Income arising to ‘Western Union’ from money transfer services isn’t taxable in India

Deputy DIT v. Western Union Financial Services Inc. [2015] 64 taxmann.com 230 (Delhi - Tribunal)

‘Western Union’ isn’t liable to pay any tax in India for transferring money to India for their American clients even if it appoints agents in India to provide those services and setS-up a liaison office to interact with such agents.

Facts

• Western Union Financial Services Inc. (‘Western Union’), incorporated in USA, was engaged in the business of rendering money transfer services.
• In order to provide said services to citizens of the USA desirous of remitting money to India, Western Union had set-up a liaison office (LO) in India. It appointed agents in India and provided them software (Voyager) to access its mainframes in the USA. The agents were paid commission on completion of money transfer transactions.
• Western Union filed its return declaring ‘nil’ income by contending that it was not liable to pay any tax in India on income arising from money transfer services as it didn’t have any permanent establishment (PE) in India.
• The Assessing Officer was of the view that income arising to the Western Union from money transfer services was taxable in India both under the Income-tax Act (‘the Act’) and the India-USA DTAA.
• CIT(A) set aside the order of the AO. Aggrieved by the order of the CIT(A), revenue filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under-

Though Western Union had business connection in India in terms of section 9 of the Income-tax Act, yet it did not have a PE in India under India-USA DTAA. It made following observations on different categories of PEs:

• Fixed Place PE

It was held that Western Union could not be said to have fixed place PE in India as it did not have its own outlet in India and it was carrying on its business through agents appointed in India.

• Liaison office as PE

It was held that LO could not be considered as Western Union’s PE in India as it carried out activities which were of a preparatory or auxiliary character. It had not carried on any trading activity for the assessee in India. It had only a small number of executives and a support staff. The LO had also filed status reports to the RBI listing out the activities which it actually carried out during the years. None of the activities could be described as anything other than of preparatory or auxiliary character. Therefore, the LO could not be considered to be the PE of the Western Union in India.

• Software as PE

It was held that the software was the property of the Western Union and it had not parted with its copyright therein in favour of the agents. The agents had only been allowed the use of the software in order to gain access to the mainframe computers in the USA. Mere use of the software for the said purpose from the premises of the agents could not lead to the decision that the premises-cum-software would be the PE of the assessee in India. As per article 5 of India-USA DTAA, an installation might amount to a PE, provided it is used for the exploration of natural resources. Therefore, even if the software was to be considered as an installation, since it was not used for exploration or exploitation of natural resources, it could not per se be treated as a PE.

• Dependent Agent PE

It was held that agents appointed by Western Union were acting in the ordinary course of their business and their activities were not devoted wholly or almost wholly to the Western Union. Further, commissions were paid to them at arm’s length price. Therefore, the agents were independent agents under Article 5.5 of the India-USA DTAA.

Hence, in the absence of any PE in India the profits of the Western Union, if any, attributable to the Indian operations could not be taxed In India.

Officer can have a Camp Office at taxpayer's house to examine him on oath after search and seizure

Dy. DIT(I) v. Prakash V. Sanghvi [2015] 64 taxmann.com 221 (Karnataka High Court)

Facts:

In the appellate proceedings, the Single Judge held that the Assessing Officer was not vested with the power to have a camp office at the residence of the assessee and get his attendance in connection with the proceedings under the Act and, therefore, the impugned notice issued under section 131 was one without authority of law.

The Karnataka High Court held as under:

• Sub-section (1) of section 131 confers the power on the authorities the powers of a Court under the Code of Civil Procedure in respect of matters mentioned in the said provision. One such provision is enforcing the attendance of any person including any officer of a banking-company and examining him on oath.
• Sub-section (1A) vests an officer to exercise the power conferred under section 131(1) even before initiating any proceedings with respect to such person under the provisions of the Act.
• Once such power is vested, the authorized officer has an option to summon the person to appear before him at his office or he can go to the place of such person and examine him on oath. The said provision enables the authorized officer to enforce attendance if the person is not willing to appear before him.
• The examination of such person on oath may be at the place of the authorized officer or at the place of person who has to be examined.
• Nothing could be read out of that phrase 'camp at your residence'. All that it means is, as he has already entered the premises of the residence, in order to comply with the legal requirement, he has served summons on him calling upon him to depose. To show the place where he should depose, the phrase, 'camp at your residence' is mentioned.
• In that view of the matter, the Single Judge was not justified in his view that the authorized officer has no right to enter the premises of the residence. The observation of the Single Judge that the authorized officer has trespassed into the house of the assessee and it deserves to be prosecuted before the competent criminal Court, has no legal basis.

Allotment of shares in lieu of interest liability as per BIFR scheme held as actual payment under section 43B

CIT v. Rathi Graphics Technologies Ltd [2015] 64 taxmann.com 65 (Delhi High Court)

Facts:

• The assessee had borrowed loan from IDBI and there was outstanding interest on such loan. A rehabilitation scheme was sanctioned by the BIFR, wherein it was decided that the IDBI would be allotted equity shares by the assessee and the interest to the extent of shares would be taken as having been paid.
• The assessee allotted certain shares to the IDBI and claimed that the said allotment of shares should be taken to be against the interest amount 'actually paid' within the meaning of section 43B.
• The assessment was completed accordingly. Thereafter, the Assessing Officer reopened the case of assessee on the ground that mere allotment of equity shares in lieu of interest liability could not be construed as 'actually paid' as required under section 43B.
• On appeal, the Commissioner (Appeals) held that the reopening of the case was valid. However on merit, he deleted the addition. On second appeal, the Tribunal held that in the original assessment proceeding itself the Assessing Officer had raised a query on this issue which had been explained satisfactorily by the assessee and accepted by the Assessing Officer and, therefore, the instant case was a case of change of opinion. The Tribunal however upheld the decision of the Commissioner (Appeals) on merits.

The High Court held as under:

• This was indeed a case of mere change of opinion by the Assessing Officer. A specific query was raised by the Assessing Officer in the original assessment proceedings itself as regards the conversion of a portion of the interest into shares.
• When pursuant to a settlement the creditor agrees to convert a portion of interest into shares, it must be treated as an extinguishment of liability to pay interest to that extent. In essence, there will be no further outstanding interest to that extent. Consequently, the situation where an interest payable on a loan is converted into shares in the name of the lender/creditor is different from the situation envisaged in Explanation 3C to section 43B, viz., conversion of interest into 'a loan or borrowing'. In the latter instance, the liability continues, although in a different form. However, where the interest or a part thereof is converted into equity shares, the said interest amount for which the conversion is taking place is no longer a liability.
• The plea of the assessee, which was accepted by the Commissioner (Appeals) and the Tribunal that the said conversion of a portion of interest into shares should be taken to be 'actual payment' within the meaning of section 43B, merits acceptance. In that view of the matter, there is no legal infirmity in the impugned order of the Tribunal.

RBI clarifies regulatory relaxations for Start-ups

The RBI in its sixth bi-monthly monetary policy statement had proposed steps to improve ease of doing business for start-ups through easier access to foreign capital and by enabling smoother transfer of ownership. Certain issues which requires clarification for start-ups are:

a) Whether start-up can accept payment on behalf of overseas subsidiary?

b) Whether Indian companies can issue shares without cash payment through sweat equity shares?

On first issue RBI made following clarification:

• RBI vide AP (DIR Series) Circular No. 51 dated 11-02-2016 has clarified that a start-up with an overseas subsidiary is permitted to open foreign currency account abroad to pool the foreign exchange earnings.
• Further start-up is also permitted to avail of the facility for realising the receivables of its overseas subsidiary or making the above repatriation through Online Payment Gateway Service Providers for value not exceeding USD 10,000 or up to such limit as may be permitted by the RBI from time to time under this facility.
• RBI further clarified that the overseas subsidiary of the start-up is also permitted to pool its receivables arising from the transactions with the residents in India as well as the transactions with the non-residents abroad into the said foreign currency account opened abroad in the name of the start-up.

On second issue RBI made following clarification:

RBI vide AP (DIR Series) Circular No. 51 dated 11-02-2016 has also clarified that Indian companies can issue shares without cash payment through sweat equity shares. It stated that companies are allowed to issue equity shares against any other funds payable by the investee company (e.g. payments for use or acquisition of intellectual property rights, for import of goods, payment of dividends, interest payments, consultancy fees, etc.), remittance of which does not require prior permission of the Government of India or Reserve Bank of India under FEMA, 1999.

Five Easy Ways to Save Tax

A year of hard work and part of the salary vanishes in the name of tax. It is quite obvious that working people would want to make use of their payments in a better way. The government has given many avenues to do so and a person who is aware of these easy methods can utilize it to the maximum extent.

For example consider the basic necessities of modern day living, food, shelter, travel, health care, investments and consider the possible ways of saving tax on these.

1. Food: The taxable amount on a salaried employee will reduce if the company offers food to the employee during the working hours. The cost of the meal can be a maximum of Rs 50 and the annual total of this expense is deducted from the taxable amount of employee. 
2. Shelter: If the employee is living in a rented house then certain percentage of the basic pay is allowable as house rent and this amount also gets deducted from the taxable sum of the employee. For this purpose a receipt from the owner of the house for rent paid is required. So if you are living in a rented house start collecting these receipts that help you during the end of the financial year.If the person (irrespective of salaried or self employed) is repaying a home loan then he/she can get a claim up to Rs 1 lakh on the repayment of principal and Rs 1.5 lakh on the amount paid towards interest on housing loan annually.
3. Health care: The next important factor in a person’s life would be the health and there is an allowance towards the expenses made towards medical treatment. An amount of Rs 15,000 is deducted from taxable amount if proper receipts are produced by the employer for the expenses that are incurred in a financial year.  Make sure that the receipts contain the Tax Identification Number (TIN). An additional Rs.15,000 is allowable as exemption from tax if this amount is paid towards the health insurance scheme of parents. So if your parents are not insured with health insurance, it is a good idea to shop for a policy now. 
4. Travel: Conveyance allowance is paid for the expense of the employee’s travel from and to the office. This is a very small amount but yet, can be accounted for, to some extent if you use the mass transport system. The allowance is up to Rs 800 per month. There is also an allowance called  leave travel allowance(LTA). This allowance lets you travel with your family and the expense to certain extent is deducted from the taxable income.
5. Investments: Government also encourages investments in mutual funds, insurance schemes, ELSS, Public Provident Fund etc. There is a tax exemption of Rs 1 lakh that you get on investments made towards these schemes. The Government has increased the limit of investment in PPF from Rs.70000/- to Rs.100000/- to encourage savings in long term investments. There is another simple way to divert your income towards your personal benefits like, purchasing a life insurance policy for self while you also reduce the taxable income on the other hand. These are more  a benefit because it helps the tax payer make use of his income in the best possible way by removing off some basic expenses through these deductions in tax.

Basic Investment Principles for Beginners

Investment is like planting a tree today so that in future you and your family may be able to enjoy its fruits and also be able to rest in its shade comfortably. You all know how important it is for you to provide financial security to your family and yourself.

It is needless to say that all the hard work and effort that you put in from morning to evening in earning those dollars and rupees is aimed at providing your family and yourself a good standard of living and also securing future. The best way to manage your hard earned money is to invest it sensibly so that in future it not only helps you when in need but also multiplies itself in the due course of time.

There cannot be a rule book that can guide you through with your investment planning and procedure but there are a few basic principles or guidelines that can help you to become a successful investor. These are: 

1. Investing Early – It is always advisable to start investing as soon as you start earning. It is quite obvious that you may be able to invest say as little as Rs 500 every month but you should not forget that compounding earns you good margins even with small savings. This also cultivates a habit of investing regularly in a disciplined manner. It is also advisable to re-invest the interest that you earn and just wait and watch how magically it grows through compounding formula. 

2. Analyze Yourself – This means it is important for you to identify the kind of investor you are. It is important for you to realize if you are the one who will get deeply involved in the art of investing and put in your time and energy in exploring every possible lucrative investing option thus earning higher returns, or are you an individual who will put in less effort and time and will be satisfied with a lower profit margin. 

3. Know the Market in which you will Invest – It is important for you to gather as much information as possible about the scheme, plan or options in which you plan to invest. It is also important for you to take a glance at all the market players who are  offering the same or similar schemes and plans and the returns or commitments that each one of them is giving. This will help you in cracking the most profitable deal for your investment. It is very important for you to understand completely the plan you are investing in, the player you are investing with and the returns you are aiming at. 

4. Investment Goals – It is advisable for you to comprehend your goals pertaining to your investment. This would include the assessment of your current financial condition, the amount you can spare from your expenditure, time frame i.e monthly, quarterly, half-yearly etc, the kind of investment and also the kind of returns that you wish to have which again maybe based on your personal requirements like for a retired individual monthly credit of interest seems to be quite apt. 

5. Diversification of Funds – As the famous phrase goes “You should never put all your eggs in one basket” it is very important for you to diversify your funds i.e do not put all your money in one particular scheme or plan. Always invest in a bouquet of funds in order to balance the risk. 

6. Time Factor – When it comes to time, you need to keep in mind two factors related to time. First is the time when you enter the market and the second is the duration for which you play in the market. It is very difficult to anticipate the movements in the market. You need to be clear and specific about when you enter the market and for how long you have to stay there. 

7. Long Duration Investment – It is always advisable to stay tuned in market for a longer duration. The duration of investment determines the risks and returns on your investment. It depends on you as to how much return you aim at and the risk you are ready to take. Generally if you stay invested for long duration, your risk gets balanced due to an average market condition thereby bringing better returns. Put it this way - it is important for you to analyze the risk that you can take. 

8. Adopt a conservative approach when it comes to valuation of profits – you need to understand that you can not be overly optimistic about the investments you are making. You need to adopt a conservative approach while weighing your returns from a particular investment. It is very important to be cautious and careful while computing your future growth rates. 

9. Hallo and Horn Effect – Do not get affected by the Hallo and Horn Effect. This means that you should not judge an investment plan or scheme merely on the basis of its past performance or solely because it benefited your friend so it will benefit you as well. You cannot totally neglect the past performance of the stock but you cannot predict the future of the same solely on past performance. 

10. Don’t let one slump affect future prospects – It is very important to be cautious. So goes the famous phrase “once bitten twice shy” but it emphasizes on being cautious, learning from past experiences but it doesn’t say that you will let one market slump hinder your long-term investment planning. Do not get discouraged by the bulls and bears of the market. 

11. Once sold, it is gone – It is always advisable to let bygones be bygones. Once you have taken a decision of selling your stock, do not check the price of your stock once you have sold it. You have just started investing. It’s a big life and a long game. “Ohhh I sold it…should have waited more.” This can always tickle your mind after you have sold your stock. But what if you had waited and the returns have been less than what you gained today? Seize the day and go ahead with no regrets. 

12. Keep Patience – There are moments when we all run out of patience and when its money that you are playing with it is obvious to be anxious and be impatient. But keeping your cool will always help you to sail smoothly through the lows and highs of the market. 

13. Monitoring your Portfolio – It is very important for you to keep yourself updated with the market scenario and keep a constant check on your portfolio. You cannot hold on to a stock forever. So keep updating your portfolio with the ever changing scenario of the volatile market. 

14. Accept, you can not be right always – You need to accept this before you get started that you are a human being and you are bound to make mistakes. You can not always make a right decision for every investment that you make. The key is to make the best out of the right choice and to learn from the wrong ones. 

Financial Investment Options

There are a number of financial investment options available in the market and you can pick and choose as per your requirement from the bouquet of options which are as follows:

• Equities
• Precious Stones
• Gold/Silver
• Bonds
• Mutual Funds
• Fixed Deposits
• Recurring Deposits
• Real Estate
• Insurance Plans

Tax planning, the right way...

Tax planning probably sounds a bit weird now, because the tax filing season just got over and nobody is really thinking about it or doing anything. Tax consultants are going on holiday this month. But smart people will realise how important it is to do tax planning right now. To save tax, you are better off starting now than later because you will have a lot more options now, time to think and make the right decision and no HR person sitting on your head to do the needful as soon as possible.

Myths and reality

Many people still have this notion that tax planning is wrong and responsible citizens should pay their taxes and not cheat. Tax planning is not tax evasion or tax avoidance. Tax evasion or tax avoidance is illegal where the letter and spirit of the law are broken. Tax planning is done well within the framework of the law and the government actually encourages you to plan your taxes by seeking investment in tax saving bonds, giving benefits under various sections etc.

Another misconception about tax planning is that it is all about investing in 80C.

People ask which is better, PPF or ELSS for tax planning? Tax planning is much more than 80C investments. It requires thoughtful planning of how your income is accounted, how you spend and invest your money and a few more nitty gritties. It is also a myth that tax planning is cumbersome and quite tricky for an average person to comprehend. Of course the tax laws are complex and dynamic, but what is applicable to the normal common person is rather simple.

Tax planning has to be integrated with your overall financial plan. In everything you do, you have to find a tax efficient way of doing it. For eg: You can invest in liquid funds or short term debt funds for  emergency needs. But depending on your tax bracket, the short term funds can be more advantageous than the liquid funds or vice versa.

How to save tax?

Invest your surplus savings or use your income in any of the following ways and your total taxable income will come down to that extent, subject to a maximum of Rs 1 lakh.

Repay your home loan – the principal portion can be claimed for deduction

Pay tuition fees for children's education (maximum 2 children)

Pay life insurance premium

Invest in national saving certificate.

Invest in public provident fund

Invest in equity linked savings schemes (ELSS)

Invest in banks and post office fixed deposits of five years.

You can claim tax exemption on house rent allowance received as part of your salary if you are staying in a rented house.

Home loan

If it is a self occupied property, you can claim upto R1.5 lakh paid as interest as loss on house property. That will bring down your overall taxable income. If your property is rented out, on one side you will have to add the rent with your other income and pay tax, meanwhile you can deduct all the interest amount (without any limit) from your overall income and bring down taxable income.

Education loan

The interest paid on an education loan taken for higher education of self, spouse or children can be deducted under Section 80E and thereby your total taxable income can come down.

Protect your health

If you pay premium for a medical insurance policy for self or spouse or dependent children/ parents you can claim tax rebate under Section 80D. And from the current year, a sum of R 5,000 can be claimed if you or your dependants do a preventive health check up.

Social cause

Under Section 80G donations to particular institutions/ funds get tax benefits. While it is true that tax planning is a critical activity, a financial decision to buy a house or make an investment should not be  motivated by tax saving. It is the financial plan that should tell you what to do with your money, but within the options, you should choose the most tax efficient one to get the best benefits

Common Mistakes to Avoid in Personal Finance Planning

Financial planning involves a complete understanding of one’s financial needs and future goals. Once these are established it is easy to finalise on a comprehensive solution. In the journey towards securing ourselves financially there are some common mistakes that we commit. Some of the mistakes to avoid and the solution are discussed in detail.

No Concrete Budget Plan in place

This is the most unhealthy personal finance habit that we must be wary of. This has two disadvantages: firstly we end up spending excessively in areas that are not necessary and secondly we end up not spending money where it is needed. This could leave you high and dry, in spite of all your hard work and years of service. A sound budget is one that includes all the expenses (don’t forget to allocate funds towards entertainment, house repair and renovation and retirement savings) and factors in affordability and consistency. This must be backed by proper execution of the plan. Ensure financial discipline by all family members.

Trying to Make a Quick Buck When Investing

Many of us plan and budget well, but we skid and slip in the execution phase. Temptation gets the better of us and we try to put hard earned money in schemes that lure the investors with false promises. Most of these investments turn sour and we end up losing our investments. It is better to keep safe distance from such companies that promise say, to double your money in one month or give returns as high as 40-50% etc.

Making Investments That You Can’t Really Afford

Do not make investments that you cannot afford. Example, do not invest in life insurance that requires you to pay a huge sum as premium at the beginning of your career. Plan the amount of investment in each instrument with care and ensure you have enough to spend for rest of your needs.

Buying a Product Because it Looks Attractive

You must have your future in mind before buying an investment product. For e.g. taking a health insurance plan when you are already covered in a previous policy becomes redundant, however attractive the product may seem. Similarly, there could be newer and better sounding products that surface from time to time. It is imperative to check if these are suited to your needs and fit into the general scheme of things before you invest in them.

Investing – as a Quick Fix Solution

Investment cannot be done as a quick fix option to existing situation. For instance, in order to save tax you should not buy a product which cannot be serviced or continued in the future. Instead the extra tax liability can be paid for one year and a proper tax saving cum investment option should be planned for the years ahead.

Listen to Advice, Implementation Can Wait

Procrastination can defeat the purpose of listening to advice. If you postpone the actual investment to a later date, the features of the plan or even its availability could vary. Deciding on what to buy and implementing the decision at the earliest are both equally important.

Portfolio Without Diversity

Putting all the eggs in the same basket may spell danger as far as investments go. Remember, diversifying portfolio reduces the risk associated with a single industry. Not only should you invest in various schemes like pension, life insurance, medical insurance etc…, but also varied options like insurance, bonds, stocks of blue chip companies, gold, real estate etc.

Only One Person in the Family Knows Where the Money Goes

This situation should be avoided due to the uncertainties associated with human life. In case of an emergency it is always preferable that more than one person in the family knows where the funds have been invested. Details regarding medical claim, insurance claim should be shared with the spouse. Physically held investments like bond certificates, gold, etc. should be secured in lockers and the key should be kept safe. 

There is No Emergency Fund

We are living in an era of ATMs and therefore may be tempted to leave the money in the bank as long as we can, so that it can earn interest till we find the need for the cash. While this lends so seamlessly to logical thinking, care must be taken before you empty the house of the minimum cash which may be required during times of emergency. There are times when the ATMs near the house do not work or are out of cash. Some vendors do not believe in credit cards and hence do not accept them.

Children are Kept Away From Money Concepts

In the fast paced world it is very important to teach children about money matters. Children should be allowed not only to buy what they need from nearby shops, they should also be told about the finances of the house to the extent understandable by them. This will help them draw up their budget and plan their expenses when they start earning. While this will make them avoid unwanted expenses, it will also encourage them to spend where required.

Employee Benefits aren’t Well Understood or Utilized

There are certain benefits given by employers for the benefits of employees. It is imperative to understand these correctly and utilize them as they are intended to be utilised. For instance your company could make a part of the payment in the form of food coupons. Make sure you collect them and use them in the relevant outlets.

Renting Your Living Accommodation Rather Than Buying It

If you do this you will end up paying a lower rent, nevertheless at the end of the many years of paying increasing rent you will retire without a roof over your head. Investing in a house is important as it saves the tax that you need to pay, while creating an asset for you.

The points discussed above are broad guidelines which will help you in planning your finances. As a final word of caution I would like to add that there are no quick ways of making money. Better be safe than sorry!