[Analysis] of International Tax & Transfer Pricing Provisions in the Finance Act 2023

Table of Contents

1. Extending section 9(1)viii) to gifts made to RNOR
2. Angel Tax Provisions
3. Reduction in Time Limit for Furnishing TP Report
4. Time Limit for Export Proceeds Realisation for SEZ
5. Exclusion of NBFC from Interest Deductibility Restriction
6. Amendment in Rates of TCS on LRS Remittances
7. Amendment in Rates of TCS on Remittances
8. Taxability on Distribution by Business Trust
9. Typical Structures of REIT & InvIT
10. Distribution History of Embassy REIT
11. TDS on Distributions to Non-residents
12. Tax incentives to IFSC
13. Changes in TDS Provision and Procedures
14. Increase in Tax Rate of Royalty/FTS

1. Extending section 9(1)viii) to gifts made to RNOR

• Previously any sum of money exceeding fifty thousand rupees, received by a non-resident without consideration from a person resident in India, was deemed to be income accruing or arising in India under section 9(1)(viii).
• Finance Act 2023 amends the existing clause by extending the scope of the deeming provision to receipt without consideration of any sum of money exceeding fifty thousand rupees by a person being not-ordinary resident from a person resident in India.
• Now receipt of any gift of sum of money by RNOR is also covered under the deeming provision of section 9(1)(viii) e.f.01-04-2023.

2. Angel Tax Provisions

• Section 56(2)(viib) was introduced in the year 2012 to prevent generation and circulation of unaccounted money through share premium received from resident investors in a closely held company in excess of its fair market value.
• Section 56(2)(viib) provide that where a closely held Indian company receives any consideration for issue of shares that exceeds the face value of such shares as well as the fair market value of the shares, then the excess consideration received over the fair market value of the shares would become chargeable to income-tax for the Indian company under the head ‘Income from other sources’.
• Rule 11UA of the Income Tax Rules, 1962 provides the formula for computation of FMV of unquoted equity shares for the purposes of the Section 56(2)(viib).
• Exemption from this section:

1. 1. Investments made by Venture Capital Company or Venture Capital Fund or Category I & II AIFs regulated by SEBI/IFSC.
   2. Start-ups registered with DPIIT and satisfying conditions such as total share capital and share premium after issuance < INR 25 crores; prohibition from making purchase of investment assets such as land/building/residential house/jewellery, shares etc.

• Finance Act 2023: Provides to remove the qualification of resident shareholders and extends the applicability to consideration received from non-resident shareholders too.
• Thresholds for determining chargeability to tax:

• Methods to determine FMV:

1. 1. Valuation exercise u/s 56(2)(viib) needs to be carried out at the time of issuance of equity shares or CCPS. What about applicability of section 56(2)(viib) at the time of conversion of CCPS/CCDs into equity shares?
   2. Valuation report would now be required under three different laws for investment received from non-residents and it would lead to disparity as shown below unless the shares are  issued exactly at fair value arrived commonly under all laws:

• Principles emerging from judicial decisions on Sec. 56/ Rule11UA

1. 1. AO has no right to change the method of valuation adopted by the assessee
   2. AO can scrutinize the valuation report and if not satisfied with assessee’s explanation, AO has to record the reasons and basis for not accepting the valuation report. Only thereafter, he can go for own valuation or obtain the fresh valuation report from an independent valuer and confront the same to the assessee; though under the same valuation method
   3. For scrutinizing the valuation report, facts and data available only on the date of valuation to be considered and actual result of future cannot be a basis to decide about reliability of the projections
   4. The primary onus to prove the correctness of the valuation report is on the assessee
   5. Assessee has to satisfy about the correctness of the projections, discounting factor, terminal value, etc. with the help of empirical data or industry norms, if any, and/or scientific data, scientific method, scientific study and applicable guidelines regarding DCF method of valuation since assessee is privy to the facts of the company

3. Reduction in Time Limit for Furnishing TP Report

• As per section 92D(3), the Assessing Officer (including Transfer Pricing Officer) or the Commissioner (Appeals) during the course of any proceedings may require to furnish any information or document (say transfer pricing study report) within 30 days from the date of receipt of a notice issued. Further on an application made by the assessee, the time period of 30 days may be extended by an additional period of 30 days.
• FinanceAct 2023 reduces the time period from 30 days to 10 days for furnishing the report. It also reduces the additional time sought on an application made by the assessee to 10 days.

4. Time Limit for Export Proceeds Realisation for SEZ

• Currently, eligible SEZ units were allowed deduction of a specified percentage of profit from their total income u/s 10AA.
• Finance Act 2023 now provides that such deduction will be available only if a return of income has been filed u/s 139(1) and export proceeds of goods /services have been brought into India within 6 months from the end of the previous year or such other period that the RBI may allow.
• Further it is also provided that any export proceeds shall be deemed to be received in India even in cases where such proceeds are credited to a separate account maintained outside India with the approval of RBI.
• Consequential amendment in section 155(11A) to allow the AO to amend the assessment order later where the export earning is realized in India after the permitted period.

5. Exclusion of NBFC from Interest Deductibility Restriction

• Section 94B provides restriction to an Indian company / PE of a foreign company on deduction of interest expense exceeding rupees one crore beyond 30% of EBIDTA in respect of any debt issued by NR AE.
• Further section 94B(3) excludes companies that are engaged in the business of banking or insurance.
• FinanceAct 2023 extends this exclusion to specified class of NBFCs that may be notified by the Government.

6. Amendment in Rates of TCS on LRS Remittances

• Section 206C(1G) deals with TCS on foreign remittances through the Liberalised Remittance Scheme (LRS) and on sale of overseas tour package.
• Finance Act 2023 provides that remittances under LRS, whether outside India or within India (for e.g. Transfer to NRO a/c or bank a/c in IFSC), will be covered within the purview of the aforesaid section. Further FA 2023 amends TCS rates in case of certain LRS remittances which are tabulated below for ease of reference [applicable e.f. 1st July 2023]:

7. Amendment in Rates of TCS on Remittances

• Prior to amendment, section 206CC provided that TCS shall be collected at the higher of twice the rate specified in the relevant provision or @ 5% in case of failure to furnish Similarly, provision was also present for non-filers of ITR u/s 206CCA.
• Finance Act 2023 amends sections 20CC & 206CCA to provide that rate of TCS under this section, in any case, shall not exceed 20%. In absence of this amendment, TCS rate could have shot up to 40% in case of non-availability of PAN/non-ITR filers.

8. Taxability on Distribution by Business Trust

• Finance Act 2023 has inserted new sub-section 56(2)(xii) to provide that any specified sum received by a unit holder from a business trust other specified income taxable in the hands of the unit holder/ business trust, will be deemed to be an income in the hands of unit holder which will be taxable as IFOS. Specified Sum = A-B-C where

A = aggregate of sum (excluding special income and taxable income of business trust) distributed by the business trust during the previous year (PY) + any earlier PY;

B = Issue price of the unit;

C = amount charged to tax under this clause in any earlier PY.

If the specified sum is negative as per the above formula, it will be deemed as ‘0’.

• Finance Act 2023 also amends section 10(23FE) to exempt sums taxable u/s 56(2)(xii). Accordingly, any distribution received by the SWF, Pension fund in the form of a specified sum will be exempt from tax in their hands.
• Finance Act 2023 further amends section 48 to provide that cost of acquisition of a unit shall be reduced by any sum which is not taxed in the hands of the business trust/ unit holder either as specified income/sum.
• Finance Act 2023 also amends section 193 to provide that there is no requirement to withhold tax on payment of interest in respect of any securities by SPV to business trust. 

9. Typical Structures of REIT & InvIT

10. Distribution History of Embassy REIT

Figures in INR/ Unit

Analysis

• The aforesaid amendments can be explained with the help of following illustration: Unit holder (UH) has invested Rs. 2000 in a unit of business trust (BT). In Year-1, Mr. UH receives Rs. 1500 from BT as repayment of debt and Rs. 800 similarly in Year-2. Mr. UH redeemed the units @ Rs.3000 in Year-3.

Decision Tree

11. TDS on Distributions to Non-residents

• Applicable TDS rates at SPV level on the distribution of income to business trust:

• Applicable TDS rates at business trust level on distribution of income to non-residents:

12. Tax incentives to IFSC

12.1 Relocation of funds to IFSC

• Section 47 provides for tax-neutral transfer in cases where assets of the original fund are relocated to the resultant fund in an IFSC.
• Finance Act 2023 amended the definition of ‘Original Fund’ to include an investment vehicle in which Abu Dhabi Investment Authority (ADIA) is the direct/indirect SH or unit holder or beneficiary or interest holder and such investment vehicle is directly/indirectly wholly owned and controlled by ADIA or Government of Abu Dhabi.

12.2 Non-Applicability of Angel tax

• Finance Act 2023 provides that Angel tax provisions will not be applicable in case where consideration for issuance of shares is received from an AIF set up in IFSC.

12.3 Incentives for aircraft leasing

Capital Gain Income

• FinanceAct 2023 by inserting section 10(4H) exempts CG income of NR/unit of an IFSC engaged in the business of leasing of aircraft from the transfer of equity share of a domestic company engaged in the business of leasing of aircraft subject to:
• Domestic company commences operation in IFSC on or before 01-04-2026 and
• CG arises within 10 years from the commencement of operations in IFSC by the domestic company or AY 2034-35, whichever is later.

Dividend Income

• Finance Act 2023 by inserting section 10(34B) exempts dividend income of a unit of an IFSC engaged in the business of leasing of aircraft received from the company being a unit of an IFSC engaged in the business of leasing of aircraft.

12.4 Offshore Banking Units (OBU)

 Increase of tax holidays for OBU

• Hitherto, section80LA provided tax holidays to OBU as under:
  • 100% deduction of such income for 5 consecutive AYs;
  • Thereafter 50% deduction of such income for 5 consecutive AYs
  • Finance Act 2023 provides to increase the 50% limit to 100% from 1st April 2023

Exemption on distribution of income

• Hitherto, section 10(4E) provided exemption to non-residents on income from transfer of Offshore derivative Instrument (ODI) entered into with the IFSC Banking Unit (IBU).
• Finance Act 2023 extends the exemption to any distribution of income on ODI entered into with an OBU of an IFSC.

Tax on dividend

• Hitherto, income by way of dividend was taxed @20% u/s 115A.
• FinanceAct2023 provides that dividends received by NR or a foreign company from an IFSC unit will be taxable @10% instead of 20%

12.5 Tax rate on borrowing u/s 194LC

• Hitherto, section 194LC provided for a concessional withholding tax rate @ 4% in case of income earned by NR or a foreign company from the long-term bond or rupee-denominated bond listed on a recognized stock exchange located in IFSC issued prior to 1st July 2023.
• FinanceAct 2023 did not extend the sunset clause and accordingly, interest income on bonds issued after 1st July 2023 would have attracted tax @20%.
• However, Finance Act 2023 provides for a concessional tax rate @ 9% in case of income earned by NR or a foreign company from the long-term bond or rupee-denominated bond listed on a recognized stock exchange located in IFSC issued on or after 1st July 2023.

13. Changes in TDS Provision and Procedures

13.1 Amendment in Section 196A

• Hitherto, u/s 196A, any person making payment to non-residents or a foreign company, being income from units of a mutual fund was required to deduct tax @20%.
• Finance Act 2023 provides that where the Government of India has DTAA with a foreign country and if such DTAA provides for a beneficial tax rate, then TDS shall be subject to a lower rate provided in DTAA or 20% provided non-residents furnishes tax residency certificate.

13.2 Amendment in section 194LBA

• Section 194LBA provides that the business trust shall deduct tax @ 5% on the interest income of non-resident unit holders and 10% on dividend income respectively. Whereas, Section 197 deals with applicability made by any recipient taxpayer for withholding of taxes either without deduction or at a lower rate. However, section 197 did not cover deduction under section 194LBA within its scope.
• Finance Act 2023 amends section 197(1) to provide that the sums on which tax is required to be deducted under section 194LBA shall also be eligible for the certificate for deduction at a lower rate.

14. Increase in Tax Rate of Royalty/FTS

• Section 115A deals with taxation of specified income including royalty/FTS, in case of NRs @ 10% (plus applicable surcharge and cess).
• However, Finance Act 2023 has increased the tax rate to 20% (plus applicable surcharge and cess) from the earlier 10% (plus applicable surcharge and cess).