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Special Bench Analyses Vital Transfer Pricing Issues Influencing IT-ITeS Sector

Author : Sanjiv Malhotra
Dated: Apr 23, 2014

With nine rounds of transfer pricing audit completed in January 2014, the challenging days for Indian outsourcing sector does not seem to get over. The total quantum of transfer pricing adjustments made in FY 2012-13 was to the tune of seventy thousand crores1 (for Assessment Year (“AY”) 2009-10) up by 54 per cent earlier. Indian outsourcing sector accounts for more than half the total claims in transfer pricing adjustments made during the aforesaid audit cycle from about one-third earlier.

However, as per recently disseminated data, the additions to income of companies undertaking international transaction has dropped by over 14 per cent to sixty thousand crores2 in FY 2014 tax audit cycle (for AY 2010-11). This seems to be a silver lining in an otherwise dismal environment emanating from the North Block.

Outsourcing sector accounts for more than USD 100 billion share in India’s economy with big foreign companies like IBM, Capgemini, Microsoft, GE etc. putting forward a big basket of service offerings viz. customer service, risk and fraud management and finance and accounting. In the backdrop of the great demographic dividend, India has been one of the most preferred Knowledge Services Outsourcing (“KSO”) destinations holding 70 per-cent share of the global KSO market3. India is poised to emerge as a global hub for KSO by 2015.

Over a period of time, multiplicity of business arrangements have happened in the outsourcing space starting from outsourcing of accounting processes to legal and research process outsourcing. While, Business Process Outsourcing (“BPO”) service stands for taking up routine operations like data entry, voice calling and accounting services, a shift of functions performed that requires expert analysis and decision making viz. patent application drafting, technical research and advisory activities etc. mark the outset of a new category of Knowledge Process Outsourcing (“KPO”) services. This broad bifurcation though coined by the industry itself is important from a transfer pricing stand-point and is analyzed deeply by the Special Bench of Mumbai Tribunal in the case of Maersk Global Centres (India) Private Limited discussed in this article.

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Income abroad may get benefit under tax agreement

Author : Raghunath Rao
Dated: Apr 18, 2014

I will be travelling to South Africa for a year starting May 2014. I will be paid a substantial sum for freelance work there. How and where will this income be taxed if I bring back some of the money to India?

-Shubham

The taxability of the income earned by you in India from your freelance work would depend upon your residential status for the purposes of the Indian tax laws. If you stay in India for a period of 182 days or more during the year or if you have stayed in India for 365 days or more in the previous four years and for 60 days in this year, you will be considered to be a resident for tax purposes.

Considering that your stay in India will be less than 60 days during the year, you will qualify to be a non-resident for Indian tax purposes and the taxability of the income would depend upon the provisions of the Income-tax Act, 1961, and India’s Double Taxation Avoidance Agreement (DTAA) with South Africa. I am assuming that your freelance work is not linked to any business or professional setup in India, in which case the income will be taxable only in South Africa. The mere act of bringing such income into India should not result in any further tax liability.

I moved to London in October of 2013. I was paid salary in India until then and in London for the rest of the year. Where will I be taxed for 2012-13?

—A. Baidya

The taxability of the income earned by you would depend upon your residential status for tax purposes in India as well as the UK. I am assuming that you have not travelled out of India during the period April-September. As a consequence, you would have stayed in India for more than 182 days, thereby making you a resident for Indian income-tax purposes.

Under the Indian tax laws, the entire income of a person resident in India is taxed in India irrespective of where it is earned. However, this is subject to the benefits, if any, under the India-UK DTAA. Under this, salary paid to you pursuant to your exercise of employment in the UK may be taxed in the UK. However, if your presence does not exceed 182 days and if the salary is paid to you by or on behalf of an employer who is not a resident of the UK and the salary paid to you is not deductible in computing the profits of your employer taxable in the UK, the salary paid to you will not be taxable in the UK. Consider consulting a tax consultant for any further clarifications.

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Foreign currency bank deposit interest is tax exempt for NRIs

Author : Raghunath Rao
Dated: Apr 11, 2014

Does a non-resident Indian (NRI) have to pay income tax on interest earned from deposits of foreign earnings while abroad? How do you calculate tax on deposits in India from earnings as an NRI?—Gautam Nambiar

Interest earned on deposits held in foreign currency with a scheduled bank, by a non-resident or by a person who is not ordinarily resident (RNOR) is exempt from income tax according to the provisions of section 10 (15) of the Income-tax Act, 1961 (the Act).

The exemption would be available until you are non-resident or an RNOR under the Act. You will be an RNOR if you are a non-resident in nine out of the 10 previous years or your stay in India in the seven previous years preceding the current year does not exceed 729 days.

Typically, a returning NRI would qualify to be RNOR for two years; consequently, she will be eligible to claim exemption on the interest earned from deposits in foreign currency.

Once you are considered as being ordinarily resident for income tax purposes, your global income becomes taxable in India. Your earnings from deposits in India would be chargeable to tax as per the slab rates applicable to an individual.

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I-T return filed after last date needs CBDT approval

Author : Raghunath Rao
Dated: Apr 04, 2014

I have been in China since April 1999. Till that time I was a resident Indian earning in India, but I have been unable to file my Income tax return for the last financial year in India. Being a salaried employee, the tax was deducted at source. Do I need to file returns?—Vinay Agarwal

I understand that you have not been able to file return for income in financial year 1998-1999, i.e. the year ended 31 March 1999. The last date till which you could have filed a belated return for that year was 31 March 2001.

Under the income tax law, any individual having income chargeable to tax is required to file the return of income within the specified due date. Any return filed after the last date allowed under the income tax law will be considered to be invalid unless there is a specific permission from the Central Board of Direct Taxes (CDBT).

As a result, even if you file a return of income now, the same may be considered to be an invalid return.

However, the CBDT is empowered to authorize any income tax authority to admit an application or claim for any exemption, deduction, refund or any other relief even after the expiry of the due dates specified under the Income-tax Act.

In case you have any refund due or a claim to be made for that year, you could approach the CBDT seeking a condonation for the delay in filing the return and request for allowance of the claim or refund.

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