Income Tax 2025

Appearance

Special measures in respect of transactions with persons located in notified jurisdictional area. ​

176(1) ​

The Central Government may, by notification specify any country or territory outside India, as a notified jurisdictional area, having regard to the lack of effective exchange of information with such jurisdiction.

176(2) ​

Irrespective of anything contrary in this Act, if an assessee enters into a transaction where one of the parties to the transaction is a person located in a notified jurisdictional area, then,—

  • (a) all the parties to the transaction shall be deemed to be associated enterprises within the meaning of section 162;
  • (b) any transaction of the nature described in section 163(1) and (2) shall be deemed to be an international transaction within the meaning of section 163, and the provisions of sections161, 162, 163, 165 except the benefit of variation specified in sections 165(3)(a)(ii), 166, 167, 171, 172 and 173 shall apply accordingly.

176(3) ​

Irrespective of anything to the contrary in this Act, no deduction shall be allowed—

  • (a) for any payment made to any financial institution located in a notified jurisdictional area, unless the assessee furnishes an authorisation in the prescribed form authorising the Board or any other income-tax authority acting on its behalf to seek relevant information from the said financial institution on behalf of such assessee; and
  • (b) for any other expenditure or allowance (including depreciation) arising from the transaction with a person located in a notified jurisdictional area, unless the assessee maintains such other documents and furnishes such information as prescribed, in this behalf.

176(4) ​

Irrespective of anything to the contrary in this Act, if, in any tax year, the assessee has received or credited any sum from any person located in a notified jurisdictional area and—

  • (a) the assessee does not provide any explanation about the source of the said sum in the hands of such person or in the hands of the beneficial owner (if such person is not the beneficial owner of the said sum); or
  • (b) the explanation provided by the assessee, in the opinion of the Assessing Officer, is not satisfactory, then such sum shall be deemed to be the income of the assessee for that tax year.

176(5) ​

Irrespective of anything to the contrary in this Act, if any person located in a notified jurisdictional area is entitled to receive any sum or income or amount on which tax is deductible under Chapter XIX-B, the tax shall be deducted at the highest of the following rates––

  • (a) at the rate or rates in force;
  • (b) at the rate specified in the relevant provisions of this Act;
  • (c) at the rate of 30%.

176(6) ​

In this section,—

  • (a) “person located in a notified jurisdictional area” shall include,— (i) a person who is resident of the notified jurisdictional area; (ii) a person, not being an individual, which is established in the notified jurisdictional area; or (iii) a permanent establishment of a person not falling in sub-clause (i) or (ii), in the notified jurisdictional area;
  • (b) “permanent establishment” shall have the meaning assigned to it in section 173(c);
Explanation

Section Summary: ​

This section introduces special measures for transactions involving individuals or entities located in "notified jurisdictional areas" (NJAs). NJAs are countries or territories outside India where there is a lack of effective exchange of information with Indian tax authorities. The purpose is to prevent tax evasion and ensure compliance by imposing stricter rules on transactions with entities in these areas.

Key Changes: ​

  1. Introduction of Notified Jurisdictional Areas (NJAs): The Central Government can designate specific countries or territories as NJAs if they lack effective information-sharing mechanisms with India.
  2. Deemed Associated Enterprises: Transactions with entities in NJAs are treated as transactions between associated enterprises, triggering transfer pricing rules.
  3. Restrictions on Deductions: Deductions for payments or expenses related to NJAs are disallowed unless specific documentation and authorizations are provided.
  4. Deemed Income: Sums received from NJAs may be treated as the taxpayer's income if the source of funds cannot be satisfactorily explained.
  5. Higher TDS Rates: Tax deducted at source (TDS) on payments to NJAs must be at the highest applicable rate (30% or the rate specified in the Act).

Practical Implications: ​

  1. For Taxpayers:

    • Transactions with NJAs will attract stricter scrutiny, including transfer pricing rules and documentation requirements.
    • Deductions for payments or expenses related to NJAs may be disallowed unless proper authorizations and documentation are maintained.
    • Unexplained sums received from NJAs may be taxed as income.

  2. For Businesses:

    • Businesses must ensure compliance with transfer pricing rules and maintain detailed records for transactions with NJAs.
    • Payments to NJAs will attract higher TDS rates, increasing compliance costs.

  3. For Compliance Processes:

    • Taxpayers must furnish authorizations allowing Indian tax authorities to seek information from financial institutions in NJAs.
    • Detailed documentation must be maintained for all transactions with NJAs to claim deductions or avoid deemed income provisions.

Critical Concepts: ​

  1. Notified Jurisdictional Area (NJA): A country or territory designated by the Central Government due to inadequate information-sharing mechanisms with India.
  2. Associated Enterprises: Entities treated as related parties under transfer pricing rules, triggering additional compliance requirements.
  3. Permanent Establishment: A fixed place of business in an NJA, such as a branch or office, which is subject to these rules.
  4. Deemed Income: Sums received from NJAs that cannot be explained satisfactorily are treated as the taxpayer's income.

Compliance Steps: ​

  1. Identify NJAs: Monitor notifications from the Central Government to identify designated NJAs.
  2. Maintain Documentation:
    • Keep detailed records of transactions with NJAs.
    • Furnish authorizations allowing Indian tax authorities to seek information from NJAs.
  3. Apply Higher TDS Rates: Deduct TDS at the highest applicable rate (30% or the rate specified in the Act) for payments to NJAs.
  4. Explain Source of Funds: Provide satisfactory explanations for sums received from NJAs to avoid deemed income provisions.

Examples: ​

  1. Scenario 1 – Deduction Disallowance:

    • A company in India pays interest to a bank located in an NJA. To claim a deduction, the company must furnish an authorization allowing Indian tax authorities to seek information from the bank. If the authorization is not provided, the deduction will be disallowed.

  2. Scenario 2 – Deemed Income:

    • An individual receives ₹10 lakh from a person in an NJA. If the individual cannot explain the source of this amount to the satisfaction of the tax officer, the ₹10 lakh will be treated as the individual's income and taxed accordingly.

  3. Scenario 3 – Higher TDS:

    • A company pays royalties to a firm in an NJA. The applicable TDS rate is 10%, but under this section, the company must deduct TDS at the highest rate (30%). This increases the company's compliance burden and cash flow impact.

This section aims to tighten tax compliance for transactions with NJAs, ensuring transparency and preventing tax evasion. Taxpayers and businesses must adapt to these stricter rules by maintaining proper documentation and adhering to higher compliance standards.