There is going to be a lots of discussion in this post regarding Section 57 of Income Tax Act 2058 (ITA). If you do not have concept on Section 57 already see my another blog on What the bug is Section 57?
Basic Timeline of Events
1 December 2015
Telia announced divestment of 100% stake of Reynod Holdings to Axiata for USD 1.365 billion. Reynold Holdings had 80.00% stake in Ncell.
Niraj Govinda Shrestha (Nepal) announced divestment of 20.00% of its stake in Ncell to Sunivera Capital Ventures Pvt. Ltd. (Bhawana Singh Shrestha) for USD 48 million.
22 December 2015
Ncell had asked for an advance ruling from the department on December 22, asking how much revenue it needs to pay to IRD. Basically, the department should reply to Ncell within 45 days. However, due to indecisiveness IRD hadn’t made any reply for this ruling.
April 2016
Actual transaction was made.
January 2018
Sukdev Bhattarai Khatri (then AG), Dwarikanath Dhungel and Jagadish Chandra Baral (former government secretaries) with members of civil societies filed a writ at the Supreme Court.
Decisions Made
The discussion on the decisions made will follow in the points below. Two decisions were made in the Ncell Tax Issue. Follow the links to Nepal Kanun Patrika:
Decision One: Dwarikanath Dhungel v. Large Taxpayer’s Office 6-Feb-19
Decision Two: Ncell Pvt. Ltd. v. Large Taxpayer’s Office 26-Aug-19
Interpretations that were failure to Tax the Ncell Transaction
Based on location of the assets
Section 5 of ITA, Tax is charged in four heads namely Income from Employment, Income from Business, Income from Investment and Income from Wind-fall gain.
Section 6 of ITA, Incomes earned by any person for any business, employment or investment in any income year shall be considered assessable income:
(a) Income earned by any Resident person from his employment, business or investment in that income year irrespective of the place of his source of income, and
(b) Income earned in that income year by any non-resident person from employment, business or investment having income source in Nepal.
Section 67 of ITA says, net gain income is deemed to be source in Nepal if disposed assets or liability is in Nepal. In case of Investment in Securities, Net Gain is source based on residency of Owner.
Section 67 of ITA says, “Property situated in Nepal” means the land or buildings situated in Nepal and the property other than land or building of a resident person situated in any foreign country or if the person is associated with a controlled foreign entity pursuant to Section 69, inclusive his interest in that entity. “Liability to be borne in Nepal” means the liability of a resident person.
Because Telia Sonera is not a resident entity in Nepal its divestment of shares of Reynold Holdings cannot be said to be income sourced in Nepal.
Based on the taxation on withholding on disposal of shares
Based on application of GAAR
Section 35 of ITA, for purposes of ascertaining the tax liability the Department may re-characterize any arrangement or any part of such arrangement made or attempted to be made as a part of a tax avoidance scheme, disregard any arrangement or any part of such arrangement that does not show any substantial effect, or re-characterize any arrangement or any part of such arrangement that does not show any substantial element. Further it explains that “tax avoidance scheme’ means any arrangement with a main objective to have avoidance of tax liability or to lessen the tax liability. From this Provision, The Income Tax Department may tax Telia Sonera terming the Investment made through Reynolds Holdings Ltd, West Indies is an arrangement/structure made to avoid the Tax.
But if we look at the Global Business Trend, it is a common practice among Multinational Companies (MNCs) to make Investments through their Company registered in Tax Heavens like Caribbean Islands, Mauritius, Dubai or the countries where Double Taxation Avoidance Agreements are entered into are established practices to get the Tax Benefits provided by such Countries. Telia Sonera has such investment in many countries practices to get the benefits (other than just tax benefits) provided by such Countries. There is a commercial sense behind establishing companies in tax heaves due to investment laws, banking laws, availability of professional consultants, repatriation laws, access to investors, location of business etc. There may be multiple other business/commercial sense behind it than just for the purpose of reaping tax benefits. Telia Sonera has such investment in many countries including West Indies through which it has been making Investments throughout the Globe. And hence only because investments are made through these countries i.e. tax heavens cannot be termed as an attempt to tax evasion. Similar was the interpretation was made in the case of Vodafone India. The cardinal principle states that “given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance”.
The eagerly awaited decision in Vodafone Case in India had provided a clarity regarding the key principles of Indian taxation. It is important to note that India did not apply the GAAR principle to tax Vodafone because Indian law does not currently tax offshore share transfers, and absent such legislation, the law cannot view such a transaction in isolation simply to widen the tax net.
The meaning being GAAR provisions are most of the time just a tool to scare taxpayers from tax evasions.
Decision One Highlights
Regarding Beneficial Ownership
Here are the facts regarding the underlying ownership structure of Ncell.
- 80% of Ncell Pvt. Ltd. (Nepal) is held by Reynolds Holdings (Mauritius)
- 100% of Reynolds Holdings (Mauritius) is held by Telia Sonera Norway Nepal Holdings (Norway)
- 100% of Telia Sonera Norway Nepal Holdings (Norway) is held by Telia Sonera Norway Asia Holdings As (Norway)
- 75.45% of Telia Sonera Norway Asia Holdings As (Norway) is held by Telia Sonera UTA Netherlands (Netherlands) and 24.55% of Telia Sonera Norway Asia Holdings As (Norway) is held by SEA Telecom Investment BV (Netherland)
- 100% of Telia Sonera UTA Netherlands (Netherlands) is held by Telia Sonera Finland (Finland)
- 100% of Telia Sonera Finland (Finland) is held by Telia Sonera AB (Sweden)
As per ITA, Telia Sonera Company Sweden (Sweden) had underlying ownership in Ncell Pvt. Ltd. (Nepal) equal to 80%×100%×100%×75.45%×100%=60.36%
The transaction was: 100% of Reynolds Holdings (Mauritius) was bought by Axiata Investment (UK) from Telia Sonera Norway Nepal Holdings (Norway)
- 100% of Axiata Investment (UK) is held by Axiata Berhad (Malaysia)
Here distinction is necessary between two terms: Substantial Underlying Ownership versus The Exercise of Control
The concept of “Change in Control” as per Section 57 is more mathematical and methodic rather than testing actual composition/dilution of ownership in fact. Just because a 50%+ ownership of a company is held by a person might not mean that the substantial control of the entity is exercised by the person. It might be dependent on other factors as well:
1) The classes of shares representing the ownership (Different Voting and Dividend Rights)
2) The nature of the investor (e.g. and Equity Fund investing in company may essentially be just a lender to the company despite the fact that the fund may have substantial share ownership in the company). This can depend on condition of entry, income participation rights, exit conditions and such.
3) The fact that an investor has substantial income participation rights and ownership in the company may not mean that the investor will have exercised those controlling rights in the company. This can depend on nomination of directors, management influence of the investors. This will be dependent on how the Companies Law of the country deal with the rights and duties of the directors.
Essentially, we need a distinction that substantial underlying ownership may not always mean substantial exercise of control.
However, is this idea discussed above valid for the test of “Change in Control” as per Section 57?
No. The concept of “Change in Control” as per Section 57 is more mathematical and methodic rather than focusing on actual fact of ownership underneath. Section 57 clearly states: Where there is a change of 50% or more in the ownership of an entity as compared with its ownership 3 years previously, the entity shall be treated as disposing of any assets owned by it and any liabilities owed by it. Regarding the mathematics behind the computation of change in control see my another blog on What the bug is Section 57?
What is counted for computing "Change in Control"? Direct Ownership or Underlying Ownership?
In the Ncell Case, due to the interpretation of the word ownership as both direct ownership and indirect ownership there has been room for interpreting the provisions under Section 57 to be applied even if the underlying ownership in fact has not been changed. However, I think, we should not be of two-minds here. It is a fact that, an entity suffers a change in control where there is change in underlying owners in fact.
- Although the Nepalese translation of the Income Tax Act 2058 doesn’t mention “निहित स्वामित्व” but simply only mentions the word “स्वामित्व” only, the English translation of the Section 57 (which is the first hand draft of the author of Nepal Tax, Peter Harris himself), Income Tax Act of Commonwealth of Symmetrica (“Symmetrica”) published by IMF, specifies that the the ownership to be considered for the purpose of Section 57 is the “underlying ownership”. In determining whether there is a change of control, it is the “underlying ownership” that counts.
- One could say that this is just a translation fluke and may not hold its meaning/rational but for corroboration we can compare this with Income Tax Act of Tanzania (which was drafted by Peter Harris as well). Section 56 of Tanzania’s Income Tax Act is very much similar to Income Tax Act of Nepal which also states that only the change in underlying ownership should be considered for the purpose of counting change in ownership.
- ITA, ITA Directive doesn’t state that change in control will be triggered by direct changes in shareholding even if the underlying ownership remains with the same entity. There aren’t any case laws to this effect decided either. Also as per the view of Peter Harris, while determining whether there is a change of control, it is the “underlying ownership” that is the defining criteria. “Underlying ownership” is particularly important where entities hold interests in other entities and there are changes in the shareholding within the group entities for the internal restructuring purposes. Applying Section 57 of ITA without regard to underlying ownership will result in unintended consequences of triggering change in control of an entity even though no interests in the entity have directly changed hands. Further this approach is also supported by uniform model law instruments like . Section 57 of ITA is substantially based on Section 171 of Income Tax Act of Commonwealth of Symmetrica (“Symmetrica”) published by IMF.
What is ownership as per Income Tax Act 2058?
The term ownership is not defined in Income Tax Act 2058. However, reading the definition of underlying ownership provided by the Income Tax Act 2058, Ownership can be defined as
- In relation to an entity: The interest in an entity, or
(As per Section 2(Ma), Interest in an entity means a right, including a contingent right, to participate in the income or capital of an entity.) - In relation to an asset: The right to possession or the right to beneficial ownership
(Beneficial Ownership has not been explicitly defined in Income Tax Act 2058 but has been implied in various Chapters including Chapter 8 of the Act)
What is underlying ownership (indirect ownership) as per Income Tax Act 2058?
As per Section 2(Ra) Underlying ownership means following ownership:
- In relation to an entity: An ownership created on basis of an interest held in the entity directly or indirectly through one or more interposed entities by an individual or by an entity (in which no individual has an interest); or
- In relation to an asset owned by an entity: An ownership of the asset that is determined on basis of proportion to the ownership held by the persons having underlying ownership of the entity.
Although the Ncell case has not given clarity in this regard, it is though common sense and commentary of Income Tax Act of Commonwealth of Symmetrica (“Symmetrica”) published by IMF, that we derive that Section 57 is triggered only in the case of change of 50% or more in underlying ownership.
The Intent of Characterization in Ncell Case
Large Taxpayer’s Service Office iterated in the decision that Reynold Holdings (Mauritius) is (i) a shell company, (ii) doesn’t have any employee, and (iii) established for the purpose of tax minimization and hence recharacterization in line with General Anti-Avoidance Rule as per Section 35 is required. This has led to serious doubt in how Nepal views companies established in tax havens. Let’s see how Ncell case dealt this issue.
Companies established in tax havens are not illegal per se. A tax haven is essentially an offshore financial institution with low or no taxes known for confidentiality. Individuals can use these financial institutions to set up businesses. As noted above individuals generally create shell companies in these tax havens. A shell company is one that exists only on paper. It does not have an office. It does not have employees. The sole reason for the shell company’s existence is to manage wealth. Using a shell company to manage assets can be a valuable financial strategy. It is not illegal. Shell companies are only illegal if used for illegal purposes, like hiding assets and avoiding tax obligations.
But if we look at the Global Business Trend, it is a common practice among Multinational Companies (MNCs) to make Investments through their Company registered in Tax Heavens like Caribbean Islands, Mauritius, Dubai or the countries where Double Taxation Avoidance Agreements are entered into are established practices to get the Tax Benefits provided by such Countries. Telia Sonera has such investment in many countries practices to get the benefits (other than just tax benefits) provided by such Countries. There is a commercial sense behind establishing companies in tax heaves due to
(i) investment laws, banking laws,
(ii) availability of professional consultants,
(iii) repatriation laws, exchange control laws
(iv) access to investors,
(v) location of business,
(vi) disclosure requirements,
(vii) access to tax treaties with multiple countries,
(viii) regulations like taxation and companies laws
(ix) royalty protection laws and etc.
Countries around the world like Andorra, The Bahamas, Belize, Bermuda, The British Virgin Islands, The Cayman Islands, The Channel Islands, The Cook Islands, Hong Kong, The Isle of Man, Mauritius, Liechtenstein, Monaco, Panama, Switzerland, St. Kitts and Nevis etc. are considered to be tax havens because they have reduced tax rates. These reduced tax rates are the incentives provided by the countries for bringing international companies and businesses into the country. This is not illegal per se. There may be multiple other business/commercial sense behind it than just for the purpose of reaping tax benefits through tax avoidance. Telia Sonera has such investment in many countries including West Indies through which it has been making Investments throughout the Globe. And hence only because investments are made through these countries i.e. tax heavens cannot be termed as an attempt to tax evasion. Similar was the interpretation was made in the case of Vodafone India. The cardinal principle states that “given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance”.
The eagerly awaited decision in Vodafone Case in India had provided a clarity regarding the key principles of Indian taxation. It is important to note that India did not apply the GAAR principle to tax Vodafone because Indian law does not currently tax offshore share transfers, and absent such legislation, the law cannot view such a transaction in isolation simply to widen the tax net.
If we look at the Ncell case, the decision reiterated that विवादित कारोबारमार्फत निहित स्वामित्वको निसर्ग भएको र त्यस्तोमा ऐनको दफा ५७ आकर्षित हुने र सिर्जित लाभमा कर बुझाउनु पर्ने भएबाट पुँजीगत लाभकर लाग्ने अवस्था देखिन्छ । यस्तो कर कुनै तरहबाट छल्ने प्रबन्ध भएको देखिएमा ठूला करदाता कार्यालयले ऐनको व्यवस्थाबमोजिम त्यस्तो प्रबन्ध वा प्रबन्धको कुनै भागलाई ऐनको दफा ३५ बमोजिम पुनः चारित्रीकरण गर्न सक्ने नै हुन्छ ।
This understanding of the decision has been in line with how the tax havens are recognized internationally. Companies established in tax havens are not illegal per se unless otherwise motivated by tax avoidance.
Regarding if Ncell is a PE of Telia Sonera
First Decision states that
प्रस्तुत विवादको सन्दर्भमा यी शब्दहरूको अर्थ गर्दा रेनोल्ड्स् र अन्ततः टेलिया सोनेरा स्वीडेनको “स्थायी संस्थापन” उक्त दफा ५७(१) को प्रयोजनको लागि एनसेल नै “निकाय” भित्र समाहित हुने रहेछ भनी बुझ्नुपर्ने देखिन्छ ।
This has bought unnecessary confusion regarding if a subsidiary company is a PE of the Head Office. In this regard, Article 5(7) of the OECD MC states that: “The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.” For the purpose of taxation, such a subsidiary constitutes an independent legal entity. Accordingly, both companies are subject to tax liability in the state in which they are resident or where their place of management is located. Mere factum of existence of a controlled subsidiary in another state does not automatically make itself a PE of the parent.
A parent company may, however, be found, to have a permanent establishment in a State where a subsidiary has a place of business. Thus, any space or premises belonging to the subsidiary that is at the disposal of the parent company and that constitutes a fixed place of business through which the parent carries on its own business will constitute a permanent establishment. Also, a parent will be deemed to have a permanent establishment in a State in respect of any activities that its subsidiary undertakes for it if the subsidiary has, and habitually exercises, in that State an authority to conclude contracts in the name of the parent, unless these activities are limited to those referred to the subsidiary acting in the ordinary course of its business as an independent agent.
The Virtual Projection Risk: Nokia Networks v. Indian Taxation
- Nokia is a resident of Finland and sold GSM equipment manufactured by it to Indian telecom operators, on a principal-to-principal basis.
- It’s Indian subsidiary, Nokia India Private Limited was either assigned the installation contracts by the Assessee or entered into independent contracts with the customers for installation. NIPL also entered into technical support agreements with customers. NIPL’s income from these activities was taxed in India.
- The Assessing Officer was of the view that NIPL constituted a PE of the Assessee and attributed an additional 30 percent of the profit from the equipment to NIPL.
- Paramount importance whether NIPL was at the disposal of the Assessee for conducting the latter’s own business activities. (Virtual Projection of Business Place)
A dissenting opinion (the opinion that was not laid as decision) held in Nokia Networks v. Indian Taxation that Nokia Network’s Indian Subsidiary would constitute a PE. It was justified by relying on the test of virtual projection. Referring to the term ‘alter ego’ and placing reliance on other international commentators, it was opined that when a subsidiary company’s survival for carrying on its business activities is entirely connected with and dependent on the business of its parent, then the subsidiary is merely an alter ego, or virtual projection, of its parent. Consequently, it must be treated as a PE of the non-resident parent. This view was not materialized in the Nokia Networks v. Indian Taxation case but there may be a risk of Virtual Projection in treating whether subsidiary constitutes a PE of the parent.
Regarding Market Value of deemed disposal of Net Assets
This is probably the much debated and discussed issue on application of Section 57.
Section 57(1) states that where there is a change of 50% or more in the underlying ownership of an entity as compared with its ownership 3 years previously, the entity shall be treated as disposing of any assets owned by it and any liabilities owed by it.
When Section 57 applies the entity shall be treated as disposing of any assets owned by it and any liabilities owed by it pursuant to Section 41: Disposal with Retention of Asset or Liability. For the purpose of Section 41 the person shall be treated as deriving an amount in respect of the disposal equal to the market value of the asset at the time of the disposal.
There may be two views here:
View 1: Considering the MV of both identifiable and non-identifiable assets
View 2: Considering the MV of only the identifiable assets
Section 2(Ka.dha): Asset means a tangible or intangible asset and includes currency, goodwill, know-how, property, an owner’s interest in a foreign branch, a right to income or future income, and a part of an asset.
As per ITA the definition of assets includes goodwill as well. Although goodwill is an asset, it is a non-identifiable asset. It itself doesn’t have any value to it for tax purpose. Rather, goodwill is the excess value perceived in a pool of business assets. Meaning, although goodwill is an asset in definition, it is not possible to assign any value to goodwill. We can refer to Section 49 of the Act for this concept. “A person shall be required to apportion the costs incurred or the amounts derived by the person in acquiring, incurring, or disposing of each asset or liability between the assets and liabilities according to their market values at the time of acquisition, incursion, or disposal, as the case requires.” Meaning even when goodwill arises as per the business transaction, for tax purposes goodwill is apportioned to identifiable assets (which may be both tangible or intangible) according to their market values.
Why is goodwill a non-identifiable asset?: Goodwill is a non-identifiable asset because goodwill cannot be determined alone. Goodwill is baked in with other assets of the entity. It cannot be separately valued unless the actual transaction takes place.
For the purpose of Section 57, the assets are deemed to be disposed because they aren’t actually disposed. In such case it is only possible to identity the market values of the identifiable assets of the entity but not the actual value of goodwill. Here, distinction may be necessary between two terms Transaction Price of Asset and Market Value of Asset.
Transaction Price of Asset and Market Value of Asset
We Know, Goodwill = Transaction Price of Asset – Market Value of Asset
OR, Market Value of Asset = Transaction Price of Asset – Goodwill
What is Transaction Price?
Transaction Price is a value to an asset, which is a present value of all economic advantages of the asset.
What is Goodwill?
Goodwill is a value to an asset, in addition to its market value, which is a present value of all unique economic advantages of the asset.
What is Market Value?
Market Value is a value to an asset, which is a present value of all non-unique economic advantages of the asset.
In this basis, the meaning of MV of assets of the company doesn’t include the value of goodwill of the company. Additionally, the transaction price that triggers the application of Section 57 doesn’t not always indicate the entire change of 100% ownership of the business. Hence the transaction price is not a wise substitute for the Market Value of the assets that are deemed disposed.
Then. why was transaction price taken as the basis of taxation under Section 57 in Ncell Case?
In Ncell Case, the decision to consider transaction price as MV of the asset is probably wrong. However, they might have taken that view because
(i) of Ncell’s failure to submit accurate details of transactions
(ii) for the purpose of determining the MV of the license (presence of identifiable intangible asset like license, unlike goodwill)
(iii) Supreme court reserves reserves the “उचित उपचार प्रदान गर्ने” र “विवादको टुङ्गो लगाउने” असाधारण अधिकार as per संविधानको धारा १३३
Whatever might be the logic behind to consider the transaction price as basis for taxation under Section 47 in Ncell Case, the decision has clearly stated that:
सेयर तथा हितहरू बिक्री कारोबारसँग सम्बन्धित कागजातहरू पेस गर्न एनसेललगायत एक्जिएटा टेलिया सोनेरालाई पटकपटक माग गर्दासमेत हालसम्म पेस गरेको छैन । सेयर हस्तान्तरण गरिँदा कुन मूल्यलाई आधार मानी लाभ र दायित्व तय गरी कारोबार गरिएको छ भन्ने कुरा Due Diligence Audit Report, Share Purchase Agreement (SPA), Escrow Agreement, Escrow Account सम्बन्धी विवरणलगायतका कागजातहरू उपलब्ध नभएसम्म स्पष्ट हुन सक्ने देखिँदैन । यी कागजातहरू विपक्षी ठूला करदाता कार्यालयले मागेको र सो प्राप्त नभएपछि तत्काल देखिएका प्रमाणका आधारमा कर निर्धारण गरी थप प्रमाण र सूचना प्राप्त हुँदा लाभकर्ताको थप आय भएको पाइएमा पुनः कर निर्धारण गर्दै जाने नीति अख्तियार गरी मिति २०७४।३।१३ मा सो समयसम्म प्राप्त कागजातका आधारमा बिक्री मूल्य रू.१,४४,७८,२५,०६,०००।- कायम गरी सो आधारमा ठुला करदाता कार्पुँयालयले पुँजीगत लाभकर निर्धारण गरेको पाइयो ।
So it is likely that using the transaction price for the taxation under Section 57 was not the intention of Ncell case afterall.
Regarding Treaty Shopping
Pursuant to Article 13 of the Double Tax Avoidance Agreement signed between Nepal and Norway 1996 (“DTAA”), the gains from the alienation/disposal of shares shall be taxable only in the contracting state of which the alienator is a resident. Therefore, entities resident of Norway and beneficially owned by Norwegian person can avail this relief under DTAA.
In this regard the contention of the Telia Sonera Norway Nepal Holdings (Norway) was that, because the shares of the company resident in Norway was disposed of, the capital gain taxes could not be levied in Nepal. However, because 75.45% (more than 50%) of the underlying ownership of Telia Sonera Norway Nepal Holdings (Norway) lied with company resident in Sweden the transaction could not be valid for the DTAA benefit as per Section 73(5) of the ITA.
Section 73(5): Where Section 73(4) applies, the exemption or reduction under Section 73 shall not be available to any entity:
a. Who, for the purposes of the agreement, is a resident of the other contracting state; and
b. 50% or more of whose underlying ownership is held by “individuals” or “entities in which no individual has an interest” and who, for the purposes of the agreement, are not residents of that other contracting state or Nepal.
The Mathematics behind 80% change in Ownership
In both the decision it has been repeatedly mentioned that the change in ownership of 80% of the shares of Reynold Holdings triggered the application of Section 57. Here’s how it came to be 80%.
Since the transaction of transfer of ownership from Niraj Govinda Shrestha to Sunivera Capital Venture occurred after the transaction of Telia to Axiata, we will consider the transaction of Telia to Axiata only for the purpose of computing the % change that triggered the application of Section 57.
Change in Ownership of Direct Owners
| Direct Owners | Before | After | Change |
| Reynold Holdings | 80.00% | 80.00% | 0.00% |
| Niraj Govinda Shrestha | 20.00% | 20.00% | 0.00% |
| Total | 100.00% | 100.00% | 0.00% |
Change in Ownership of Underlying Owners
| Underlying Owners | Before | After | Change |
| Telia Sonera AB | 60.36% | 0.00% | 0.00% |
| SEA Telecom Investment BV | 19.64% | 0.00% | 0.00% |
| Axiata Berhad | 0.00% | 80.00% | 80.00% |
| Niraj Govinda Shrestha | 20.00% | 0.00% | 0.00% |
| Total | 100.00% | 80.00% | 80.00% |
This is how a change in control of 80% was derived.
Decision Two Highlights
Provision of Section 117, 118 and 119 in in line with Section 57
Second decision states that
कारोबारपश्चात् विवरण दाखिल नगरेबापत उक्त शुल्क लाग्ने व्यवस्थाअनुरूप उक्त शुल्क लगाइएको हुँदा सोलाई अन्यथा मान्न मिल्ने हुँदैन । त्यस्तै ऐनको दफा ११८ मा किस्ताबन्दीमा दाखिल गर्ने कर रकमभन्दा कम हुने गरी बुझाएकोमा ब्याज लाग्ने व्यवस्था भएबमोजिम लगाइएको ब्याज पनि अन्यथा देखिएन । त्यस्तै ऐनको दफा ११९ मा पनि कर तिर्नुपर्ने मितिसम्म कुनै व्यक्तिले कर दाखिल नगरेमा दाखिल गर्न बाँकी रहेको रकममा दाखिल गर्न बाँकी रहेको अवधिभरको लागि सो व्यक्तिलाई प्रत्येक महिना र महिनाको भागमा सामान्य ब्याजदरले ब्याज लाग्ने भन्ने व्यवस्था तथा ऐनको दफा २(क ब) मा सामान्य ब्याजदर भन्नाले वार्षिक १५ प्रतिशतको ब्याजदर सम्झनुपर्ने भन्ने व्यवस्था भएअनुसार ब्याज लगाइएको पाइन्छ । टेलियालाई लाग्ने कर एनसेल प्रा.लि.लाई लागेको हुँदा विवादित करको दायित्व कारोबार मिति २०७२।१२।२९ गते नै सिर्जना भई समयमै कर दाखिल नभएबापत उपर्युक्त शुल्क ब्याजहरूसमेत लाग्ने तथ्यमा विवाद गरिरहनु पर्ने आवश्यकता रहेको छैन ।
It was established that the fines for non filer of return under Section 117, interest on instalment taxes to be paid under Section 118 and interest on delay on payment of taxes under Section 119 were applicable even in the case where Section 57 is triggered. There aren’t any exceptions or relaxation to these fines and interest even though the concept of taxation under Section 57 is rather different than normal business taxation. But it is what it is.
Filing of Income Tax Return
As per Section 57(3), where there is a change in ownership of the type referred to in Section 57(1) during the income-year of an entity, the parts of the income-year before and after the change in ownership are treated as separate income years.
Meaning
This means that the entity’s normal income year is divided into several income years as need be, as per the change in ownership. For example say the Change in control occurred only one during the fiscal year, the fiscal year would be separated into two parts:
- Part One: From the beginning of the fiscal year to the date of change in ownership
- Part Two: From the day immediately following the date of change in ownership till the end of the fiscal year
When to file the Income Tax Return?
As per Section 96 of the Income Tax Act 2058, every person shall file at the place prescribed by the Department not later than 3 months after the end of each income year a return of income for the year. So, the “Change in Control Return” shall be filed within three months from the date of change in ownership.
Payment of Taxes
As per Section 57(1) the entity shall be treated as disposing any assets owned by it and any liabilities owed by it once the Change in Control as per Section 57 is triggered.
How to determine the taxable amount for the case of disposal of net assets?
Section 40(3)(e) of the Act has identified the deemed disposal under Section 57 of the Act as Disposal with Retention. Further, Section 41 of the Act has specified the amount of incoming and outgoings for this deemed disposal:
- The person shall be treated as deriving an amount in respect of the disposal equal to the market value of the net assets at the time of the disposal; and
(meaning the incomings for the deemed disposal shall be the market value of the net assets) - For the purpose of subsequent disposal of the net assets, the net outgoings for the net assets to the time of the disposal under this Section shall be treated as equal to the amounts derived.
(meaning, the market value treated as incomings, shall be treated as the cost for the future)
So, the entity shall be taxed on the following transactions at the point of filing the tax returns for the “Change in Control”
- Transactions from the beginning of the fiscal year to the date of change in ownership
- Market value of the net assets reduced by the tax base of the net assets
How to pay installment taxes in fiscal year where Section 57 is triggered?
We know that a person who derives taxable income during the year is required to pay tax for the year by three instalments as follows:
- By the end of Poush: 40% of the estimated tax
- By the end of Chaitra: 70% of the estimated tax
- By the end of Ashad: 100% of the estimated tax
Meaning income tax is collected in installments before the end of the fiscal year. Any delay in submitting the tax in instalment as above attracts interest at the rate of 15% per annum. A 10% margin is allowed for any difference that might occur by the reason of the inaccuracy in estimate as per Section 118(1)(Kha) of the Act.
Now the question arises, if there are any relaxation in payment of instalment taxes in situation where Section 57 is triggered? No, there aren’t any relaxations. The entity is supposed to pay the taxes in instalments as usual.
How to pay the taxes? Once Section 57 is triggered the taxable amount and tax liability till the date of change in ownership is computed. If any due date for instalment tax payment had fallen before that date, taxpayer should have deposited the instalment amount accordingly and any amount remaining thereafter should be deposited within 3 months from the end of the income year.
Example: Let’s say Section 57 triggered on an entity on Magh end during an income year and the total tax to be paid including the transactions till Magh and gain from deemed disposal under Section 57 came out to be Rs. 100,000 and total tax to be paid after the date of Change in control came out to be Rs. 50,000.
- Liability of Rs. 100,000
- 100,000×40% should be deposited within Poush End
Elsewise u/s 118(1): Interest @15% p.a. until Baisakh End - Any remaining amount should be deposited within Baisakh End
Elsewise u/s 119(1): Interest @15% p.a. after Baisakh End
3 months from the end of Magh End is Baisakh End
- 100,000×40% should be deposited within Poush End
- Liability of Rs. 50,000
- 50,000×70% should be deposited within Chaitra End
Elsewise u/s 118(1): Interest @15% p.a. until Ashad End - 50,000×100% should be deposited within Ashad End
Elsewise u/s 118(1): Interest @15% p.a. until Ashoj End - Any remaining amount should be deposited within Ashoj End
Elsewise u/s 119(1): Interest @15% p.a. after Baisakh End
3 months from the end of Ashad End is Ashoj End
- 50,000×70% should be deposited within Chaitra End
Regarding Basis for Fines under Section 120 of ITA
Second decision states that
निवेदकले जानाजानी लापरवाही, जालसाजीपूर्वक वा भूलवश गलत विवरण दाखिला गरेको हो ? वा आफूसँग वा आफ्नो पहुँचमा भएको कागजातलाई आफूसँग र साथै पहुँचमा पनि नभएको भनी पेस नगरेको हो ? सो बारे यथोचित रूपमा उपयुक्त आधार र कारणसहित कुनै तथ्य खुल्न आई सो प्रमाण कागजातबाट पुष्टि हुन आए त्यसबारेमा सम्पूर्ण आधार कारण खुलाई ऐनको दफा १२०(क) अनुसार शुल्क लगाउन पाउने अधिकार ठुला करदाता कार्यालयलाई रहे भएको अवस्थामा ती सबै अवस्था र परिस्थितिको पृष्ठभूमिको सन्दर्भमा कुनै आधार र कारण नखुलाई टेलिया सोनेरालाई कर निर्धारण गर्दा लगाएको दफा १२०(क) बमोजिमको शुल्क नै एनसेललाई पनि जस्ताको तस्तै रूपमा लगाउने गरेको कार्य कानूनसम्मत रहे भएको देखिन आएन ।
Pursuant to the decision the burden to prove the fraud under Section 120 lies with the assessing office and the basis for penalty under Section 120 can be applied only if the tax officer is able to prove through the facts and documents that
(a) the company has either knowingly, negligently or fraudulently submitted false or misleading statement on any matter or
(b) the company has not submitted the documents on its reach.
Else the penalty under Section 120 cannot be applicable.