, being other than an Indian passport, issued by a country with which India is not having a SSA?
In the absence of a SSA, the survivor benefits such as widow/widower pension, children /orphan pension, nominee/parent pension, etc. as the case may be, shall be payable to a bank account of the eligible beneficiary in India. (Para 14 of EPS)
29) What is the criterion for receiving the withdrawal benefit for the services of less than 10 years under EPS, 1995?
In respect of employees hailing from the countries with which India has signed a SSA, the withdrawal benefit shall be paid or accounted for as per the provisions of the SSA. In all other cases, it shall be guided by the principle of reciprocity with reference to the entitlement available to Indian employees in the other country. (Para 14 of EPS)
30) How long an Indian employee retains the status of “International worker”?
An Indian employee attains the status of “International worker” only on account of his employment in a country with which India has signed a SSA. He shall remain in that status till the time he avails the benefits under a social security programme covered under that SSA. (Para 2 f)
31) Under what condition the contributions received in the PF account are payable along with interest?
The full amount standing to the credit of a member’s account is payable if any one of the circumstances mentioned under Para 69 of the EPF Scheme, 1952 is fulfilled
32) Is there a cap on the salary up to which the contribution has to be made to EDLI Scheme by both the employer?
Yes, the cap on the salary up to which contribution has to be made to EDLI Scheme remains unchanged at Rs.6500.
In rendering services to the subsidiary, there is no “permanent establishment” under DTAA
Where services are rendered to subsidiary, there will not be a PE under DTAA.
ACIT vs. Epcos AG (ITAT Pune)
Where the assessee, a German company, rendered services to its Indian subsidiaries in respect (a) product marketing and sales support services and (b) information and technology support services and the AO claimed that as the assessee had a permanent establishment in India to which the said services were “effectively connected”, the business profits had to be computed on a gross basis by applying s. 44D, HELD, rejecting the stand of the Revenue that:
(i) As a tax treaty is an alternative taxation regime in the sense that it allocates taxing rights between two competing tax jurisdictions, it is useful to first check whether the receipt is chargeable to tax under the DTAA before considering its taxability under the Act;
(ii) The concept of PE is a result of compromise between residence rule and source rule of taxation, and it constitutes ‘home’ of a foreign enterprise abroad. In order to constitute a PE, there should be (a) a fixed place of business in the source jurisdiction and (b) the business of the foreign enterprise should be carried on through such a fixed place of business in the source jurisdiction.
(iii) Under Article 5(7), while the existence of a subsidiary or parent company in the source jurisdiction by itself does not constitute a PE; the parent or subsidiary can be a PE of each other if the business of the foreign enterprise is carried out by the PE. This depends on the facts of the each case.
(iv) On facts, the assessee had rendered support services to its subsidiaries and some employees of the latter had worked under the guidance of the assessee, but the work so done by the employees was for the business of the Indian subsidiaries and not for the assessee. There is a distinction between business of the foreign company and that of its Indian subsidiaries. What was done by the employees of the Indian subsidiaries was running the business of the Indian subsidiaries with the guidance of the assessee. The work done by the employees of Indian subsidiaries did not mean that these employees were doing business of the foreign principal unless the work so done by these employees entitled the assessee for rewards of the work so done. The situs and manner of rendering of services, by anyone other than the employees or sub-contractees of the foreign principal, cannot govern whether or not the foreign principal will have a PE in India.
(v) Further, a non-resident having a PE in India, by itself, does not lead to taxability in India; there must be some profit attributable to such a PE which alone could be taxed in India because of the existence of the PE. When the PE carries on an activity which does not serve overall purpose of the foreign enterprise, or which does not contribute to profits of the enterprise, the existence of such a PE is wholly academic and does not have any tax implications in the source jurisdiction.
(vi) For purposes of the exclusion clause in Article 12 (5) to apply and for royalties and fees for technical services to be taxable on gross basis u/ss 44D and 115A, it will have to be demonstrated that the royalties and fees for technical services have a live economic nexus with the PE. The mere fact that there is a PE is not sufficient.
ACIT vs. Epcos AG (ITAT Pune)
Where the assessee, a German company, rendered services to its Indian subsidiaries in respect (a) product marketing and sales support services and (b) information and technology support services and the AO claimed that as the assessee had a permanent establishment in India to which the said services were “effectively connected”, the business profits had to be computed on a gross basis by applying s. 44D, HELD, rejecting the stand of the Revenue that:
(i) As a tax treaty is an alternative taxation regime in the sense that it allocates taxing rights between two competing tax jurisdictions, it is useful to first check whether the receipt is chargeable to tax under the DTAA before considering its taxability under the Act;
(ii) The concept of PE is a result of compromise between residence rule and source rule of taxation, and it constitutes ‘home’ of a foreign enterprise abroad. In order to constitute a PE, there should be (a) a fixed place of business in the source jurisdiction and (b) the business of the foreign enterprise should be carried on through such a fixed place of business in the source jurisdiction.
(iii) Under Article 5(7), while the existence of a subsidiary or parent company in the source jurisdiction by itself does not constitute a PE; the parent or subsidiary can be a PE of each other if the business of the foreign enterprise is carried out by the PE. This depends on the facts of the each case.
(iv) On facts, the assessee had rendered support services to its subsidiaries and some employees of the latter had worked under the guidance of the assessee, but the work so done by the employees was for the business of the Indian subsidiaries and not for the assessee. There is a distinction between business of the foreign company and that of its Indian subsidiaries. What was done by the employees of the Indian subsidiaries was running the business of the Indian subsidiaries with the guidance of the assessee. The work done by the employees of Indian subsidiaries did not mean that these employees were doing business of the foreign principal unless the work so done by these employees entitled the assessee for rewards of the work so done. The situs and manner of rendering of services, by anyone other than the employees or sub-contractees of the foreign principal, cannot govern whether or not the foreign principal will have a PE in India.
(v) Further, a non-resident having a PE in India, by itself, does not lead to taxability in India; there must be some profit attributable to such a PE which alone could be taxed in India because of the existence of the PE. When the PE carries on an activity which does not serve overall purpose of the foreign enterprise, or which does not contribute to profits of the enterprise, the existence of such a PE is wholly academic and does not have any tax implications in the source jurisdiction.
(vi) For purposes of the exclusion clause in Article 12 (5) to apply and for royalties and fees for technical services to be taxable on gross basis u/ss 44D and 115A, it will have to be demonstrated that the royalties and fees for technical services have a live economic nexus with the PE. The mere fact that there is a PE is not sufficient.
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