ARTICLE
20 November 2024

Tax Street – October 2024

NP
Nexdigm Private Limited

Contributor

Nexdigm is an employee-owned, privately held, independent global organization that helps companies across geographies meet the needs of a dynamic business environment. Our focus on problem-solving, supported by our multifunctional expertise enables us to provide customized solutions for our clients.
We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of October 2024.
Worldwide Tax

We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of October 2024.

  • The 'Focus Point' covers key aspects of the FEMA compounding rules 2024.
  • Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
  • Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
  • Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.

We hope you find our newsletter useful and we look forward to your feedback.

You can write to us at taxstreet@nexdigm.com. We would be happy to hear your thoughts on what more can we include in our newsletter and incorporate your feedback in our future editions.

FEMA Compounding Rules 2024

The Government of India in September 2024 notified the Foreign Exchange (Compounding Proceedings) Rules, 2024 in supersession of the erstwhile Foreign Exchange (Compounding Proceedings) Rules, 2000.

If a person violates any provision of the Foreign Exchange Management Act, 1999 (FEMA) or any rule, regulation, notification, direction, or order issued under the act, they have the option, under Section 15 of FEMA, to apply for the compounding of the contravention. However, this does not apply to violations under Section 3(a) of FEMA (which involves contraventions related to suspected money laundering, terrorist financing, etc.). The application for compounding is a voluntary action by the individual, who acknowledges the contravention and seeks resolution by paying a monetary penalty. The compounding authority will review the application, provide an opportunity for a personal hearing, and then determine the penalty.

Key Changes and Implications

The gist of proposed amendments are discussed below:

Change in monetary limits:

  • In a case, where the sum involved in such contravention does not exceed INR 6 million, an officer not below the rank of the Assistant General Manager of the Reserve Bank;
  • In a case, where the sum involved in such contravention does not exceed INR 25 million, an officer not below the rank of the Deputy General Manager of the Reserve Bank;
  • In a case, where the sum involved in such contravention does not exceed INR 50 million, an officer not below the rank of the General Manager of the Reserve Bank; and
  • In a case, where the sum involved in such contravention is above INR 50 million, an officer not below the rank of the Chief General Manager of the Reserve Bank.

The revised rules have increased the limits of the sum involved in contravention for each of the officers of the RBI for handling compounding matters. Hence, this will reduce the burden and dependency on higher officers of RBI for compounding matters. This will also reduce the time required for compounding.

Increase in compounding application fees:

  • The amendment rules have increased the application fees from INR 5,000 to INR 10,000 (plus applicable GST)

Online payment process

  • The application fees and compounding amount can be paid by demand draft or NEFT, or RTGS, or such other permissible electronic or online modes of payment in favor of the compounding authority. Earlier, such an amount was accepted only in form of a demand draft.

Non-compoundable cases:

No contravention shall be compounded:

  • where the amount involved is not quantifiable; or
  • where the provisions of Section 37A of the FEMA are applicable; or
  • where the Directorate of Enforcement is of the view that the proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting the sovereignty and integrity of the nation, the compounding authority shall not proceed with the matter and shall remit the case to the appropriate Adjudicating Authority for adjudicating contravention under Section 13; or
  • where the Adjudicating Authority has already passed an order imposing a penalty under Section 13 of the act; or
  • where the compounding authority is of the view that the contravention involved requires further investigation by the Directorate of Enforcement to ascertain the amount of contravention under Section 13 of the act.

Pending proceedings:

  • Any compounding application pending before the compounding authority, on the date of commencement of these rules, shall be governed by the provisions of the Foreign Exchange (Compounding Proceedings) Rules, 2000 superseded herein.

Discontinuation of adjudication

  • New Rules clarify that in respect of contravention which is already compounded prior to adjudication of such contravention under Section 16 of FEMA, no inquiry or further inquiry can be initiated or continued against the person. There was always a bar on holding or initiating an inquiry for adjudication of contravention which has been successfully compounded however, this revised provision clarifies also to discontinue any existing inquiries by the adjudicating authority.

Powers of Compounding Authority

  • In addition to the powers granted to the compounding authority under the previous rules to request further information, records, or documents, the new rules also empower the authority to require the applicant to take necessary actions related to the transactions involved in the contravention. As part of the process, compounding of the contravention is permitted only after all administrative actions are completed, such as obtaining the necessary approvals from the Government or RBI, finalizing pending filings, unwinding transactions, etc. The compounding authority is now authorized to mandate the completion of any other actions required to compound the contravention, without needing to return the application, while ensuring that the process is completed within the prescribed timeline.

These recently introduced changes undoubtedly simplify the existing FEMA compounding process. The provision of multiple payment options aligns with current trends, offering greater flexibility. Increasing monetary thresholds for handling compounding matters and discontinuing pending adjudication actions for compounded cases should help improve the efficiency of compounding officers, ensuring quicker resolution of cases. Additionally, the revision of reporting formats and clarifications on matters such as the treatment of currently pending applications is a positive step.

Direct Tax

Can an individual with dual residency is treated as a resident for India tax purposes under Article 4 of the India-US tax treaty, based on his economic ties?

Ashok Kumar Pandey [TS-736-ITAT-2024(Mum)]

Facts

The Assessee, filed his return of income, declaring an income of INR 9500. The Assessee was a dual resident of India as well as USA and he claimed that his 'center of vital interest' was in the USA under Article 4(2)(a) of the India-US tax treaty and thus, he was a US resident for tax purposes. Assessee is a US passport holder, and his family primarily resides in the USA. However, he actively manages a company in India with a substantial financial involvement.

The key issue was whether the Assessee, who claimed dual residency in India and the U.S., should be treated as a U.S. resident for tax purposes under the India-U.S. Double Taxation Avoidance Agreement (DTAA).

The AO argued that based on the Assessee's presence in India for over 183 days, the AO classified him as a resident of India under Indian tax law and assessee's active business involvement in India.

The case was brought before the Mumbai Tribunal or Mumbai Income Tax Appellate Tribunal (Mumbai ITAT), which examined the 'tie-breaker' rule of the DTAA.

Held

After applying tie-breaker rule, the Mumbai ITAT held the following:

  • It determined that, based on his active role in the Indian company, substantial time spent in India, and primary residence with his family in India, the Assessee's center of vital interest was closer to India.
  • It emphasized that personal and economic relationships, including active business management, took precedence over passive investments in establishing residency.
  • Concluding that the Assessee was an Indian resident under Article 4(2)(a) of the India-US DTAA, the Mumbai ITAT dismissed the appeal, confirming that his global income, including income sourced from the USA, is taxable in India under Indian tax laws.

Our Comments

The decision highlights the application of the 'tie-breaker' rule under the IndiaU.S. DTAA, focusing on the importance of clear and substantial connections to a country for residency claims and how both personal and economic relationships can influence tax residency under international treaties.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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