Taxation of Gift Transaction

Taxation of GIFT Transactions

In the Hands of Donor

1.       There is no separate tax in the hands of Donor on the amount of gift given, whether in cash or kind.

2.       The transfer of CAPITAL ASSET by way of GIFT is also not subject to Capital Gain Tax in the hands of Donor (Section 47(iii))

In the hands of Donee/Recipient

Recipient- Individual & HUF {Section 56(2)(vii)}

Type of Asset Received by way of Gift

1.       Any sum of money received in excess of Rs. 50,000- Entire amount is taxable in the hands of recipient as Income from Other Sources

2.       Any immovable property

a)      Property  received without consideration -  Stamp Duty Value of such property will be taxable in the hands of recipient as Income from Other Sources, ifsuch exceeds Rs. 50,000

b)      Property Received for Consideration ,consideration being less than Stamp Duty Value by more than Rs. 50,000- Stamp duty value less consideration given, will be taxable in the hands of Recipient as income from other sources

3.       Any other property, other than Immovable Property:-

a)      Property received without any consideration – Fair Market Value of such property will be taxable in the hands of recipient as Income from Other Sources, if FMV exceeds Rs. 50,000.

b)      Property received for consideration, consideration being less than Fair Market value by more than Rs. 50,000- Fair Market value less consideration given, will be taxable in the hands of Recipient as income from other sources.

Property ,other Immovable property, meaning

a)      Shares & Securities, both listed and unlisted

b)      Jewellery

c)       Archaeological collections

d)      Drawings

e)      Paintings

f)       Sculptures

g)      Any work of art

h)      Bullion

Fair Market value of Property,  other than immovable Property.

1)      Shares & Securities

A)     Listed Shares & Securities – Lowest price of such shares & securities on any recognised stock exchange on the date of gift

B)      Unlisted Equity Shares – Book value per equity share on the date of gift.

C)      Unlisted other securities – Value which such security will fetch, if sold in open market on the date of gift.

2)      Other than Shares & Securities – The value which it will fetch if sold in open market or value given by registered valuer.

Exception – Cases, where recipient will not be subject to tax on Gift received in cash or kind

a)      Received from Relative.

b)      Received on occasion of marriage of the Individual recipient.

c)       Received under will or by way of inheritance.

Recipient- Firm & Specified Company {Section 56(2)(vii)a}

Type of Asset Received by way of Gift

1.       Shares (Equity & Preference) of Specified Company received:-

a)      Without consideration and Fair Market value of shares exceeds Rs. 50,000- Fair Market Value of such shares will be taxable in the hands of recipient as income from other sources.

b)      For consideration which is less than Fair Market value by more than 50,000-  Fair Market value less consideration given, will be taxable in the hands of Recipient as income from other sources.

Meaning of Specified Company

1.       Private Limited Company

2.       Unlisted Public Company

3.       Unlisted public company, which is not a wholly owned subsidiary of listed company.

Fair Market value of Share

Shares & Securities

A)     Listed Shares & Securities – Lowest price of such shares & securities on any recognised stock exchange on the date of gift

B)      Unlisted Equity Shares – Book value of the date of gift

C)      Unlisted Preference shares – Value which such security will fetch, if sold in open market on the date of gift.

Taxation of Excess Consideration against Issue of shares (Section 56(viib))

1.       Applicability

a)      Entity- Specified Company

b)      Transaction – Issue of shares (equity or Preference) at a price more than the face value.

2.       Taxability – Consideration received against issue of shares, which is more than fair market value of such shares, then such consideration in excess of Fair market value will be taxable in the hands of specified company as Income from other sources.

3.       Specified Company

a)      Private Limited Company

b)      Unlisted Public Company

c)       Unlisted public company, which is not a wholly owned subsidiary of listed company.

4.       Fair Market Value – Fair market value is either of following value at the option of specified company

a)      Book value on the date of issue of shares

b)      Value determined by merchant banker  of practising FCA by way of DCF method

c)       Value justified by specified company before Assessing office based on the value of intangible assets being goodwill, know-how, patents, copyrights etc.

Transfer Pricing - Interest Free Loan to Foreign AE- Commercial Factors to be considered for ALP

The Ahmedabad Tribunal Judgment in Micro Ink Ltd (ITA No. 1668/AHD/2006, AY- 2002-03) is hallmark judgment establishing the fact that international transaction is not be evaluated in isolation from Transfer Pricing perspective but entire commercial considerations involved in transaction and Associated enterprises has to be considered.

Tribunal held that in international transaction involving loan to foreign subsidiary, the said transaction should be benchmarked against prevailing LIBOR rate but the commercial business expediency between associated enterprise is also need to be considered rather than blindly applying LIBOR plus rate to loan transaction.

Facts:-

1.       The assessee is engaged in the business of manufacturing and sale of printing inks and other intermediate and allied products. The assessee claims that it was ranked first in India and it was ranked sixteenth in the world, and that the assessee, thus, is a major global player in the field of printing inks and allied activities.

2.       Having achieved a leading position in the Indian market and established a presence abroad as an exporter, the assessee explored the possibilities of physical operations in its foreign markets and to strengthen its position globally.

3.       Assessee, through its wholly owned subsidiary, Micro Inks GmbH, Austria (Micro GmbH Austria), set up a company by the name of Micro Inks Corporation Inc. (Micro USA, in short),incorporated in Delaware, USA, said step down subsidiary referred to as MIC.

4.       During the FY 2001-02 assessee advanced interest free amount to MIC, which it claims to quasi-capital. The assessee advanced money to MIC from EEFC account and per RBI regulation, loan from EEFC could be given up to $ 50 Mn, without any RBI clearance. For Investment is equity RBI permission is required. Assessee has applied for RBI permission for equity investment w.e.f April 1, 2013 and pending that permission, it has classified the amount as loan/quasi capital

5.       Assessee 92% of total exports and 50% of entire sales was to MIC.

6.       MIC was is losses at that point of time.

7.       TPO/CIT(A) determine the ALP of Loan transaction by benchmarking the same with LIBOR plus rate and made addition.

Held

1.       For benchmarking loan transaction, through CUP method and using LIBOR plus rate, one essential condition is that adjustment should be made for difference between international transaction and uncontrolled comparable transaction or between the enterprises undertaking the transactions.

2.       LIBOR plus rate cannot be applied in the instant case on account of following factors:-

a)      In typical LIBOR plus rate transaction, motive for giving advance is to earn interest only.

b)      LIBOR plus rate cannot be adopted for following two reasons:-

i)      Transaction is not a simplictor financing transaction between the assessee and Micro USA, as it is a transaction of investing in a step down subsidiary as quasi capital pending formal capital subscription with the approval of Reserve Bank of India.

ii)      It is not a case of granting advance to a business concern without significant and decisive commercial considerations, as the monies are given for strengthening assessee’s marketing apparatus in US and to keep alive its biggest exports customer.

3.       Further held that the comparable uncontrolled price for interest on such a transaction in which advances are made pending capital subscription in a company which plays strategically significant commercial role in assessee’s business , in our considered view, would be nil.

Disallowance of Salary Expenditure- Paid to Non-Resident or outside India- Case when there is no such disallowance

Disallowance of Salary Expenditure- Paid to Non-Resident or outside India- Case when there is no such disallowance

Section 40a(iii) provides that in computing income under the head business or profession, no deduction shall be allowed in respect of salary expenditure, if following conditions are satisfied:-

1.       Amount paid is chargeable under the head Salaries

2.       Amount is paid outside India or to non-resident

3.       No TDS has been deducted on such payments.

In this write up, attempt is made to analyse the situation, when above-said Salary expenditure will NOT be disallowed in the hands of employer, while computing income under the head business or profession, if no TDS has been deducted.

The pre-requisite for attracting disallowance u/s 40a(iii) is that  amount paid is chargeable under the head Salaries. In the other words the amount concerned should be chargeable to tax in India under the head Salaries.

The chargeability of income to Tax in India is dependent upon the residential status of assessee, which is governed by section 5.

Section 5 provides that following income shall be chargeable to tax in India, in hands of following assessee:-

The point for consideration is when shall salary be accrue or deemed to accrue in India to employee, if the employer is resident and making payment from India.

In this connection, it is essential to look at section 9(1)(ii) and 9(1)(iii), which provide guidance on accrual of salary in India

1.       Section 9(1)(ii) provides that salary shall be taxable in India, if it is connection with service rendered in India. Thus rendition of service governs the place of accrual of salary in normal situation.

2.       Section 9(1)(iii) provides that salary paid to citizen of India for service rendered outside India, by the Government shall be taxable in India. Thus this is special provision providing of taxability of salary in India, even if service is rendered outside India.

At this point, it is also important to look at Article 16 of Model DTAA, which governs the right to taxability of Salary among two contracting states.

1.       It provides that primary right to tax the salary income will be with state, where the employee is resident.

2.       The other state, where employee render services, will also have right to tax, if prescribe conditions are met.

Based on above, the salary paid by Indian employer, will be taxable in India in the hands of employee in following cases:-

1.       Employee is resident in India, irrespective of rendition of service

2.       Employee is Non-resident but rendition of service is in India.

Thus the disallowance/non-disallowance u/s 40a(iii) is summarised as under:-