Section 92D

Maintenance, keeping and furnishing of information and document by certain persons.

 

The Section 92D of the Income Tax Act, 1961, requires that every person who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect of such transactions which are prescribed by the department of income tax. Refer Rule 10D below.

 

Threshold limit for maintenance of prescribed information and documents

 

However, this requirement is not applicable where the aggregate value of international transactions in a financial year does not exceed Rs. 1 crore as per the books of account of the assessee.

 

Time for which the records are to be kept

All the information in relation to such international transactions shall be kept for a period of 8 years from the end of the relevant assessment year, i.e., for Financial Year 2020-21 the relevant assessment year is AY 2021-22, the records to be kept for 8 years i.e., up to FY 2029-30.

 

Power of Assessing Office or Commissioner Income Tax (Appeals) to ask for the information and documents 

The Assessing Office or Commissioner Income Tax (Appeals) may require any assessee to furnish information and documents maintained by the assessee within a period of 30 days from the date of receipt of the notice in this regard. However, a further extension of 30 days can be provided on application of the assessee.

 

Rule 10D – Information and documents to be kept and maintained under section 92D

Every person who has entered into an international transaction or a specified domestic transaction shall keep and maintain the following information and documents, namely:

  • a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises
  • a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions or specified domestic transactions, as the case may be, have been entered into by the assessee, and ownership linkages among them
    • a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted

 

  • the nature and terms (including prices) of international transactions or specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction
  • a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction or the specified domestic transaction
  • a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions or the specified domestic transactions entered into by the assessee
    • a record of uncontrolled transactions considered for analyzing their comparability with the international transactions or the specified domestic transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions or specified domestic transactions, as the case may be
    • a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction or specified domestic transaction

 

  • a description of the methods considered for determining the arm’s length price in relation to each international transaction or specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case
  • a record of the actual working carried out for determining the arm’s length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions
  • the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm’s length price
    • details of the adjustments, if any, made to transfer prices to align them with arm’s length prices determined under these rules and consequent adjustment made to the total income for tax purposes
    • any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm’s length price

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

Concept of Indexation

Concept of Indexation

 

Changes in the value of asset according to your living cost is called indexation.

The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition following factors are to be considered:

  • Cost and Year of acquisition &/or improvement
  • Year of transfer
  • Cost inflation index of the year of acquisition &/or improvement
  • Cost inflation index of the year of transfer

 

Indexation Benefits

  • Helps to bring purchase price equivalent to market inflation (This process increases the cost of purchase which comes at par with the sale consideration, a higher cost price means lesser profits, which effectively means a lower tax).
  • Align asset with current market value
  • Provides higher purchase price

 

Calculation of indexed cost of acquisition

 

Indexed Cost of Acquisition =

Cost of Acquisition   X   CII for the year in which the asset is transferred

                                       CII for the year in which the asset was first held by

                                            assessee or P.Y. 2001-02, whichever is later.

 

Calculation of indexed cost of improvement

 

Indexed Cost of Improvement =

Cost of Improvement     X   CII of the year in which the asset is transferred

                                                       CII for the financial year in which the

                                                                 improvement took place

 

Meaning of Cost Inflation Index (CII):

It is used for estimating the prices of goods which has been increased year by year due to inflation.

Let’s say a price of an item was Rs. 100 in 2001, what will be the price of the same item today?

 

Meaning of inflation: It means decrease in purchasing power. A person who used to purchase 2 chocolates for Rs. 10, now can only purchase 1 chocolate only for the said amount.

 

 

COST INFLATION INDEX TABLE FROM FY 2001-02
FINANCIAL YEAR COST OF INFLATION INDEX (CII)
2001-02 (Base Year) 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021-22 317

 

 

Let us take an example to calculate indexation:

Mr. Modi purchased Land in May 2012 for Rs. 1,00,000 with unit value Rs. 10 per unit and sold in January 2019 for Rs. 1,80,000.

Solution

Cost of Acquisition = Rs. 1,00,000

Financial Year of Acquisition = FY 2012-13

Calculation of Indexed Cost of Acquisition =

Cost of Acquisition   X   CII for the year in which the asset is transferred

                                       CII for the year in which the asset was first held by

                                            assessee or P.Y. 2001-02, whichever is later.

i.e.

= 1,00,000*(280/200))

= Rs. 1,40,000

Long Term Capital Gain = 1,80,000 – 1,40,000 = Rs. 40,000

Tax on Long term capital gains = Rs. 40,000*20% = Rs. 8,000

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

Meaning of Associate Enterprise in Transfer pricing

What is the meaning of the term Associated Enterprise (AE)?

 

The provisions of transfer pricing will apply only if the transactions happen to between the Associated Enterprises (AE). The term Associated Enterprises is specifically defined by the Income Tax act, 1961 in Section 92A. The definition explains various scenarios when an organization happens to be the Associated Enterprise, be it due to holding certain percentage of shares in the other entity or having control over it. Let us understand these various aspects in detail.

 

The section 92A of the Income Tax Act, 1961 defines the word ‘Associated Enterprises’ for the purpose of following:

 

 

The conditions are:

for Examples
an enterprise which participates, directly or indirectly, or through one or more intermediaries, in:

  • the management or
  • control or
  • capital

of the other enterprise.

 

If A controls the management directly in B and B controls the management of C. This means that A has a direct control on B and an Indirect control on C. and hence B & C both are the AEs of A.

  Or  
Two enterprises are AEs if:

managed or

controlled or

Owned,

By the same persons who participate, directly or indirectly, or through one or more intermediaries in the said enterprises.

Ms. M control the management of C Pvt. Ltd. And V Pvt. Ltd. and hence C Pvt. Ltd. And V Ltd. Are AEs.

 

 

 

Apart from the above criteria, there are other parameters on which two enterprises are deemed to be the AEs. These are as follows:

 

Ownership not less than 26% of the voting power in the other enterprise, directly or indirectly
Substantial voting power by common person in 2 different entities not less than 26% of the voting power in each of such enterprises, directly or indirectly
Advancing a substantial loan amount not less than 51% of the book value of the total assets of the other enterprise
Guaranteeing the borrowings not less than 10% of the total borrowings of the other enterprise
Appointment of more than half of the Board of Directors If any enterprise has appointed more than half of the Board of Directors of any other enterprise, the both the enterprises are deemed AEs
Appointment of more than half of the Board of Directors by same person If more than half of the Board of Directors of 2 enterprises are appointed by the same person, those 2 enterprises are deemed AEs
Dependence in terms of know-how, patents, and other intangibles Where the business of one enterprise is wholly dependent on the use of know-how, patents, technical know-how, etc. of which the other enterprise is the owner or has exclusive rights, the 2 enterprises are deemed AEs
Supply of 90% or more of the raw materials 2 enterprises are deemed AEs, if 90% or more of the raw material and consumables as required by the one enterprise for manufacturing or processing of the goods or articles, is supplied by the other
Dependence on Sale the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise
Control by an individual and/or his relative 2 enterprises are deemed to be AEs where they are controlled severally or jointly by the individual or/ and his relative
Control by HUF and its members where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative
Interest in Firm, AOP or BOI Where one enterprise is a Firm, AOP or BOI and the other enterprise holds not less than 10% interest in such Firm, AOP or BOI.
Mutual Interest relationship There exists between the two enterprises, any relationship of mutual interest, as may be prescribed

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

 

Transfer Pricing – Section 92

Transfer Pricing – Section 92

 

What is Transfer Pricing?

Transfer pricing is the related to determining the value of goods & services exchanged or transferred between two related parties or related parties situated in other countries. The purpose of transfer pricing is to ensure that the price determined in the following transaction should be at arm’s length price.

 

For what type of transactions pricing is computed under transfer pricing?

 

  • Any income arising from an international transaction
  • Allowance for any expense or interest arising from an international transaction
  • Allocation for any cost/ expense in relation to the services provided to the associated party
  • Any income, expense or interest or allocation of any cost in relation to specified domestic party

 

In case of, all of the above transaction the transfer pricing is used to determine the price of transaction at arm’s length price.

 

In what cases the provisions of Transfer pricing will not apply?

 

The provisions of transfer pricing will not apply where in the process of:

  • Computation of income
  • Determining the allowance for any expense or interest
  • Determination of any cost or expense allocated

 

Will result in reducing the income chargeable to tax (profit) or increasing the loss of the assessee to whom the transfer pricing is applied.

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

Rate of tax on Short-Term Capital Gains Section 111A

Rate of tax on Short-Term Capital Gains Section 111A

 

Where there are capital gains arising from the transfer of short-term capital asset, being an:

  • Equity share listed in a recognized stock exchange;
  • Units of equity-oriented funds or;
  • A unit of a business trust.
  • The transaction of sale is chargeable to securities transaction tax (STT).

Such Short-term capital gains are taxable at 15% on transfer of listed equity shares, units of equity-oriented fund.

 

  • Short term capital gain arising from transactions undertaken in foreign currency on recognized stock exchange located in an International Financial Service Centre (IFSC) would also be taxable at 15%. In this case, no STT has to be paid on sale transaction.

 

  • The cases where the transaction of transfer is not subject to securities transaction tax, short-term capital gain is added to your computation of Income and the taxpayer is taxed according to the slab rates applicable in his case.

 

NOTE:

  • Securities such as preference shares, debentures, deeply discounted bonds, units of debt mutual funds etc. are not covered under section 111A.
  • Benefit of slab rate is available on such short-term capital gains a in case of resident or HUF.

 

Meaning of Equity-oriented funds: It is a fund where investable funds are invested by way of equity shares in domestic company for more than 65% of total proceedings of such funds.

 

Meaning of Business trust: (Real Estates + Infrastructure Investment Trust) These trusts raise resources from many investors to be directly invested in real estate or infrastructure projects.

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

 

 

Here’s an example:

Mr. Prakash sold equity shares of SBI Ltd. through Bombay Stock Exchange after holding them for a period of 8 months. What will be the tax rate applicable on the STCG?

Solution:

The STCG in this case is covered under section 111A and, hence, will be charged to tax @ 15%.

 

Capital Gains in case of Joint development agreements Section 45(5A)

Capital Gains in case of Joint development agreements – Section 45(5A)

 

It is a common procedure nowadays and a win-win situation for both the parties i.e., the land owner and the developer to enter into Joint Development Agreement. Herein, the resources and the efforts of the landowner and the developer are combined together so as to bring out the maximum productive results.

 

Conditions to be satisfied:

  • There should be an individual or HUF;
  • He should be an owner of the land or building;
  • There should be an agreement of transfer between the owner and the builder.

 

With reference to Section 45(5A)

A landowner transfers his land for the construction of a real estate project, and the developer undertakes the responsibility for the development of the property by performing all legal formalities. The landowner enters into an agreement and gives the possession of his immovable property to the developer and allows him to enter the land and do all necessary things for undertaking the construction. When the construction is completed, the landowner is handed over flats allocated to his share.

The amount received by the landowner in the developed property is considered as Capital Gain in his hands.

 

It is applicable only in the case of:

  • Individual or HUF;
  • Land/Building held as capital asset by an assessee;
  • JDA should be registered;

 

NOTE: Not applicable if landowners transfer his share before completion of project.

 

Let’s understand with an example:

Mr. A had a house in Defence Colony area in Delhi. But his house was of the time of 1990’s i.e., 01.01.1998 for Rs. 50,00,000. FMV of the land as on 01.04.2020 is Rs. 65,00,000. So, he decided to enter into a joint agreement with Chelsea Builders on 01.05.2020 for making his house modern. The builder decided to make a six-floor building and give the top most floor to the owner. Here both the owner and the builder are at profit as the owner will get a house with all new modern styles and the builder will earn profit after selling the other floors.

Mr. A gave the possession of his land to Chelsea Builders on 01.07.2020. They will pay a cheque of Rs. 60,00,000 to Mr. A on the same date These 6 floors will be completed by 30.08.2022. The stamp duty of the land as on 01.07.2020 is Rs. 2 Crores and stamp duty value of each flat as on 30.08.2022 is Rs 45 Lakhs.

 

Solution:

  1. There is a “transfer” on 01.07.2020 in the hands of Mr. A since he has come into joint agreement with the builder
  2. Period of holdings (Long Term): 01.01.1998 to 30.06.2020.
  3. Capital gain is taxable in the previous year in which the completion is issued by competent Authority.
  4. Cost of Acquisition of the land is Rs.65,00,000
  5. Stamp Duty Value = Rs.45 lakhs.

For computation of capital gains the Cheque he received for his land consideration plus the stamp duty value of his house on 6th floor will be taxable. Further he can get deduction on Cost of acquisition or cost of improvement. The value you get after all these adjustments will be your long-term capital gain.

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

 

Capital Gains in case of Compulsory Acquisition of an asset Section 45(5)

Capital Gains in case of Compulsory Acquisition of an asset Section 45(5)

 

What is compulsory acquisition?

Compulsory acquisition means, where the government acquires rights in the land, property from an individual or business in order to benefit society such as constructing roads, rails, metros, infrastructure etc.

 

With reference to Section 45(5)

In some cases when government plans to develop some areas by the way of constructing highways, metro rail projects etc. then the government acquires the land required for these projects by the way of compulsory acquisition. The land gets transferred from its owner to the Government or the Government agency who is constructing the project, and referred as the ‘transfer of a capital asset’ within the meaning of the Income Tax Act, 1961.

 

Initial Consideration

In this case, the consideration for the transfer is determined and paid as compensation by the Central Government to the owner or owners of such compulsory acquired land. Such compensation is taxable under the head “Capital gain” as income of the previous year in which it is received.

 

Let’s understand this with an example:

Government wants to start a project on construction of highways in Ghaziabad, Uttar Pradesh. Now if there are some properties coming in between the highway construction, the government will acquire those properties and in return it will pay compensation to the owners. This money will be taxed in the hands of the owners under head capital gains.

 

Case where the compensation is ‘enhanced’

Sometimes, people are not satisfied by the compensation received in exchange of their acquired property. In such cases, people go to the court of law for enhancement of compensation. If the court awards a compensation which is higher than the original compensation received, then the difference thereof will be chargeable to Capital Gains in the year in which the enhanced compensation received by the owner. For the purpose of taxation of enhanced compensation, the cost of acquisition or the cost of improvements shall be taken as Nil.

 

Reduction in Compensation

When people appear in the court of law for their enhancement of compensation but subsequently it gets reduced to an amount lower than the initial compensation by the court order, the assessed capital gain of that year shall be recomputed by taking into consideration the reduced amount. The re-computation shall be done by rectification of return.

 

Let’s understand it with the help of an example:

Mr. Raj got his property acquired by the government for the highway project. He received a compensation of Rs. 5 Lacs, but he was not satisfied with the same and appeared in court for the enhancement of his compensation. But unfortunately, the court decided that the amount he received i.e., Rs. 5 Lacs is also more for his property, he should receive only Rs. 4.5 Lacs. Here his compensation got reduced by the court and hence this amount will be recomputed for the payment of tax under capital gains.

 

Death of the Transferor

If a person dies before receiving his enhanced compensation, in that case it will be taxable in the hands of the person who receives the same.

 

NOTE: Legal expenses incurred to obtain the enhanced compensation are deductible from enhanced compensation.

50% of the interest received on compensation/enhanced compensation is deductible under section 57.

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

Long Term and Short-Term Capital Gains

Long Term and Short-Term Capital Gains

 

People these days are more involved in purchase and sale of properties. The profit or gain arising from sale of these capital assets such as house property, land, buildings shares, bonds, jewelry during a financial year will be charged under the head “income from capital gains”.

 

 

Examples for Short-term & Long-term capital assets are given below:

  • Ramesh is a salaried employee. In the month of April, 2019, he purchased a piece of land and sold the same in December, 2020. In this case land is a capital asset for Mr. Ramesh. He purchased land in April, 2019 and sold it in December, 2020, i.e., holding it for a period of less than 24 months. Hence, land will be treated as short-term capital asset.
  • Suresh is a salaried employee. In the month of April, 2019, he purchased equity shares of SBI Ltd. (listed in BSE) and sold the same in December, 2020. In this case shares are capital assets for Mr. Rakesh. He purchased shares in April, 2019 and sold them in December, 2020, i.e., after holding them for a period of more than 12 months. Hence, shares will be treated as long-term capital assets.

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

 

What is Transfer – Section 2(47)

What is Transfer – Section 2(47)

 

With reference to Section 2(47) transfer in the terms of capital gains

 

  • The Sale, exchange or relinquishment (giving up the right of an asset) of the asset.

 

  • The extinguishment of any rights therein;

For e.g., Mr. Raj had a property in Delhi, it got destroyed due to gas leak. If he had insured his house, the money received from insurance claim would be taxable.

 

  • The compulsory acquisition thereof under any law;

For e.g., Government acquired many house properties and other properties for the project of National Highway in Himachal Pradesh. The money thus received in exchange of their properties is taxable under the head “capital gain”.

 

  • The conversion of Capital Asset into Stock-In-Trade;

For e.g., Mr. Sharma who owns a jewelry shop converted his own jewelry which is a capital asset as stock-in-trade for the purpose of selling it in the normal course of his business. This conversion will be termed as transfer for the purpose of Capital Gains.

 

  • The maturity or redemption of zero-coupon bonds;

Zero-coupon bonds are issued by the government at 0% interest, which is issued at a discounted rate and redeemed at par value.

For e.g., Let’s say government started a project on metro rail for 10 years. But till the completion of this project government will not generate any revenue. Due to this they issued zero-coupon bonds. Let’s assume that the issuing amount was Rs. 100 and after 10 years it will be for Rs.1,000. Here, the zero-coupon bond is the capital asset, so the difference earned at the time of redemption (transfer for the purpose of Capital gain) will be chargeable to tax under the head “Capital gain”.

 

  • The transfer of immovable property through Power of Attorney;

Power of Attorney reflects your right in that property.

 

  • Any transaction which has the effect of transferring or enabling or enjoyment of any immovable property.

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

Capital Gains on Conversion of Capital Asset into Stock-In-Trade Section 45(2)

Capital Gains on Conversion of Capital Asset into Stock-In-Trade Section 45(2)

 

What is Stock-In-Trade?

The goods kept in hand by a business for the purposes of its trade.

For example, a person dealing in electronic items such as laptop, printers, computers will be his stock-in-trade.

 

With reference to Section 45(2)

At the time of business dealings, one may convert or treat his capital asset as stock-in-trade for the purpose of selling it in the normal the course of his business. This type of transaction is called a transfer for the purpose of Capital Gain.

 

Also, it may be seen as the profits or gains arising from such transfer by way of conversion or treating it as a stock-in-trade is charged to tax under the headcapital gains in the previous year in which the stock-in-trade is sold or otherwise transferred by the owner.

 

At the time of such conversion & transfer two types of income arises:

  • Capital Gain
  • Profits & Gains from Business or Profession

 

The income arising from the above heads will be calculated as follows:

Capital Gain Profits & Gains from Business or Profession

 

Fair Market Value of the asset on date of conversion

(-) Cost of Acquisition of Asset

(-) Cost of Indexation of Asset

Selling price of Stock-in-Trade

(-) Fair Market Value of the asset on date of conversion

 

 

Note: If the entire stock-in-trade is not sold then Capital gain shall be taxable to the extent the converted stock-in-trade is sold in the year in which it is sold.

 

Let’s understand it with an example:

Mr. Sharma who owns a jewelry shop converted his own jewelry which is a capital asset as stock-in-trade for business on 15th May 2020 and sold it on 1st July 2020. It will be considered as transfer under section 2(47) during the financial year 2020-21 (AY 2021-22). However, the profits or gains arising from the above conversion will be chargeable to tax during the financial year 2020-21 (AY 2021-22), since the stock-in-trade has been sold only on 1st July 2020.

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.