In this blog post, Nitsimar Guliani, a student at Symbiosis Law School, Noida and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details how a deemed associate enterprise is taxed.

Definition: Section 92A(2) of the Income Tax Act, 1961 (IT Act)

An “associate enterprise”[1], in relation to other enterprises are those which can be owned and controlled by the same or common interest.[2] The expression “associated enterprises” as per Section 65B (13) of the Finance Act, 2001 (Finance Act) shall have the meaning assigned in Section 92A of the IT Act.[3]

Clauses (a) to (m) of Section 92A (2) defines “deemed associate enterprise” as under:

“…a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or

(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or

(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or

(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or

(e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or

(f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or

(g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or

(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or

(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or

(j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or

(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or

(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.”

Two enterprises shall be deemed to be associate enterprises if, at any time during the previous year one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise/each of such enterprises.[4] However, Section 92A (1) does not prescribe any minimum or maximum limit for participation in management, control or capital. This can be noted as an apparent irregularity within the provision.

Two enterprises shall be deemed to be associate enterprises if, at any time during the previous year, more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise.[5] The contemplation with regard to ‘appointment’ must be considered as “actual appointment” and not “a mere power to appoint.”

In the recent case of Kaybe Private Ltd.[6], it was held by the Mumbai Bench of the Income-Tax Appellate Tribunal that two enterprises would be treated as Associated Enterprises if the conditions of Section 92A (1) are satisfied irrespective of the deeming fiction set out under Section 92A (2) of the IT Act.

How Deemed Associate Enterprise Are Taxed:

In any fiscal laws, the idea of levy, collection and payment of tax to the Government are the principal perspectives. Duty of tax is straightforwardly connected with the taxable occasion. Once the occasion has ended up being taxable, then appears the subject of collection of tax.[7]

Note, deemed associate enterprise are taxed the same as associate enterprise.

Departmental clarification on Associated Enterprises[8] Vide Letter no. No.334/1/208-TRU  clarifies as follows :

2008. By virtue of Section 66, service tax at the rate of 12% is levied on the value of taxable services. Section 67, pertaining to valuation of such taxes, has however been omitted by the Finance Act, 2008. As per Rule 6 of the Service Tax Rules, 1994 – the service tax is only required to be paid only after receiving the payment.
2009. It has been conveyed that the provision requiring payment of service tax after receipt of payment are utilized for tax shirking particularly when the transaction is between associated enterprises. There have been occurrences where in service tax has not been paid on the ground of non-receipt of payment despite the fact that the transaction has been perceived as revenue/expenditure in the announcement of profit and loss account behind deciding corporate tax liability.
2010. Likewise an anti-avoidance measure, it may be suggested to elucidate that service tax will be leviable on taxable services, and duty to pay tax regardless of the measure will be not really received, yet the measure may be credited or debited in the books of service provider. In different words, service tax will be paid then afterward receipt of payment or crediting/debiting of the sum in the books of accounts, whichever is prior. However, this provision may be confined to transaction between associated enterprises. This provision would likewise apply to service tax payable under reverse charge method. (Section 66A) as taxable services received from associated enterprises. Notice amendment to Section 67 and rule 6(1) for this purpose.
2011. The term ‘associated enterprise’ has the same meaning as assigned to it in section 92A of the Income Tax Act, 1961. It is a relative concept i.e. an enterprise is an associated enterprise when it is viewed in relation to other enterprises. This concept is used in the Income Tax Act for applying transfer pricing provisions.
2012. Section 92A (2) of the Income Tax Act specifies various situations under which two enterprises shall be deemed to be associated enterprises. Enterprise means a person who is engaged in the provision of any services of any kind. For details, relevant provisions of Income Tax Act may be referred to.

As per Finance Act (as amended w.e.f. 10-05-2008)

[As per third proviso to Rule 7, in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be –

o   the date of debit in the books of account of the person receiving the service;

o   the date of making the payment, whichever is earlier.][9]

Take into account, also, the first proviso of Rule 7 of Point of Taxation Rules, 2011 that lays down that if the payment for service is not made within six months from the date of invoice, the Point of Taxation would be determined as if rule was not made.

Provisions related to service tax liability, would apply.

Cenvat Credit Rules, 2004[10]:

As per Rule 4(7) of CCR, credit of Cenvat Credit is allowed only after payment is made to service provider. However in case of Associate Enterprise, service tax is payable when entry has been made in books of account. So for availing of CCR, it has been clarified that as per deeming fiction in section 67(4)(c) of Finance Act 1994, book adjustment is deemed payment. Further rule 4(7) does not indicate form of payment. Thus debit in books of account can also be payment made.[11]

Conclusion

It is common knowledge that the Point of Taxation Rules have brought about significant changes in the monetary practices, and provided a more sophisticated version of dealing with Associated Enterprise Transactions. The step of insertion of service tax on book adjustments is a reformative step to combat tax avoidance. The only change the present calls for is the amendment in Cenvat Rules, 2014 in respect of service tax paid by associate enterprises on book adjustments.

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[1] See Section 65B (13) to F of the Finance Act for the meaning of “associated enterprise.”

[2] http://saprtax.blogspot.in/2013/03/associate-enterprise-ae-under-indian-tp.html, retrieved on 30 September 2016 at 9:26 pm.

[3] For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, “associated enterprise”, in relation to another enterprise, means an enterprise—

(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or

(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

[4] Section 92A (2)(a) and (b) of the IT Act.

[5] Section 92A 2 (e)

[6] Kaybee Pvt. Ltd. V. ITO (ITA No. 3749/Mum/2014)

[7] Balasubramanium, C.A.J., Point of Taxation Rules, retrieved at https://www.sircoficai.org/downloads/cpe-materials/POT_SIRC_JB.pdf on 30 September 30, 2016 at 10:15 pm.

[8] CBE&C TRU letter F. No.334/1/208-TRU dated 29-02-2008

[9] Balasubramanium, C.A.J., Point of Taxation Rules, retrieved at https://www.sircoficai.org/downloads/cpe-materials/POT_SIRC_JB.pdf on 30 September 30, 2016 at 10:15 pm.

[10] CBE&C circular 122/03/2010-ST dated 30-4-2010

[11]Kaushik, Alok, Point of Taxation while dealing with Associated Enterprises, (2015) retrieved at http://www.simpletaxindia.net/2015/02/point-of-taxation-rules-while-dealing.html#axzz4LkqM9Fuk