Section 194N Exemption for Foreign Representations: Key Highlights of the New Income-Tax Notification

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  On 28th November 2024 , the Ministry of Finance issued Notification No. 123/2024 , bringing clarity to the applicability of Section 194N of the Income-tax Act, 1961. The notification exempts specified foreign representations from the provisions of this section, reinforcing India's commitment to international diplomatic norms and global cooperation. Effective from 1st December 2024 , this move comes after due consultation with the Reserve Bank of India (RBI) and aligns with international protocols such as the Vienna Convention and the United Nations Privileges and Immunities Act . Understanding Section 194N of the Income-tax Act Section 194N mandates tax deduction at source (TDS) on cash withdrawals exceeding ₹1 crore in a financial year . The provision applies to withdrawals from banks, co-operative banks, and post offices, aiming to curb cash usage and promote digital transactions. Fifth Proviso to Section 194N The fifth proviso grants the Central Government the authority ...
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Aries Agro Ltd. vs. Assessment Unit, NFAC

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Court: ITAT Mumbai

Bench: Narendra Kumar Billaiya and Rahul Chaudhary
Date: October 7, 2024
Assessment Year: 2020-21

Overview

Aries Agro Ltd., a manufacturer of micronutrients and fertilizers, transferred funds to its Associated Enterprise (AE) in the UAE as share application money. These funds were designated to support the establishment of a manufacturing facility in Sharjah’s SAIF Zone. However, due to administrative delays in receiving approvals from the SAIF Zone Authority, the issuance of shares to Aries Agro Ltd. was postponed. The Transfer Pricing Officer (TPO) challenged this delay, recharacterizing the remittance as an interest-free loan, leading to an addition to income based on imputed interest.

Key Question

The central issue was whether the remittance should be treated as a loan (due to the delay in share allotment) and thus subject to interest adjustments or if it should remain classified as share application money as originally intended by Aries Agro Ltd.

Facts and Arguments

  1. Purpose of the Funds: Aries Agro Ltd. maintained that the funds were intended for equity investment and that the delay was solely due to pending regulatory approval required in the SAIF Zone, which was outside their control.

  2. TPO’s View: The TPO argued that the prolonged delay suggested the remittance was functioning as an implicit loan and, therefore, should bear an interest charge. As a result, the TPO proposed an adjustment, treating the transaction as a loan and calculating interest accordingly.

  3. Assessee’s Defense: Aries Agro Ltd. countered that this delay was procedural and that they had been transparent about the purpose of the funds from the start. They also pointed to past decisions in similar cases that upheld the treatment of such remittances as equity investments rather than loans.

Tribunal’s Findings

  1. Past Decisions: The Tribunal acknowledged previous judgments in favor of Aries Agro Ltd. that classified similar transactions as equity investments. These decisions were referenced to affirm that the share application funds had been intended for equity purposes in prior years, not as loans.

  2. Revenue’s Burden of Proof: The Tribunal emphasized that the Revenue had not provided evidence to prove that the funds should be treated as a loan. The onus was on the Revenue to substantiate any loan characterization by investigating the reasons for the delay, but no such verification was undertaken.

  3. Absence of Revenue’s Verification: The Tribunal noted that the Revenue did not pursue verification from the SAIF Zone Authority or Aries Agro’s AE in UAE to substantiate its claims. The Tribunal found no evidence to dispute Aries Agro’s explanation that the delay stemmed from regulatory procedures beyond their control.

Decision

The Tribunal ruled in favor of Aries Agro Ltd., holding that the remittance should be treated as share application money and not as an interest-free loan. The proposed transfer pricing addition was deleted as the delay was found to be procedural rather than intentional.

This judgment underscores that, in cross-border transactions, the purpose of a remittance must be evaluated in light of regulatory requirements. Without clear evidence of loan characteristics, share application funds intended for equity should not be reclassified merely due to administrative delays.

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