tax planning with respect to amalgamation and mergers

8/13/2019 Tax Planning With Respect to Amalgamation and Mergers

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Tax planning with respect to amalgamation and mergers

Under Income Tax Act, 1961 Section 2(1B) of Income Tax Act defines amalgamation asmerger of one or more companies with another company or merger of two or more companies tofrom one company in such a manner that:-

1. All the property of the amalgamating company or companies immediately before the

amalgamation becomes the property of the amalgamated company by virtue of theamalgamation.

2. All the liabilities of the amalgamating company or companies immediately before theamalgamation becomes the liabilities of the amalgamated company by virtue of theamalgamation

3. Shareholders holding at least three-fourths in value of the shares in the amalgamatingcompany or companies (other than shares already held therein immediately before theamalgamated company or its nominee) becomes the shareholders of the amalgamatedcompany by virtue of the amalgamation.(Example: Say, X Ltd merges with Y Ltd in a scheme of amalgamation and immediately

before the amalgamation, Y Ltd held 20% of shares in X Ltd, the above mentionedcondition will be satisfied if shareholders holding not less than 75% in the value ofremaining 80% of shares in X Ltd i.e. 60% thereof, become shareholders in Y Ltd byvirtue of amalgamation)

The motive of giving this definition is that the benefits/concession under Income Tax Act, 1961shall be available to both amalgamating company and amalgamated company only when all theconditions, mentioned in the said section, are satisfied. Amalgamating company meanscompany which is merging and amalgamated company means the company with which itmerges or the company which is formed after merger.However, acquisition of property of one company by another is not amalgamation .

Income Tax Act defines amalgamation as merger of one or more companies with anothercompany or merger of two or more companies to from one company. Let us take an example ofX Ltd and Y Ltd. Here following situations may emerge:-

(a) X Ltd Merges with Y Ltd. Thus X Ltd goes out of existence. Here X Ltd isAmalgamating Company and Y Ltd is Amalgamated Company.

(b) X Ltd and Y Ltd both merges and form a new company say, Z Ltd. Thus both X Ltdand Y Ltd goes out of existence and form a new company Z Ltd. Here X Ltd and YLtd are Amalgamated Company and Z Ltd is Amalgamated Company.

Tax Benefits in case of Amalgamation and mergerIf an amalgamation takes place within the meaning of section 2(1B) of the Income Tax Act,1961, the following tax reliefs and benefits shall available:-

1. Tax Relief to the Amalgamating Company:


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a) Exemption from Capital Gains Tax [Sec. 47(vi)] : Under section 47(vi) of the Income-tax Act, capital gain arising from the transfer of assets by the amalgamating companies tothe Indian Amalgamated Company is exempt from tax as such transfer will not beregarded as a transfer for the purpose of Capital Gain.

b)

Exemption from Capital Gains Tax in case of International Restructuring [Sec.47(via)] : Under Section 47(via), in case of amalgamation of foreign companies, transfer ofshares held in Indian company by amalgamating foreign company to amalgamated foreigncompany is exempt from tax, if the following two conditions are satisfied:

c) At least twenty-five per cent of the shareholders of the amalgamating foreign companycontinue to remain shareholders of the amalgamated foreign company, and

d) Such transfer does not attract tax on capital gains in the country, in which theamalgamating company is incorporated

2. Tax Relief to the shareholders of an Amalgamating Company:

a. Exemption from Capital Gains Tax [Sec 47(vii)]: Under section 47(vii) of the Income-tax Act, capital gains arising from the transfer of shares by a shareholder of theamalgamating companies are exempt from tax as such transactions will not be regardedas a transfer for capital gain purpose, if:

The transfer is made in consideration of the allotment to him of shares in theamalgamated company; and

Amalgamated company is an Indian company.

3. Tax Relief to the Amalgamated Company :

a)

Carry Forward and Set Off of Accumulated loss and unabsorbed depreciation of theamalgamating company [Sec. 72A]: Section 72A of the Income Tax Act, 1961 dealswith the mergers of the sick companies with healthy companies and to take advantage ofthe carry forward of accumulated losses and unabsorbed depreciation of the amalgamatingcompany. But the benefits under this section with respect to unabsorbed depreciation andcarry forward losses are available only if the followings conditions are fulfilled:-

There should be an amalgamation of (a) a company owning an industrialundertaking (Note 1) or ship or a hotel with another company, or (b) a bankingcompany referred in section 5(c) of the Banking Regulation Act, 1949 with aspecified bankNote 2), or (c) one or more public sector company or companiesengaged in the business of operation of aircraft with one or more public sector

company or companies engaged in similar business. The amalgamated company should be an Indian Company. The amalgamating company should be engaged in the business, in which the

accumulated loss occurred or depreciation remains unabsorbed, for 3 years or more. The amalgamating company should held continuously as on the date of

amalgamation at least three-fourth of the book value of the fixed assets held by ittwo years prior to the date of amalgamation.


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The amalgamated company holds continuously for a minimum period of five yearsfrom the date of amalgamation at least three-fourths in the book value of fixed assetsof the amalgamating company acquired in a scheme of amalgamation

The amalgamated company continues the business of the amalgamating companyfor a minimum period of five years from the date of amalgamation.

The amalgamated company fulfils such other conditions as may be prescribed toensure the revival of the business of the amalgamating company or to ensure that theamalgamation is for genuine business purpose.

b) Expenditure on scientific research [Sec. 35(5)] : When an amalgamating companytransfers any asset represented by capital expenditure on the scientific research to theamalgamated Indian company in a scheme of amalgamation provisions of section 35 shall

be applicable- Unabsorbed expenditure on scientific research of the amalgamating company will be

allowed to be carried forward and set off in the hands of the amalgamated company, If such asset ceases to be used in the previous year for scientific research related to

the business of amalgamated company and is sold by the amalgamated company thesale price to the extend of cost of asset shall be treated as business income and theexcess of sale price over the cost shall be subject to the provisions of capital gain.

c) Amortization of expenditure in case of Amalgamation [Sec. 35DD]: Under Sec 35DDfor expenditure incurred in connection with the amalgamation the assessee shall beallowed a deduction of an amount equal to one-fifth of such expenditure for each of thefive successive previous years beginning with the previous year in which theamalgamation takes place.

d) Treatment of preliminary expenses [Sec. 35D(5)]: When and amalgamating company

merges with an amalgamated company under a scheme of amalgamation, the amount of preliminary expenses of the amalgamating company to the extend not yet written off shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.

e) Expenditure for obtaining a licence to operate telecommunication services [Sec.35ABB(6)]: Where in a scheme of amalgamation, the amalgamating company sells orotherwise transfer its licence to the amalgamated company (Being an Indian Company),the provisions of Section 35ABB which were applicable to the amalgamating companyshall become applicable in the same manner to the amalgamated company, consequently:

The expenditure on acquisition on license, not yet written off, shall be allowed to the

amalgamated company in the same number of balance installments. Where such licence is sold by the amalgamated company, the treatment of the

deficiency/surplus will be same as would have been in the case of amalgamatingcompany.

f) Treatment of capital expenditure on family planning [U/S 36(1)(ix)]: If Assetrepresenting capital expenditure on family planning is transferred by the amalgamatingcompany to the amalgamated company under a scheme of amalgamation, such


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expenditure shall be allowed as deduction to the amalgamated company in the samemanner as would have been allowed to the amalgamating company.

g) Treatment of bad debts [Sec. 36(1)(vii)]: When due to amalgamation debts of theamalgamating company has been taken over by amalgamated company, and subsequently,

such debts turn out to be bad, it shall be allowed as deduction to the amalgamatedcompany.

Double Taxation Treaties

To finance the welfare and the administrative expenditure, governments around the worldimpose certain taxes on their subjects.

In cases, where cross country economic activity is carried out, it is a tricky affair to identify and justify the appropriate jurisdiction of tax authorities. In order to mitigate the hardships ofmultiple jurisdictions, the Governments enter into bilateral arrangements, which are commonly

denoted as Double Taxation Avoidance Agreements

Double Taxation Avoidance AgreementsDTAA refers to an accord between two countries, aiming at elimination of double taxation.These are bilateral economic agreements wherein the countries concerned assess the sacrificesand advantages which the treaty brings for each contracting nation. It would promote exchangeof goods, persons, services and investment of capital among such countries.

Indian Government is actively pushing DTAA negotiations with several countries to help itsresidents in understanding their tax jurisdictions and accountability towards the appropriateauthorities. So far India has signed DTAA with 81 countries and discussion is on with many

others. The natures of DTAA s entered by India are greatly diverse in their nature and contents. ObjectivesDTAA treaties must help in avoiding and alleviating the burden of double taxation prevailing inthe international arena. The tax treaties must clarify the taxpayer to know with certainty of his

potential tax liability in the country, where he is carrying on economic activities. Tax Treatiesmust ensure that there is no prejudice between foreign tax payers who has permanent enterprisein the source countries and domestic tax payers of such countries. Treaties are made with the aimof allocation of taxes between treaty nations and the prevention of tax avoidance. The treatiesmust also ensure that equal and fair treatment of tax payers having different residential status,resolving differences in taxing the income and exchange of information and other details amongtreaty partners.

ClassificationDouble taxation avoidance agreements may be classified into comprehensive agreements andlimited agreements based on the scope of such agreements. Comprehensive Double TaxationAvoidance Agreements provide for taxes on income, capital gains and capital investmentswhereas Limited Double Taxation Avoidance Agreements denote income from shipping and airtransport or legacy and gifts. Comprehensive agreements ensure that the taxpayers in both the


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countries would be treated on equitable manner in respect of the issues relating to doubletaxation.

Active & Passive IncomePassive Income refers to income derived from investment in tangible / intangible assets eg.

Immovable property, dividend, interest, royalties, capital gains, pensions etc. Active income isthe income derived from carrying on active cross border business operations or by personal effortand exertion in case of employment eg. Business profits, shipping, air transport, employment etc.

Current Scenario in IndiaThe Indian Income Tax Act, 1961 administrates the taxation of income accrued in India. As perSection 5 of the Income Tax Act, 1961 residents of India are liable to tax on their global incomeand non-residents are taxed only on income that has its source in India. The Provisions of DTAAoverride the general provisions of taxing statute of a particular country. It is now well settled thatin India the provisions of the DTAA override the provisions of the domestic statute. Moreover,with the insertion of Sec.90 (2) in the Indian Income Tax Act, it is clear that assessee have an

option of choosing to be governed either by the provisions of particular DTAA or the provisionsof the Income Tax Act, whichever are more beneficial. Further if Income tax Act itself does notlevy any tax on some income then Tax Treaty has no power to levy any tax on such income.Section 90(2) of the Income Tax Act recognizes this principle.

Relief to the tax payerIn order to prevent the hardship of double taxation, relief is provided to the tax payer. Such reliefis provided by two ways:

Bilateral ReliefBilateral relief is provided in section 90 and 90A of the Indian Income Tax Act. Bilateral relief is

provided through following methods:(i) Exemption MethodOne method of avoiding double taxation is for the residence country to altogether excludeforeign income from its tax base. The country of source is then given exclusive right to tax suchincomes. This is known as complete exemption method and is sometimes followed in respect of

profits attributable to foreign permanent establishments or income from immovable property.Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes.(ii) Credit MethodThis method reflects the underline concept that the resident remains liable in the country ofresidence on its global income, however as far the quantum of tax liabilities is concerned creditfor tax paid in the source country is given by the residence country against its domestic tax as ifthe foreign tax were paid to the country of residence itself.(iii) Tax SparingOne of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreigninvestment flows in India from foreign developed countries. One way to achieve this aim is to letthe investor to preserve to himself/itself benefits of tax incentives available in India for suchinvestments. This is done through Tax Sparing. Here the tax credit is allowed by the country ofits residence, not only in respect of taxes actually paid by it in India but also in respect of thosetaxes India forgoes due to its fiscal incentive provisions under the Indian Income Tax Act.


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Unilateral ReliefUnilateral Relief is provided in section 91 of the Income Tax Act. The aforesaid method isdepending on bilateral activity of both the countries. However, no country will have such anagreement with every country in the world. In order to avoid double taxation in such cases,

country of residence itself may provide relief on unilateral basis.Apart from relief to persons of a country where India has entered in Double Taxation AvoidanceAgreement, there is relief given even in cases where the Government of India has not enteredinto DTA agreement with any foreign country. In such cases if any resident Indian producesevidences to show that, he has paid any tax in any country with which the Government of Indiahas not entered into a DTA agreement, tax relief on that part of his income which sufferedtaxation in the foreign country, to the extent of tax so paid in such foreign country, or the taxleviable in India under the Income Tax Act on such income whichever is less shall be allowed asdeduction u/s 91 while calculating his tax liabilities on such income.

TAX PLANNING IN CASE OF FOREIGN COLLABORATIONS AND JOINTVENTURE

There are two types of foreign collaborations:a) Financial collaboration (foreign equity participation) where foreign equity alone is involved .

b) Technical collaboration (technology transfer) involving licensing of technology by theforeign collaborator on due compensation. -There are two approving authorities1) Reserve Bank of India, and2) Department of Industrial Development in the Ministry of Industry, Government of India.

Government PolicyThe Government of India s policy on foreign private investment is based mainly on theApproach adopted in 1949. The basic policy is to welcome foreign private investment on aselective basis in areas advantageous to the Indian economy. The conditions under which foreigncapital is welcome are as follows:a) All undertakings (Indian or foreign) have to conform to the general requirements of theGovernment s Industrial Policy.

b) Foreign enterprises are to be treated at par with their Indian counterparts.c) Foreign enterprises would have the freedom to remit profits and repatriate capital subject toforeign exchange considerations.The Industrial Policy 1991, is based on the view that while freeing Indian Industry from officialcontrols, opportunities for promoting foreign investments in India should also be fully exploited.It is felt that foreign investment would bring attendant advantages of technology transfer,marketing expertise, introduction of modern managerial techniques and new possibilities for

promotion of exports.

Areas of Foreign CollaborationThe Government of India issues from time to time a list of industries indicating where foreigninvestments may be permitted. The lists so issued are illustrative only The Government of India(Foreign Investment Promotion Board) also considers import of technology in Industries listed in


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Annexure A & Annexure B of Schedule 1 of Foreign Exchange Management (Transfer or issueof security by a person resident outside India) Regulations, 2000 subject to compliance with the

provisions of the Industrial Policy and Procedures as notified by Secretariat for IndustrialAssistance (SIA) in the Ministry of Commerce and Industry Government of India from time totime.

Technical CollaborationThe Industrial Policy, 1991, also provides that equity collaboration need not necessarily beaccompanied with technical collaborations. The salient features of the Policy relating to ForeignTechnology Agreements are outlined below:

Paragraph 39C - Foreign Technology Agreements.

Standard Conditions Attached to Approvals for Foreign Investment & TechnologyAgreements

1) The total non-resident shareholding in the undertaking should not exceed the

percentage(s) specified in the approval letter.2) A) The royalty will be calculated on the basis of the net ex-factory sales price of the product, exclusive of excise duties, minus the cost of the standard bought-out componentsand the landed cost of imported components, irrespective of the source of procurement,including ocean freight, insurance, customs duties, etc. The payment of royalty will berestricted to the licensed capacity plus 25% in excess thereof for such items requiringindustrial licence or on such capacity as specified in the approval letter. This restrictionwill not apply to items not requiring industrial licence. In case of production in excess ofthis quantum, prior approval of Government would have to be obtained regarding theterms of payment of royalty in respect of such excess production.B) The royalty would not be payable beyond the period of the agreement if the orders hadnot been executed during the period of agreement. However, where the orders themselvestook a long time to execute or were executed after the period of agreement, then in suchcases the royalty for an order booked during the period of agreement would be payableonly after a Chartered Accountant certifies that the orders in fact were firmly booked andexecution began during the period of agreement and the technical assistance wasavailable on a continuing basis even after the period of agreement.C) No minimum guaranteed royalty would be allowed.

3) The lumpsum shall be paid in three instalments as detailed below, unless otherwise stipulatedin the approval letter:-

i. First 1/3rd after the approval for collaboration proposal is obtained from Reserve Bank ofIndia and collaboration agreement is filed with the Authorised Dealer in ForeignExchange.

ii. Second 1/3rd on delivery of know-how documentation.iii. Third and final 1/3rd on commencement of commercial production, or four years after the

proposal is approved by Reserve Bank of India and agreement is filed with theAuthorized Dealer in Foreign Exchange, whichever is earlier. The lumpsum can be paidin more than three instalments, subject to completion of the activities as specified above.

1) All remittances to the foreign collaborator shall be made as per the exchange rates prevailing on the date of remittance.


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2) The applications for remittances may be made to the Authorised Dealer in Form A2 withthe undernoted documents:-

a) A No Objection certificate issued by the Income-tax authorities in the standard form or acopy of the certificate issued by the designated bank regarding the payment of tax wherethe tax has been paid at a flat rate of 30% to the designated bank.

b) A certificate from the Chartered Accountant in Form TCK/TCR (depending upon the purpose of payment).c) A declaration by the applicant to the effect that the proposed remittance is strictly in

accordance with the terms and conditions of the collaboration approved byRBI/Government.

3) The agreement shall be subject to Indian Laws.4) A copy of the foreign investment and technology transfer agreement signed by both the

parties may be furnished to the following authorities:-a) Administrative Ministry/Department.

b) Department of Scientific and Industrial Research, New Delhi.c) Concerned Regional Officer of Exchange Control Department, RBI.

d) Authorised Dealer designated to service the agreement.5) All payments under the foreign investment and technology transfer agreement includingrupee payments (if any) to be made in connection with the engagement/deputation offoreign technical personnel such as passage fare living expenses, etc. of foreigntechnicians, would be liable for the levy of ces under the Research and DevelopmentCess Act, 1986 and the Indian Company while making such payments should pay thecess prescribed under the Act.

6) A return (in duplicate) in Form TCD should be submitted to Regional Office of theReserve Bank of India in the first fortnight of January each year.

Withholding Tax for NRIs and Foreign Companies:Withholding Tax Rates for payments made to Non-Residents are determined by theFinance Act passed by the Parliament for various years. The current rates are:

i) Interest 20%ii) Dividends paid by domestic companies : Niliii) Royalties 10%iv) Technical Services 10%v) Any Other Services Individuals: 30% of the income Companies: 40% of the net

incomeThe above rates are general and in respect of the countries with which India does not have a

Double Taxation Avoidance Agreement (DTAA).

Tax consideration in MAKE or BUY

Management decision should be based on careful consideration of all the factors, includingimplication as regard to tax liability. Keeping view various tax implications that are relevantwhile taking some specific management decision under different provision of Income tax Acthave dealt with:


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Make or Buy:

One of the vital investment subject to the influence of tax factor is Make or buy decision. Mostof the companies have to decide sometimes or the other whether they should buy a part from amarket and stop making it themselves or whether they should stop buying it and start making it.

There are various consideration affecting this decision, chief of which is cost. In other words, inmaking this sort of decision the various cost of making the product or part component of productis compared with its purchase price in market. A host of other consideration such as capacityutilization, supply position of the article to be bought, terms of purchase, ill effect of layoffs etc.are kept in view while taking such decision. Tax planning can be helpful in decision as regardsmaking or buying a particular product, component etc.

The decision to make or buy is a costing decision and is a lso influenced by many generalfactors which are as follows:

Availability of financial resources Investment required in fixed assets Availability of skilled and unskilled labour Availability of suppliers Existence of idle capacity in organization Price at which the product is available in the market Other miscellaneous factors

Apart from costing considerations following factors also go in decision makingprocess:

Utilization of Capacity Inadequacy of funds Latest Technology Dependence of Supplier Labor problem in the factory What are the cost involved in making of a part

Fixed Cost Variable Cost

What are the cost involved in buying of a part from outside agency: Buying cost Inventory cost

Comparision of both the cost shall determine which decision the company shall follow,therefore tax saved in both the cases are same.


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Tax Consideration Establishing a new unit: If the decision to manufacture a part or a component involves

a setting up separate industrial unit than tax incentives available u/s 10a,10b, 32, 80 IA,80IB should be considered.

Export: If Make or Buy decision is taken for exporting goods then tax in centivesavailable under section 80 HHC depends upon whether goods manufactured by tax playerhimself are exported or goods manufactured by others are exported by tax players.

Sale of plant and machinery: If buying is cheaper than manufacturing and the assesseedecides to buy parts or components for a long period of time, he may like sell the existing

plant and machinery. Tax implications as specified by section 50 has to be considered.If the decision is taken to produce a part, then any other industrial unit to be established. When aseparate industrial unit is established then the company may get tax benefits and also deductionsunder various sections to a company which decides to produce a part, are:

1. Deduction in respect of profits and gains from newly established small scaleundertakings in rural area (Sec 80 HHA)A tax players deriving a profits and gains from a new small scale industries undertakingset up in rural area will entitled to deduction of an amount equal to 20% of such profitsand gains. The deduction will be admissible for a period of 10 previous years in whichthe small scale industrial undertaking commences production of any article.

2. Deduction in respect of profits and gains from industrial undertaking (Ship or Hoteletc.): (Sec 80-1)Under sction-80-1, a deduction will be allowed in respect of profits and gain derivedfrom industrial undertakings, ship or hotel established after a certain date. The deduction

will be of an amount equal to 30% of such industrial undertakings or Ship or Hotel, If itscompany and 25% in categories of assesses.

3. Deduction in respect of profits and gains from newly established small scaleundertakings or Hotel business in Backward area (Sec 80 HHA)All assesses are entitled to a deduction of 20% of the profit derived by them for newindustrial undertakings and Hotel setup in backward area. The deduction will be allowedin respect of the ten assessment year relevant to previous year in which the industrialundertaking begins to manufacture or produce articles.

4. Depreciation AllowanceA company which produces a part or a component will be allowed an allowance inrespect of depreciation of buildings, machinery, plant or furniture owned and used theassesee for the purpose of business and profession.

Two primary factors which have a decisive influence on the choice of make or buy arethe cost and availability of production capacity. Facilities are made available and other

things being equal cost consideration assumes primacy. If the cost of making an item in-

house is going to be higher than the cost of acquiring it from an outside supplier, the


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choice is to buy it. On the other hand, if the cost of making the item in ones own plant is

cheaper than buying it from the supplier, the choice is to make it. A good make-or-buy

decision, nevertheless, requires the evaluation of several less tangible factors in addition

to the two basics ones.

Considerations which favor making the parts are: 1. Cost considerations less expensive to make the part2. Desire to integrate plan operations3. Productive use of excess plant capacity to help absorb fixed overheads.4. Needs to exert direct control over production and/or quality5. Design secrecy.6. Unreliable suppliers.7. No suitable supplier quotation

8.

Desire to maintain a stable workforce in periods of declining salesConsiderations which favor buying the part:

1. Cost considerations less expensive to buy the part2. Suppliers research and specialized know-how3. Small volume requirements4. Limited production facilities5. Desire to maintain stable workforce in periods of rising sales.6. Desire to maintain multiple source policy.7. Government policy favoring ancillary industries.

8. Monopoly items which are rationed by the government and on which, the buyer has nooption.

Other Factors

Some companies, by tradition, prefer to make almost every component of their products. Others

prefer to buy as much as possible from outside suppliers. In general, an aggressive company in

an industry that is expanding rapidly with many technological changes (e.g. electronics), will

prefer to buy many of its components from outside suppliers. In such industries, the company has

many opportunities to employ its capital profitably through horizontal diversification, expandingits line of finished products.

Tax Consideration in Make or Buy decision:

If a business house/company decides to make a product/part instead of buying it and the makingof product involves setting up of new industrial undertaking then a business house should make a


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1) Income to be computed as per arms length price2) Section not to apply when arms length prices decreases income or increases loss.

Associated enterprise means an enterprise which participates, directly or indirectly, in

management or control or capital of other enterprise. Further, if one or more persons participate,directly or indirectly in the management or control or capital of two enterprises those twoenterprises are associated enterprises.

Deemed associated enterprises: two enterprises are deemed to be associated enterprises. If,at any time during the PY, -

a) One holds, directly or indirectly shares carrying 26% or more of voting power in otherenterprise.

b) Any person holds, directly or indirectly shares carrying 26% or more voting power in bothof them.

c) A loan advanced by one to the other constitutes 51% or more of BV of total assets of

other.d) One enterprise guarantees 10% or more of the total borrowings of the other enterprise.e) One appoints more than half of board of directors or one or more executive directors of

the other.f) Any person appoints more than half board of directors or one or more executive directors

of both.g) Manufacture/ processing of goods or business carried on by one is fully dependent on use

of know how, patents, copyright, etc. owned by the other, or in respect of which other hasexclusive rights.

h) 90% or more of RM required by one are supplied by the other or by persons specified byother, and prices and other conditions relating to the supply are influenced by the otherenterprise.

i) Goods manufactured/ processed by one are sold to the other enterprise or to personsspecified by other, and the prices and other conditions relating thereto are influenced bysuch other enterprise.

j) Where one enterprise is controlled by an individual/HUF, the other enterprise is alsocontrolled by such individual/ HUF or his relatives or jointly by such individual/HUF andsuch relative.

k) One enterprise is a firm/AOP/BOI and other enterprise holds 10% or more interest in suchfirm/AOP/BOI.

l) There exists between the two enterprises, any relationship of mutual interest, as may be prescribed.

Section 92B in tern ational transactionIt means a transaction entered into between two or more associated enterprise (at least one is anon resident) for purchase/sale/ lease of tangible/ intangible property or provision of services or


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lending/ borrowing money or any other transaction (including sharing agreements for commoncosts) having bearing on income and assets.Deemed associated transaction: If an associated enterprise and a third person determine the termsof a transaction between third person and another associated enterprise, such transaction shall beregarded as having being entered into between two associated enterprise.

Section 92C methods under which arms length price is determined1) Arms length price (ALP) means a price applicable in a uncontrolled transaction i.e. a

transaction between non associated enterprises, in uncontrolled conditions.

2) Methods for computation of arms length price: arms length price is determined by the mostappropriate of the following methods, selected as per the mode prescribed by the board

a) Comparable uncontrolled price method b) Resale price methodc) Cost plus methodd) Transaction net margin method

e) Profit split methodf) Other prescribed method.3) When more than one price determined : by the most appropriate method, the arms length

price shall be taken to be the lower of the following

a) The arithmetical mean of such prices, or, b) A price varying up to 5% of such arithmetical mean.

ASSESSMENT PROCEDURE

Assessment of income relating to one PY starts in the succeeding financial year, which iscalled AY. Assessment procedure begins when an assessee files his return of income to the incometax department.

Filing of return [Sec 139 (1)]A person has to file return of income in the prescribed form within the specified time limit if

his total income exceeds the maximum non-taxable limit.As per section 139(1), it is compulsory for companies and firms to file a return of income for

every previous Year.Filing of return of income is mandatory for certain category of assessees. Incidental provisions foraccompaniments to the return of income, error correction, belated returns have been made. Nowfiling of the return electronically has been made mandatory for certain category of assessees.

Return of income is the format in which the assessee has to furnish information as to his totalincome and tax payable. The format for filing of returns by different assessees is notified by theCBDT.

Due date means -(a) 30th September of the assessment year, where the assessee is -

(i) a company; or


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(ii) a person (other than a company) whose accounts are required to be audited under theIncome-tax Act, 1961 or any other law in force; or

(iii) a working partner of a firm whose accounts are required to be audited under the Income-tax Act, 1961 or any other law for the time being in force.

RETURN BY WHOM TO BE SIGNED [Section 140]Managing director or where for any unavoidable reason managing director is not able to sign orwhere there is no managing director, by any director thereof. Exceptions :(a) where the company is being wound up : by the liquidator(b) where the management of the company has been taken over by the Government : the principal

officer thereof(c) company is not resident in India : a person who holds a valid power of attorney

Return of loss [Sec 139 (3)]Return can also be filed in the prescribed form in respect of loss suffered by the assessee. It

is not compulsory to file a return of loss, but certain losses can be carried forward only on filingreturn of loss

Belated return [Sec 139(4)]If the return is not furnished within the time, the person may furnish the return of any PY at

any time before the end of one year form the end of the relevant AY or before making assessmentwhichever is earlier. An assessee who files belated return are liable for penal interest

Revised return [Sec 139(5)]If after filing a return of income or in pursuance of a notice the assessee discovers any

omission or wrong statement in return originally filed, he can file a revised return. It should be filedwithin one year from the AY or before the completion of assessment whichever is earlier.

Defective return [Sec 139(9)]

Where the AO finds that the return filed by an assessee is defective he should intimate theassessee about the defect and give him an opportunity to rectify the defects within 15 days from thedate of intimation or within such further extended time as the AO may allow. If the defect is notrectified within the time allowed, the return will be treated as invalid and it will be deemed that noreturn has been filed by the assessee attracting penal interest

TYPES OF ASSESSMENT1. Self assessment [Sec 140A]When a return is furnished the assessee will have to pay tax, if any payable on the basis of

return. He has also to pay interest up to the date of filing the return along with self-assessment oftax. The return of income is to be accompanied by proof of payment of both tax and interest.Assessing officer may make an enquiry for getting full information in respect of assesses income.The assessee shall be given an opportunity of being heard in respect of any material gathered onthe basis of any enquiry so made. The assessing authority may also direct the assessee to get hisaccounts audited by an accountant nominated by chief commissioner, even if the accounts of theassessee have been audited under nay other provision.

2. Summery assessment [Sec 143(1)]If on the basis of return filed, any tax or interest is due the A.O shall send intimation to the

assessee specifying the sum so payable. If any refund is due on the basis of such return it shall begranted to the assessee. Such intimation shall be deemed to be a notice of demand. Such an


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The Indian Income Tax Act provides for chargeability of tax on the total income of a person onan annual basis. The quantum of tax determined as per the statutory provisions is payable as:

a) Advance Tax b) Self Assessment Tax

c) Tax Deducted at Source (TDS)d) Tax Collected at Source (TCS)

Tax deducted at source (TDS), as name imply aims at collection of revenue at the very source ofincome. It is an indirect method of collecting tax with the concepts of collect as it is beingearned. Its significance to the government lies in the fact that it pre-pones the collection of tax& to ensures a regular source of revenue.

The concept of TDS requires that the person, on whom responsibility has been cast, is to deducttax at the appropriate rates, from payments of specific nature which are being made to a specifiedrecipient. The deducted sum is required to be deposited to the credit of the Central Government.

The recipient from whose income, tax has been deducted at source, gets the credit of the amountdeducted in his personal assessment.

TDS RATES FOR THE A.Y. 2012-13 (IN %)

Nature of Payment Made To Residents Threshold(Rs.)

Company / Firm /Co-operative

Society / LocalAuthority

Individual /HUF

If No /Invalid

PAN

Section - Description Rate (%) Rate (%) Rate (%)192 - Salaries - NA Average rates

as applicable30

193 - Interest on securities - 10 10 20194 - Dividends - 10 10 20194A - Interest other than interest on securities -Others

5000 10 10 20

194A - Banks 10000 10 10 20194B - Winning from Lotteries 10000 30 30 30194BB - Winnings from Horse Race 5000 30 30 30194 C - Payment to Contractors - - - -- Payment to Contractor - Single Transaction 30000 2 1 20- Payment to Contractor - Aggregate During theF.Y.

75000 2 1 20

- Contract - Transporter who has provided validPAN

- - - 20

194D - Insurance Commission 20000 10 10 20194E - Payment to Non-Resident Sportsmen orSports Association

- - - -

- Applicable up to June 30, 2012 - 10 10 20- Applicable from July 1, 2012 - 20 20 20194EE - Payments out of deposits under NSS 2500 20 - 20194F - Repurchase Units by MFs 1000 20 20 20194G - Commission - Lottery 1000 10 10 20


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194H - Commission / Brokerage 5000 10 10 20194I - Rent - Land and Building 180000 10 10 20194I - Rent - Plant / Machinery 180000 2 2 20194J - Professional Fees 30000 10 10 20194LA - Immovable Property 100000 10 10 20194LB - Income by way of interest from

infrastructure debt fund (non-resident)

- 5 5 20

Sec 194 LC - Income by way of interest by anIndian specified company to a non-resident /foreign company on foreign currency approvedloan / long-term infrastructure bonds from outsideIndia (applicable from July 1, 2012)

- 5 5 20

195 - Other Sums - Average rates asapplicable

- 30

196B - Income from units 10 10 20196C-Income from foreign currency bonds orGDR (including long-term capital gains ontransfer of such bonds) (not being dividend)

- 10 10 20

196D - Income of FIIs from securities 20 20 20 20

tax planning with respect to amalgamation and mergers

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