newsletter sep 2015 - issue no.1

T a x Q u e s t / S e p t e m b e r 2 0 1 5

© 2015 K. Vaitheeswaran Page | 1 All rights reserved.

Tax Quest An e-newsletter from

K. VAITHEESWARAN & CO. Advocates & Tax Consultants

Chennai, India.

September 2015

Issue No.1

CONTENTS INCOME TAX…………………… 2 SERVICE TAX…………………… 3 EXCISE …………………………. 4 CUSTOMS……………………….. 4 VAT……………………………… 5 COMPANY LAW………………… 5 ARTICLE …………………………6 AOP Angle in Consortiums and Joint Ventures



INCOME TAX – INTERNATIONAL TAXATION

Tax Residency Certificate – DTAA Benefits

The Punjab and Haryana High Court, has held that Tax Residency Certificate issued by a foreign country can be considered valid for the purpose of claiming benefit under the Indo – Mauritius DTAA. The Court reversed the AAR Ruling and relied upon CBDT Circular No. 789 to the effect that certificate of residence issued by the Mauritius Authorities constitute sufficient evidence for residential status. The High Court also relied upon the clarification issued by the Finance Ministry dated 02.03.2013 to the effect that Tax Residency Certificate produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state (Mauritius in this case) and the Income Tax Authorities in India will not go behind the TRC and question his residential status. Serco BPO Pvt. Ltd. Vs. AAR [2015 – TII – 59 – HC – P&H – INTL]

Reimbursement of cost of software

In the case of Lionbridge Technologies Pvt. Ltd. Vs. ITO [2015-TII-139], Lionbridge USA entered into agreements with software vendors for purchase of software to be used by Lionbridge Group entities across the world. The cost of purchase of software was allocated amongst group entities based on the allocation key of the number of desktops. The allocation was made at cost without any markup. The Mumbai Bench of the Tribunal held that it is not disputed that the cost of reimbursement paid to Lionbridge USA was not chargeable to tax in India. If that is so, the assessee was not required to deduct tax under Section 195. Further, it is not a case where Lionbridge has developed the software which has been given for use to the assessee. The software has been purchased from Microsoft and the cost distributed amongst the group entities. It is a pure case of reimbursement and TDS is not applicable.

INCOME TAX – CAPITAL GAINS

Joint Development Agreement

The Punjab and Haryana High Court in the case of C.S. Atwal Vs. CIT vide its order dated 22.07.2015 has rendered a landmark decision in the context of joint development agreements. The Court held as under:-

• No possession had been given by the transferor to the transferee of the entire land in part performance of the JDA so as to attract Section 53A of the Transfer of Property Act.

• The possession delivered, if at all was, as a licencee for the development of the property and not in the capacity of a transferee.

• Where the JDA is not registered, it does not fall within the ambit of Section 53A of the TOP Act and consequently Section 2(47)(v) of the Income Tax Act does not apply.



INCOME TAX – ASSESSMENT

Manual Scrutiny

Department of Revenue, MoF, Government of India has issued Instruction No.28/2015 dated 31.08.2015 in connection with compulsory manual selection of cases for scrutiny during financial year 2015-2016. The Instruction also states that the targets for completion of scrutiny assessment and strategy of framing quality assessments as contained in central plan document for FY 2015-2016 have to be complied with.

SERVICE TAX Works Contract not liable to service tax prior to 01.06.2007

The Supreme Court has rendered a landmark decision and settled an issue providing relief to construction sector. Commercial or industrial construction service was brought into the ambit of service tax from 10.09.2004 and construction of residential complex services were brought in from 16.06.2005. Works contract service as a new levy was brought into the ambit of service tax by Finance Act, 2007 with effect from 01.06.2007. The Supreme Court has held that works contract service will not be liable to service tax prior to 01.06.2007 as there was no charging section prior to the said period to bring works contract under the service tax net. The Court held that since works contract includes both goods & service element, there has to be a specific mechanism to identify the service element in the works contract and only that portion of the works contract could be subject to service tax. The goods portion is a State subject and can only be subject to VAT and since there existed no such mechanism to identify the service portion in a works contract prior to 01.06.2007, there was no question of bringing the same under service tax net prior to the said period. [Commissioner of Central Excise & Customs Vs. M/s. Larsen & Toubro – 2015-TIOL-187]

Sponsorship service in relation to sporting events not liable to service tax

The Hon’ble Supreme Court recently dismissed the appeal filed by the Revenue against the judgment of the CESTAT, Mumbai which held that sponsorship service received from BCCI in respect of Indian Premier League (IPL) matches is exempt from service tax as the IPL tournament is a sporting event and the charging provision clearly excludes from chargeability to service tax, sponsorship in relation to sports events. Earlier, the Tribunal had held that a true and fair reading of the sponsorship agreement made it clear that the agreement is in relation to cricket tournaments conducted under the auspices of BCCI/IPL; that cricket is a sport; and the tournament (league) by the nature of its process is a sporting event and the once the event sponsored is a sporting event, there is no question of service tax. [Commissioner of Service Tax Vs. Citi Bank NA – 2015 – TIOL – 09]



Directorate General of Service Tax renamed as Directorate General of GST

The Directorate General of Service Tax (DGST) has been renamed as Directorate General of Goods and Services Tax (DGGST) with effect from 01.08.2015 and the headquarters would be shifted to Delhi from Mumbai – CBEC Order No.1/Ad.IV/2015, dated 31-7-2015.

CENTRAL EXCISE Article 14

The Supreme Court in the case of Union of India Vs. N.S. Rathnam & Sons (2015) 322 ELT 353 has held that where the goods are the same and they fall under the same heading the Notification giving exemption only to those persons who paid duty of Rs.1,400/- per LDT does not mean that such persons belong to a different category entitled for exemption as against others who paid duty on the same goods under a different formula choosing an available option. When substantive unreasonableness is found in a taxing statute / notification, it may have to be declared as unconstitutional.

Demand against Legal Representatives

The Supreme Court in the case of Shabina Abraham Vs. CCE (2015) 322 ELT 372 has held that since Section 4(3)(a) of the Central Excise Act defines ‘Assessee’ to mean ‘a person who is liable to pay duty of excise under this Act and includes his agent’, it indicates that the person can only be a living person. There is no separate machinery under the Central Excise Act to proceed against a dead person. Continuation of proceedings against the legal representatives of the sole proprietor is not valid.

CUSTOMS Larger Bench – Stage of Reference

In the issue pertaining to classification of imported coal as to whether it is steam coal or bituminous coal, the Chennai Bench of the Tribunal referred the matter to the Larger Bench and granted complete waiver of pre-deposit pending disposal of the appeal. The Department filed an appeal against the said order before the Madras High Court. The Madras High Court disposed the matter in a batch of cases namely CC Vs. Chettinad Cement Corporation Ltd. [2015-TIOL-1874-HC-MAD-Cus] and held that an appeal against an order can be preferred only by a person who is aggrieved. A reference by one bench of the Tribunal to a Larger Bench on the ground that two co-ordinate benches had come to different conclusions on the same issue is not a decision on which one or the other party can be stated to be aggrieved. There is no necessity to interfere with the stay order granted. The Court however directed the Tribunal to constitute a Larger Bench at the earliest and dispose of the appeals within a period of two months from the date of receipt of the order.



VAT Check-post

The Gwalior Bench of the Madhya Pradesh High Court has held that penalty is not leviable without conducting an enquiry or serving a notice to the transporter and without recording reasons to conclude about evasion of tax. Detaining vehicle after release order passed is also not in order. The High Court also criticized the imposition of penalty without enquiry and observed that the issue of notice reflects high handedness and whimsical exercise of power by the concerned authority. [Hariom Floor & Oil Mill Vs State of Madhya Pradesh and others (2015) 82 VST 48]

The Punjab & Haryana High Court has held that the author of the penalty order at the check post could not go beyond the powers assigned to him by raising the question of nature of the transaction. [State of Punjab and another Vs Shreyans Industries Ltd. (2015) 78 VST 264]

Surplus Input Tax Credit – Interest and Penalty

The Gujarat High Court in the case of State of Gujarat Vs. Dashmesh Hydraulic Machinery (2015) 80 VST 532 has held that where the assessee has surplus balance of input tax credit which is adjusted against the tax demand in assessment, the element of avoidance of tax is lacking. Interest and penalty are not leviable.

COMPANY LAW Companies Act, 2013 – Directors Appointed under the old law and age restrictions

The Bombay High Court in the case of Shridhar Sundarajan Vs. Ultramarine & Pigments Ltd. and Another has held that companies who had appointed directors prior to the Companies Act 2013 shall continue to function and exercise their powers in the same capacity till the expiry of their original term. Even though the new provision, Section 196 (3) (a) of the Companies Act, 2013 restricts the appointment and reappointment of Directors who attain 70 years and demands for a special resolution, this section can apply only to appointments made after 1st April 2014 and it cannot apply retrospectively. There would be no automatic cessation of the appointment as a result of Section 196 (3) (a) even in a case where the Director crosses the age of 70 years during the term of his appointment. Further, it shall not interrupt the appointment of a Director appointed after 1st April 2014, where at the date of such appointment or reappointment, the Director was below the age of 70 years but crossed that age during his tenure.

MCA notifies National Company Law Tribunal Rules

National Company Law Tribunal (Salary, Allowances and other Terms and Conditions of Service of President and other Members) Rules, 2015 and National Company Law Appellate



Tribunal (Salaries, Allowances and other Terms and Conditions of Service of Chairperson and other Members) Rules, 2015 have been notified by the MCA.

Even though the constitution of NCLT is yet to happen, the Notification of the Rules indicate significant progress in this direction.

ARTICLE

The AOP angle in consortiums and joint ventures

K. Vaitheeswaran

The sheer scale and complexity of certain infrastructure as well as other projects mandates the coming together of different entities having domain expertise in different segments relevant to the project. The project also requires overall coordination and the contractee needs a single face for its dealings including billing aspects. At the stage of tender, consortiums are formed involving both domestic and overseas companies and the successful bidder being a consortium is awarded the contract. The key question that arises is whether an association of persons (AOP) is created or not in the context of income tax law.

Linde AG

Linde AG Germany and Samsung Korea entered into a MoU to form a consortium for jointly submitting a bid to secure a contract for design / engineering / procurement / construction / installation / commissioning / handing over of the plant under a tender floated by ONGC Petro Additions Ltd. (OPAL). The contract was awarded to the consortium.

Linde filed an application under Section 197 claiming that no portion of the amount payable to Linde for supply of equipment, materials, spares and for providing basic and detailed engineering services should be subject to deduction under Section 195 as the transactions were performed and completed outside India. A ruling was also sought with reference to status of Linde and Samsung as AOP and whether TDS was applicable.

The AAR ruled that the consortium constituted an AOP and the liability of Linde and Samsung towards OPAL for due performance was joint and several and the



income received by the Applicant for offshore supply of equipments, materials and spares, drawing and designs was taxable in India.

The Delhi High Court on a Writ Petition in the case of Linde AG Linde Engineering Division Vs. Dy. DIT (2014) 365 ITR 1 held as under:-

(i) Linde and Samsung had joined together to bid for a contract; present a façade of a consortium to OPAL for execution of contract and accept joint and several liability; put in place a management structure for inter se co-ordination and execution of the project.

(ii) However in all other aspects Linde and Samsung were independent of each other and were responsible for their own deliverables under the contract without reference to each other.

(iii) Facts did not indicate a sufficient degree of joint action between L & S either in execution or management of the project to justify the conclusion of formation of an AOP.

(iv) Contract involved supply of equipment, materials and spares by Linde. There was no business connection in India and the offshore supplies cannot be taxed in India.

Hyundai Rotem Co.

Delhi Metro Rail Corporation (DMRC) issued a tender for a contract and in this connection, Mitsubishi Corporation, Japan (MC); Hyundai Rotem Co., Korea (Rotem); Mitsubishi Electric Corporation, Japan (Melco); and BEML India Ltd. (BEML) entered into a Consortium Agreement and MC was appointed as the Consortium Leader. The Consortium submitted the bid to DMRC. Under the Agreement, the responsibility of each member was identified and Rotem was responsible for mechanical works; Melco for electrical works; BEML for localization work; and MC for project co-ordination, commercial management,



contract administration, legal administration, provision of bank guarantees and collecting payments from DMRC.

The contract was awarded to the Consortium. The members entered into a Supplementary Consortium Agreement whereby the role, participation and percentage of each member were separately identified. On an application before the AAR as to whether the consortium constitutes an AOP under the Income Tax Act, the AAR ruled that

(i) The scope of work of each member was specifically defined and the work of each member was mutually exclusive of that of another.

(ii) Inter-changeability or reassignment of work and overseeing each other’s work is not possible and as per the agreement each does not act as an agent of the other.

(iii) The joint and several liabilities towards the employer are introduced as a safeguard to DMRC to have a better hold over the consortium members.

(iv) The agreement specifically provided that no legal entity or partnership was being created by the member.

(v) On an overall consideration, the consortium cannot be treated as an association of persons.

The AAR distinguished its earlier ruling in Geoconsult ZT Gmbh in Re (304) ITR 283 where an AOP was inferred on the ground that contracting parties were jointly and severally liable for the performance of the work.

Hyosung Corporation

The Authority for Advance Ruling in Hyosung Corporation Re. (2009) 314 ITR 343 ruled that parties cannot be treated as AOP merely because one of them is entrusted with supervisory responsibility.

Indira Balakrishna



The earliest decision on the issue is the decision of the Supreme Court in the case of CIT Vs. Indira Balakrishna (1960) 39 ITR 546 where the Court held that for an inference of association, there should be a shared object of producing income. Mere jointness is not enough. Jointness on account of accident or inheritance does not give rise to an AOP.

Great care is required in drafting the contracts considering the plethora of decisions on the issue. Members can come together for the object of getting the contract but there must be a clear intent for execution of contracts separately. Activity must be separately carried out and the contract should also be capable of division. The Delhi High Court in the case of Linde AG, has laid down the correct principles in determining as to whether an AOP is created or not. It also appears that the AAR in Hyundai Rotem has rightly distinguished its earlier ruling in Geoconsult. Even though an AOP was inferred in Geoconsult, the real test is to examine whether there was sharing of risk and in the absence of sharing of risk, inference of an AOP would not be proper.

***

Disclaimer:- Tax Quest is only for the purpose of information and does not constitute or purport to be an advise or opinion in any manner. The information provided is not intended to create an attorney-client relationship and is not for advertising or soliciting. K.Vaitheeswaran & Co. do not intend in any manner to solicit work through this Newsletter. The Newsletter is only to share information based on recent decisions and regulatory changes. The views expressed in the Article(s) are personal views of the author(s). K.Vaitheeswaran & Co. is not responsible for any error or mistake or omission in this Newsletter or for any action taken or not taken based on the contents of the Newsletter.

CHENNAI BENGALURU

Flat No.3, First Floor, No.9, Thanikachalam Road, T. Nagar, Chennai – 600 017. Tel.: 044 + 2433 1029 / 2433 4048

402, Front Wing, House of Lords, 15 / 16, St. Marks Road, Bengaluru – 560 001. Tel.: 092421 78157

Email: [email protected] [email protected]

newsletter sep 2015 - issue no.1

Government & Nonprofit