Section 94A of
the Income-Tax Act, 1961 - Special Measures in respect of Transactions with Persons
located in Notified Jurisdictional Area - Clarifications on Declaration of CYPRUS
as a Notified Jurisdictional Area
Press
Release, dated 01-11-2013
Section 94A was
introduced in the Income-tax Act, 1961, through the Finance Act, 2011, in
respect of transactions with persons located in notified jurisdictional area as
an anti-avoidance measure. As per section 94A, the Central Government may,
having regard to the lack of effective exchange of information with any country
or territory outside India, specify the said country or territory as a notified
jurisdictional area in relation to transactions entered into by any assessee. The
rules under section 94A were notified as Income-tax (8th Amendment) Rule, 2013,
through S.O. 1856 (E) dated 26th June, 2013, by inserting Rule 21AC and Form
10FC in the Income-tax Rule, 1962.
India and Cyprus
have entered into an agreement for avoidance of double taxation of income and
prevention of fiscal evasion which is in force since 21st December, 1994. Both
the Contracting States under this agreement have a legal obligation to exchange
such information as is necessary for carrying out the provisions of the
agreement or of domestic laws of the Contracting States, in particular for the
prevention of fraud or evasion of taxes. Since Cyprus has not been providing
the information requested by the Indian tax authorities under the exchange of information
provisions of the agreement, it has been decided to notify Cyprus as a notified
jurisdictional area under section 94A of the Income-tax Act, 1961 through
Notification No. 86/2013 dated 1st November, 2013 published in Official Gazette
through SO 4625 GI/13.
The implications
of such a Notification are summarized as under:
If an assessee enters into a transaction
with a person in Cyprus, then all the parties to the transaction shall be
treated as associated enterprises and the transaction shall be treated as an international
transaction resulting in application of transfer-pricing regulations including maintenance
of documentations [Section 94A(2)].
No deduction in respect of any payment
made to any financial institution in Cyrus shall be allowed unless the assessee
furnishes an authorization allowing for seeking relevant information from the said
financial institution [Section 94A(3)(a) read with Rule 21AC and Form 10FC].
No deduction in respect of any other
expenditure or allowance arising from the transaction with a person located in
Cyprus shall be allowed unless the assessee maintains and furnishes the prescribed
information [Section 94A(3)(b) read with Rule 21AC].
If any sum is received from a person
located in Cyprus, then the onus is on the assessee to satisfactorily explain
the source of such money in the hands of such person or in the hands of the beneficial
owner, and in case of his failure to do so, the amount shall be deemed to be
the income of the assessee [Section 94A(4)].
Any payment made to a person located in
Cyprus shall be liable for withholding tax at 30 per cent or a rate prescribed
in Act, whichever is higher [Section 94A(5)].
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