tax scout april – june 2019 copy2
TRANSCRIPT
FOREWORDAs a part of our regular quarterly update exercise, we are pleased to present the direct and indirect tax updates covering the material changes that took
st th place during the period from the 1 of April to 30 of June, 2019. We have also covered the judicial precedents covering some of the important decisions rendered by the Indian judiciary during this period.
As the cover story, we have identied that the decision to ratify the Multilateral Instrument (“MLI”) by the Indian Government is a very important initiative by it and puts Indian taxation system comparable with the global taxation regime. We have tried to discuss in greater detail about the various issues considered by the MLI and when would they become effective. This has the potential to transform the global taxation regime as individual aspects of individual treaties may no longer be the basis on which international taxation issues shall be discussed. This would also bring in
some sort of global coherence regarding a number of complex issues.
In addition to the above cover story, we have also dealt with other important developments and judicial precedents in the eld of taxation.
We hope you nd the newsletter informative and insightful. Please do send us your comments and feedback at [email protected]
Regards,
Cyril Shroff
Managing Partner
Cyril Amarchand Mangaldas
Email: [email protected]
TAX SCOUTA quarterly update on recent developments in Taxation Law
APRIL 2019 – JUNE 2019
© 2019 Cyril Amarchand Mangaldas01
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INDEX
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COVER STORY
• Welcome to the world of MLI: How will it impact India’s tax treaties ..............................................................................04
CASE LAW UPDATES- DIRECT TAX
Case Law Updates - International tax
• Kolkata ITAT holds income from testing services rendered outside India as FTS under the India-Finland DTAA .........15
• No withholding tax on payments made for services relating to GDR issue ....................................................................18
• Delhi ITAT holds that consideration received for preparation of design and drawings would be considered as business income, and not royalty, when there is a PE in India......................................................................................................20
Case Law Updates - Transactional Advisory
• Receipt of share application money relevant for trigger of Section 56(2)(viib) of the IT Act...........................................23
• Amounts paid towards discharge of mortgage obligation in connection with a property – not cost of acquisition .........25
• Bombay HC had held addition under Section 68 of the IT Act cannot be made merely due to large investments made through an investment vehicle........................................................................................................................................27
• Madras HC dismisses Cognizant's writ over share buy-back characterization ..............................................................30
• Mumbai ITAT holds buy-back of FCCB at discounted price not business income..........................................................33
Case Law Updates - Miscellaneous
• Bangalore ITAT treats customer relationship rights as goodwill eligible for depreciation ...............................................36
• Mumbai ITAT Deletes Notional Rental Addition on Unsold Inventory held as Stock-in-Trade........................................38
• SC vacates stay granted by Delhi HC on notication enabling retrospective exercise of powers under Black Money Act .............................................................................................................................................................40
CASE LAW UPDATES- INDIRECT TAX
AAR Rulings
• ITC can be claimed when consideration is paid through book adjustment.....................................................................43
Case Law Updates – Other judicial pronouncements
• Sale of goods by a Duty Free Shop not exigible to GST................................................................................................46
• Writ is maintainable for pre-arrest bail in case of offences under GST legislations........................................................48
• Transfer of land development rights not a taxable service .............................................................................................50
• ITC available on construction of immovable properties for letting out ............................................................................52
• Transitional credit permissible where no refund was claimed under erstwhile law ........................................................54
• Not mandatory to set up permanent bench of tribunal at place where permanent seat of HC is situated......................56
• DGAP is legally bound to investigate a proteering case once referred or noticed........................................................58
Regulatory Direct Tax Updates
• India-Marshall Islands Tax Information Exchange Agreement Notied ..........................................................................62
Regulatory Indirect Tax Updates
• Applicability of GST on additional/penal interest ............................................................................................................64
• Treatment of post-sales discounts under GST ...............................................................................................................64
• Clarication regarding place of supply in respect of services provided by ports ............................................................64
• Refund of taxes to the retail outlets established in departure area of an international airport beyond immigration counters making tax free supply to an outgoing international tourist..............................................................................64
• Regulations notied for electronic integration declaration (“EID”) in relation to export of goods....................................65
• DGFT amended the import policy for electronics and IT Goods ....................................................................................65
• Increase in the validity period of export authorization ....................................................................................................65
• Mechanism to verify IGST payments for goods exported out of India............................................................................65
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COVER STORY
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WELCOME TO THE WORLD OF MLI: HOW WILL IT IMPACT INDIA’S TAX TREATIES
1. Background
The Organisation for Economic Cooperation and Development (“OECD”) had undertaken a landmark Base Erosion and Prot Shifting (“BEPS”) project from the year 2009, at the behes t o f G -20 coun t r i es , i nvo l v i ng collaboration of more than 100 countries, in order to address the international tax avoidance techniques adopted by multinational companies (“MNCs”) to minimise their global tax liabilities. Such tax avoidance techniques generally refer to the strategies of MNCs that exploit gaps and mismatches in tax rules to articially shift prots to low or no-tax locations and reduce tax base for other high tax countries.
The intention was to revise the international tax framework in order to align it with the globally agreed position of taxing prots where the economic activities are carried out and value is created.
Carrying out such large scale changes on a treaty-by-treaty basis would have been time consuming and bilateral negotiations may have led to inconsistencies across treaties due to the inter-relations of the jurisdictions. Thus, BEPS Action Plan 15 was developed which contains the Multilateral Instrument (“MLI”) as an innovative mechanism that would allow a more coordinated approach with immediate effect, while retaining the exibility required to implement these changes in a broadly consensual framework to tackle base erosion.
On June 7, 2017, 68 developed and developing countr ies, including India, s igned the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Prot Shifting” in Paris, popularly referred to as MLI, to modify a large number of bilateral tax treaties entered into by over 68 countries. The signing of MLI represents the dawn of a new era with respect to the taxation of cross-border businesses. Technically, an MLI offers concrete solutions for governments to close loopholes in international tax treaties by transposing results from the BEPS project into
bilateral tax treaties worldwide.
While the MLI attempts to retain exibility by providing the countries a template of limited choices to choose from, it also mandates compliance with certain ‘minimum standards’. These minimum standards are aimed to counter treaty abuse and to improve dispute resolution mechanisms while providing exibility to accommodate specic tax treaty policies.
At the time of signature, India submitted a list of 93 tax treaties entered into by India with other jurisdictions that India would like to designate as Covered Tax Agreements (“CTA”) i.e. tax treaties to be amended through the MLI. Along with CTA list, India also submitted a provisional list of reservations and notications i.e. its MLI position with respect to various provisions of MLI.
Recently, on June 12, 2019, India announced her ratication of the MLI. The impact of the MLI on India’s CTAs shall be signicant and requires careful consideration for existing and proposed transactions and structures. As a next step, India also deposited its ratied MLI with the OECD with its nal positions on June 25, 2019.
India has notied 93 CTAs and as per the status updated by OECD till June 28, 2019, 29 countries (including India, Australia, Finland, France, Israel, Japan, Netherlands, New Zealand, Russia, Singapore, UAE, UK, etc.) have completed their ratication, out of which India has CTA with 22 countries.
2. Timelines for MLI
(i) Entry into force
For each country signing the MLI, the MLI shall come into force on the rst day of the month following the expiry of three months from the date of deposit of instrument of ratication with OECD.
Thus, as India submitted its instrument of ratication with the OECD on June 25, 2019, the MLI for the 22 countries with India will enter into force from October 01, 2019. For the remaining countries, the MLI will enter into force from the expiry of 3 calendar months from the end of the month in which these remaining countries submit their ratication of MLI.
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For each CTA, it also needs to be analyzed whether the other jurisdiction has also ratied the MLI and from what date, in order to ascertain the time from when the provisions become effective for the tax treaty.
(ii) Entry into effect
The timelines for the MLI to come into effect with respect to a CTA differs based on the type of taxation to which the modications apply.
• In case of withholding tax at source on amounts paid to non-residents such as royalties, fee for technical services, interest, capital gains, etc. – MLI will enter into effect where the event giving rise to such withholding taxes occurs on or after the rst day of the next calendar year that begins on the latter of the dates on which the MLI comes into force for each treaty partner.
For example, in case of India and Singapore, if the MLI enters into force for India on June 2019 and for Singapore on September 2018, the CTA date is June 2019 and the MLI will come into effect for all withholding taxes under the India-Singapore tax treaty which relate to an event occurring on or after January 2020.
For the purpose of its own application of MLI to withholding taxes, India has chosen to replace “taxable period” for “calendar year”. Accordingly, in the above example, MLI will cover a withholding tax payable in India if the event giving rise to such tax takes place on or after April 1, 2020, while it will cover a withholding tax payable in Singapore if such event takes place on or after January 1, 2020.
• For all other taxes – MLI will come into effect for taxable period beginning on or after an expiry of 6 calendar months from the CTA date.
Hence, in the above example, for taxes such as tax on bus iness p ro ts attributable to a PE, the MLI shall apply to such taxes levied in India from FY 2020-21, whereas it will apply for the purpose of such taxes levied in Singapore on or after January 1, 2020.
Thus, the provisions of MLI will also impact India’s tax treaties with countries who have listed India as a CTA and have already deposited the instrument of ra t i ca t ion w i th OECD, fo r bo th withholding taxes and other taxes with effect from FY 2020-21 and onwards.
Two countries can opt for different years – taxable year or calendar year. For both, the MLI will apply asymmetrically.
For the remaining CTAs, MLI will be effective after such countries ratify MLI. Thus, as the tax treaties will be impacted at an overall basis and the impact of such an amendment could be signicant, it would be relevant to analyse its impact on each of the articles.
3. Key provisions and their impact on India's bilateral tax treaties
Part I – Scope and interpretation of the terms
(i) Article 1 – Scope of the convention
Article 1 gives the scope of MLI and claries that it will modify all CTAs.
(ii) Article 2 – Interpretation of terms
Article 2 provides the denitions of various terms used in the MLI. The signicant extracts of the denition are as below:
• The term CTA means an agreement for the avoidance of double taxation with respect to taxes on income (whether or not other taxes are also covered) that is in force between two or more parties and/or jurisdictions and with respect to which each such party has made a notication to the Depository of the OECD listing the agreements which are intended to be covered through this MLI;
• A party means a jurisdiction which has signed the MLI and for which the MLI is in force; and
• The term contracting jurisdiction means a party to a CTA.
Part II – Hybrid mismatches
Part II of the MLI covers Article 3 to 5 containing provisions for prevention of double non-taxation by hybrid mismatch arrangements, an arrangement
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intended to secure a tax advantage within a multinational group resulting from a difference in tax treatment of the same nancial instrument or entity in different jurisdictions. These articles give the best practices (not minimum standards) to ensure that the benets are only granted to hybrid entities in appropriate cases.
(iii) Article 3 – Transparent Entities
MLI provides that income derived by or through a transparent entity shall only be considered income of a resident to the extent that income of such entity is treated for the purposes of taxation, as income of a resident of that contracting state. This provision is not a minimum standard and hence, it is optional for the countries whether to adopt the same or not.
India has reserved her right for non-applicability of the Article 3 in entirety.
Generally, India’s tax treaties do not contain a provision for scally transparent entities. Accordingly, an entity which is not “liable to tax” in the country where it has been formed may not qualify to be a resident to avail treaty benets.
Consequently, the eligibility of such entities to claim benet under India's tax treaties would continue to be as per the provisions of the particular tax treaty in this regard. Accordingly, the challenges faced by such entities like inability to claim credit of foreign taxes will remain.
(iv) Article 4 – Dual Resident Entities
MLI provides that residency of a person (other than an individual) who is resident in more than one contracting state (i.e. a dual resident entity), shall be determined by a Mutual Agreement Procedure (“MAP”) between the competent authorities of the contracting states having regard to its place of effective management (“POEM”), place of incorporation or constitution and any other relevant factors. It also provides that in absence of any agreement between the jurisdictions, such dual-resident entity will either not be entitled to any relief or tax exemption under the tax treaties except as agreed upon between the competent authorities of the contracting jurisdictions or will not be entitled to any relief or tax exemption at all.
At present, the OECD Model Convention provides that a dual resident entity shall be deemed to be a resident of the state in which its POEM is situated. Most of the tax treaties signed by India also contain the POEM clause as a tie-breaker rule to determine the tax residence of an entity.
India has not provided any reservation on applicability of this Article. Further, India has
1also chosen to apply this provision for 91 CTAs wherein residence of a dual resident entity will be determined based on MAP. Please note that this provision would apply only if the other treaty partner also agrees to apply Article 4 of the MLI.
(v) Article 5 – Methods for elimination of double taxation
Article 5 of the MLI refers to three options for preventing double non-taxation situations arising due to the residence state providing relief under the exemption method for income not taxed in the source state. As this is not a minimum standard, the fourth option available is to not adopt any of the options given above. Further, in case each contracting jurisdiction chooses a different option, the option chosen by a contracting jurisdiction shall apply with respect to its own residents.
India has expressed its reservation for Article 5 not to apply to any of its tax treaties in entirety. The possible reason for the same may be that India's tax treaties apply the credit method for providing relief from double taxation, the situation of double non-taxation (i.e. in both the source country and resident country) contemplated under Article 5 may not be relevant in the Indian context.
Part III – Treaty abuse
Part III of the MLI covers Article 6 to 13 containing provisions for prevention of treaty abuse. These are minimum standards in order to ensure a minimum level of protection against any treaty shopping being contemplated by certain MNCs.
(vi) Article 6 – Purpose of a CTA
Article 6 of the MLI provides a mandatory requirement to modify the text of the preamble of the CTA, by including the prescribed language to express the common intention of the
1 Except for Greece and Libya
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contracting states to eliminate double taxation. The language also includes the intent not to create opportunities for non-taxation or reduced taxation. Further, the language refers to a desire to develop an economic relationship or to enhance co-operation in tax matters, could also be added to the preamble if it is not already present.
Adoption of the above language is a mandatory requirement and accordingly, India’s tax treaties are likely to be modied to include the prescribed text. However, as there are no detailed discussions / guidelines available regarding this Article, it is not clear whether India has adopted the additional language regarding economic relationship and co-operation or not.
(vii) Article 7 – Prevention of Treaty Abuse
Article 7 of the MLI contains the provisions in relation to prevention of treaty abuse – which is a minimum standard. Under this Article, a benet under a CTA shall not be granted if it is concluded that obtaining the requisite benet was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benet, unless it is established that granting the benet would be in accordance with the object and purpose of the relevant provision of the CTA.
Certain jurisdictions may also choose to apply the provisions related to simplied limitation on benets (“LOBs”) provisions to their CTAs. Simplied LOB provisions require an entity to be able to claim relief in respect of an income, only if it is a 'qualied person' or if it is engaged in 'active business' and the income derived by such entity from India would need to be incidental to or emanate from its business. Also, (i) operating as a holding company; (ii) providing overall supervision or administration of group companies; (iii) providing group nancing; or (iv) making or managing investments (unless it is a bank or insurance company or registered securities dealer in the ordinary course of its business), do not qualify as 'active business' for the purposes of the MLI.
With regard to dealing with prevention of treaty abuse by applying the principal purpose test, India has not provided any reservation. As it is a minimum standard, it will apply to all CTAs.
Further, India has notied the list of 36 tax treaties which already contain the provision limiting the benet of the tax treaty if it is established that obtaining tax benet was one of the main purposes of the transaction. The provision of Article 7 shall be replaced by the language contained in the MLI where the other contracting state also noties with respect to this provision. Where the other contracting state does not notify this provision, the provision of MLI shall be superseded if the language of original provision is incompatible with this provision.
India has also chosen to apply the simplied LOB provision. If the other contracting state does the same, India’s CTAs may accordingly get amended to include the simplied LOB rule. At present, only 9 tax treaties signed by India have an LOB clause which shall be replaced by simplied LOB. MLI may supersede the language contained in the original provision if it is found to be incompatible with the MLI. Once adopted, a taxpayer will have to satisfy the simplied LOB rule in addition to the principal purpose test (“PPT”) to obtain the treaty benets.
(viii) Article 8 – Dividend Transfer Transactions
Article 8 of the MLI stipulates the conditions under which a person of one contracting state (holding shares benecially) can avail an exemption or limited rate of tax on dividends paid by another non-resident company. Article 8 requires the shares to be held by the benecial owner throughout a minimum holding period of 365 days in order to claim an exemption or lower withholding tax rate on dividend income. Contracting states can reserve the application of this Article in its entirety or reserve the holding period contained in any CTA, which is more or less than a period of 365 days.
India has notied 21 of its CTAs where a holding period of 365 days is proposed to be applicable in order to grant the benet of a concessional tax rate of dividend. If the other contracting states also notify these provisions, the provisions of the CTA would be replaced by Article 8 of the MLI. Further, India has reserved its right for the non-applicability of Article 8 on the India Portugal tax treaty where it already has a 24 month holding period condition.
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Please note that Article 8 may not signicantly impact India under Indian domestic tax regulations, DDT is payable by the company distributing dividends and such dividend is exempt in the hands of shareholder.
(ix) Article 9 – Capital gains from transfer of share deriving value from immovable property
Article 9 of the MLI provides for indirect transfer taxation to levy the capital gains tax arising from alienation of shares or comparable interest of companies or other entities such as partnership or trust; that derive more than a certain percent of their value (“Value Threshold”) from immovable property, in the state where the immovable property is situated.
Article 9 provides for 2 (two) alternatives: (a) Option 1, which provides that where Value Threshold is met at any time during the 365 days preceding the transfer, capital gains from the sale of shares or comparable interests shall be taxable in the country where immovable property owned by the entity is situated. Contracting states can bilaterally negotiate the Value Threshold in their tax treaties; and (b) Option 2, which is similar to Option 1 but xes a Value Threshold of more than 50% for the trigger of source taxation in Article 9.
India has chosen to apply Option 2, and the look back period of 365 days triggers the source taxation of the transfer of shares or comparable interest where such shares or comparable interest derive more than 50% of their value form immovable property situated in India. While India has notied 71 of its CTAs which contain provisions dealing with source taxation of transfer of shares which derive their value from immovable property as mentioned in Option 1. In the event that the other contracting states also choose Option 2, the provisions of CTAs would be replaced by this provision given in MLI.
If the other contracting state does not notify the provisions of the respective CTAs, the provisions of MLI shall be superseded to the extent the provisions of CTAs are incompatible with the MLI.
(x) Article 10 – Anti-abuse rule for permanent establishment situated in a third jurisdiction
Article 10 of the MLI provides that where:
i. an enterprise of a contracting state to a CTA derives income from another contracting state and the former state treats such income as attributable to a PE of the enterprise situated in the latter state;
ii. the prots attributable to that PE are exempt from tax in the former state, then the benets of the CTA shall not apply to any item of income on which tax in the latter state is less than 60% of the tax that would be imposed if that PE was situated in the former state. In such a case, the MLI provides that such income shall remain taxable as per the domestic law of the latter state. The MLI also provides that any income derived from the former state in connection with / or incidental to active conduct of a business carried out through the PE (other than business of making, managing or simply holding investments for enterprise’s own account, unless these activities are banking, insurance, or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively) shall not be subject to tax in the latter state.
iii. If benets are denied as mentioned above with respect to item of income derived by a resident of a contracting state, the resident may request the competent authority and then, the competent authority may still grant the benets if it is determined that granting the benet is justied.
India has neither expressed any reservation nor has it notied any provisions of its CTA. Consequently, the MLI provisions in this respect would supersede the CTA and would apply to the extent that the provisions of the latter are incompatible with Article 10 of the MLI.
(xi) Article 11 – Application of Tax Agreements to restrict a Party's right to tax its own residents
Article 11 provides a saving clause to clarify that CTA shall not affect the right of taxation of a contracting state to tax its own residents, save for certain benets granted, under the provisions of the CTA.
India has neither expressed any reservation nor has it notied any of its CTA, which contain such a provision. Consequently, the MLI provisions in
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this respect would supersede the CTA and would apply to the extent that the provisions of the CTA are incompatible with Article 11 of the MLI.
Part IV – Avoidance of Permanent Establishment Status
Part IV of the MLI covers Articles 12 to 15 containing mechanism for amendment of denition of PE in the existing tax treaties. However, the rules of attribution of prots to a PE have not been changed.
(xii) Article 12 – Articial Avoidance of PE through commissionaire arrangement and similar strategies
The MLI provides for a broader dependent agency PE rule. In addition to its applicability to persons having the authority to conclude contracts, the agency PE rule now extends to persons who habitually play the principal role in the conclusion of contracts that are routinely concluded, without material modications by the enterprise and these contracts are in the name of enterprise, or for transfer of ownership or granting right to use a property, or for provision of services. The activities described would however not create a PE, if carried on by certain independent agents in ordinary course of business.
Under the MLI provisions, a person cannot be considered an independent agent if he acts exclusively or almost exclusively on behalf of a person closely related to such enterprise. Article 12 gives an option to countries to opt out of this Article in its entirety.
While this is not a minimum standard and the MLI gives a right to countries not to adopt this article in entirety, India has not expressed any reservation and has notied all of its CTA, which contain provision(s) dealing with agency PE. If the other contracting states also notify the CTA, the provisions of the CTA would be replaced by Article 12 of the MLI.
However, if the other contracting state does not notify the provisions of the respective CTA, the MLI provisions contained in Article 12 would not apply to the CTA.
(xiii) Article 13 – Articial Avoidance of PE through specic activity exemption
Article 13 deals with specic activity exemptions to PE and provides two options to achieve this.
Option 1 provides that listed activities would qualify for specic activity exemption only if such activity qualies as preparatory or auxiliary in character. On the other hand, Option 2 allows contracting states to retain the automatic exemption to listed activities, irrespective of the same being preparatory or auxiliary based on the premise that these specically listed activities are intrinsically preparatory or auxiliary.
Additionally, Article 13 also provides for adopting an anti-fragmentation rule which denies specic activity exemption where the activities carried out by the foreign enterprise along with its related parties, at the same or another place, exceed the preparatory or auxiliary character.
India has chosen Option 1 and has accordingly notied all of its CTA which contain provisions dealing with preparatory and auxiliary activity exemption. When the other contracting state chooses Option 1 and also noties the CTA, the relevant provisions of the CTA would be replaced by Option 1 of Article 13 of the MLI. However, in case the other contracting state chooses Option 2, then due to incompatibility, the MLI provisions in Article 13 would not apply.
Where the other contracting state does not notify the provisions of the respective CTA, the MLI provisions contained in Article 13 would not apply to the CTA. It may be pertinent to note that India has not notied any provisions in respect of the anti-fragmentation rule and hence, it would not be relevant for India's CTAs.
(xiv) Article 14 – Splitting of contract
Article 14 of the MLI provides for determining time thresholds in a tax treaty for construction / installation / supervisory or any PE provision have been exceeded under a CTA. The Article provides for an aggregation of time spent on connected activities by related parties in the same project to determine the threshold. This provision is optional and does not apply where either of the contracting states have made a reservation on the application of this Article.
India has neither expressed any reservation nor has it notied any of its CTAs. In the event that the other contracting state noties or does not notify the CTA, the provisions of Article 14 of the MLI would apply to the extent the provisions of the CTAs are incompatible with Article 14. This is
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applicable unless the other contracting state expresses its reservation on the applicability of Article 14, in which case those CTAs would not be impacted by this article.
(xv) Article 15 – Denition of closely related to entity (“CRE”)
Article 15 of the MLI provides the denition of CRE for the purposes of Article 12-14 of the MLI. For this purpose, a related party in relation to an enterprise covers a person who has control over the other enterprise or both are under control of same persons or enterprise. This provision also deems a person as a related party if such person possesses directly or indirectly more than 50% of the: (i) benecial interest; or (ii) aggregate vote and value of shares of an enterprise.
India has not expressed any reservation; the denition would apply to the CTA unless the other contracting partner to the CTA expresses a reservation on applicability of Article 12 - Article 14 of the MLI.
Part V – Multi Agreement Procedure (“MAP”)
Part V of the MLI provides the minimum standards for improving dispute resolution and the best practices associated with it.
(xvi) Article 16 – MAP
Article 16 requires contracting states to allow taxpayers to present a MAP case to the competent authorities (“CA”) of either of the contracting states unlike the earlier procedure of being able to present the case only to the CA of the state of residence. Furthermore, Article 16 requires that MAP access should be allowed in a case where the MAP application is presented within three years of the rst notication of the action resulting in taxation not in accordance with a CTA.
Under the MLI, CAs of both the states need to endeavour to resolve a case under MAP if they are not able to arrive at a satisfactory solution unilaterally. Also, the MAP agreements are to be implemented notwithstanding any time limits under domestic laws. The CA may also consult together for the elimination of double taxation in cases not provided for in the CTA.
i. Bilateral recourse to MAP
India has reserved its right for not adoptingthe modied provisions on the basis that itwould meet the minimum standard by allowing MAP access in the resident state and by implementing a bilateral notication process. Thus, each of the CTA would have a bilateral notication process to allow MAP recourse not only to Indian residents but also residents of other contracting states of CTA.
ii. Time period of three years to invoke MAP
India has notied tax treaties which provide a lower limitation period of (a) 2 (two) years and; (b) those that have minimum period of 3 (three) years for presenting a MAP case. Thus, the notied tax treaties with Belgium, Canada, Italy and UAE would now provide a minimum time limit of three years for MAP access.
India has also noties a list of 7 tax treaties where such a provision for time limit doesnot exist. Post the MLI, such tax treaties would also have this minimum standard provided the other contracting jurisdiction also makes a comparable notication.
iii. Bilateral MAP when unilateral MAP fails
India has notied its tax treaties which require a provision enabling bilateral MAP with the CAs of both the contracting states when unilateral MAP does not resolve the dispute.
(xvii) Article 17 – Secondary Adjustments
As a minimum standard under dispute resolution, the contracting states are to provide MAP access in transfer pricing (“TP”) cases. Also, as a complementing best practice, the MLI suggests that contracting states include a provision to provide that where a TP adjustment is made in one of the contracting states,the other contracting state shall provide corresponding adjustment. The MLI provides that a contracting state may opt out of this provision to the extent the CTA already contain such a provision.
India has reserved its right for the entirety of Article 17 not to apply to CTA and has notied its CTA that already contain the enabling provision
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for secondary adjustment. Accordingly, the provisions of Article 17 will not apply to the treaties with these countries if the other contracting jurisdiction agrees to the same. For CTA that do not contain such a provision, the provisions of Article 17 would apply to the extent the provisions of the CTA are incompatible with the former.
4. Illustrative analysis of Articles of MLI having impact on certain tax treaties of India
Given below is a comparative of impact on India’s tax treaties with certain countries in order to give an indication of how the Articles of existing tax treaties would be impacted due to MLI:
Sl.
No.
MLI provision Impact of MLI on India’s tax treaties
Singapore Netherlands Japan France
1 Article 2 – CTA Both countries have covered each other as CTA 2 Article 4 – Dual
resident entities
Does not
apply
Article 4(3) of existing tax
treaty to be
replaced by
Article 4(1) of
MLI.
Article 4(2) of
existing tax
treaty to be
replaced by
Article 4(1) of
MLI. However,
no discretionary
relief can be
provided by
CA.
Does not apply
3
Article 6 – Purpose
Existing treaty language to co-exist along with additional language
prescribed (minimum standard). 4
Article 7 –
Prevention of
treaty abuse
PPT to apply and supersede the provisions of the tax treaty to the
extent incompatible with MLI. Simplied LOB not adopted by
these jurisdictions.
5
Article 8 –
Dividend
transfer
transaction
Does not apply
6
Article 9 –
Capital gains
from transfer of
share deriving
value from
immovable
property
Does not
apply
Source country
to get taxing
right if value
threshold met
anytime during
365 days
preceding the
date of
transfer.
Threshold for days and percentage
shareholding to be introduced and
shall supersede the provisions of
tax treaty to the extent
incompatible with MLI.
7
Article 10 –
Anti abuse rule
for PE situated
in third
jurisdiction
Does not
apply
MLI provision supersedes the
provisions of tax treaty to the
extent incompatible with MLI.
Does not apply
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8 Article 11 –
Application of
Tax Agreements
to restrict a
Party's right to
tax its own
residents
Does not apply
9
Article 12 –
Articial
Avoidance of
PE through
commissionaire
arrangement and
similar
strategies
Does not apply
Extended denition of dependent
agent given in MLI applicable.
Independent agent denition as
per MLI to apply
10
Article 13 –
Articial
Avoidance of
PE through
specic activity
exemption
Does not
apply
Activities carried on individually
or collectively are preparatory or
auxiliary in nature. Also, anti -
fragmentation provision shall
apply.
Anti -
fragmentation
provision shall
apply
11
Article 14 –
Splitting of
contract
Does not
apply
MLI provision
supersedes the
provisions of
tax treaty to
the extent
incompatible
with MLI
Does not apply
12
Article 16 –
MAP
Does not apply
Further, it is relevant to note the following in respect of certain other countries:
(I) US is not a party to the MLI.
(ii) MLI should not apply for China, Germany and Mauritius as these countries have not included India as a CTA.
(iii) Neither India nor Hong Kong have included each other as CTA, so the MLI shall not apply with Hong Kong.
Hence, India’s DTAA with the above jurisdictions shall not be impacted by the MLI.
12
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5. Way forward
The MLI marks a key milestone in the implementation of the BEPS project.
India’s involvement in the rst signing ceremony of MLI indicates India’s commitment and her proactive approach in combating BEPS. The success of the MLI would also depend on the number of countries that will sign it.
Having said the above, the OECD needs to be applauded for coming with a quick alternative as compared to the mammoth task of modication of more than 3,000 tax treaties. It is alsoworth noting that the OECD has done this phenomenal work over the last 4-5 years.
With the PPT being implemented as a minimum standard and strategies for avoidance of PE being tackled by Article 12 to 14 of the MLI, the network of the bilateral tax treaties will undergo a vital change. In the short and medium term, the MLI is likely to increase the complexity of doing business with other jurisdictions before the ambiguities are settled and stability is established. However, in a long run, the MLI will go a long way towards reducing BEPS.
13
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CASE LAW UPDATES
- DIRECT TAX
- INTERNATIONAL TAX
CASE LAW UPDATES
14
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KOLKATA ITAT HOLDS INCOME FROM TESTING
SERVICES RENDERED OUTSIDE INDIA AS FTS UNDER
15
THE INDIA-FINLAND DTAA
2In the case of Outotec (Finland) Oy, the Kolkata
ITAT held that in a sale of designs and drawings to
Indian buyers, income in the hands of the Finnish
seller would not be taxable in India in the absence of a
PE, since it would be characterized as business
income and not royalty or FTS. The ITAT has also held
that income from testing services rendered in Finland
but used by service recipients in India, would be
taxable in India despite the presence of a unique
clause in the India-Finland DTAA, which confers the
right of taxation on the country in which the service
was performed.
FACTS
Outotec (Finland) Oy (“Assessee”), incorporated in
Finland and a resident of Finland, was involved in the
business of providing solutions for customers in the
metal processing industry. During AY 2015-16, the
Assessee had earned over INR 28 Million from Indian
entities from the sale of designs and drawings and INR
33 Million from rendering testing and other services,
which were not offered to tax. The AO sought to tax the
consideration for sale of designs and drawings as
royalty taxable under Section 9 of the
IT Act read with Article 12 of the
India-Finland DTAA and income
from rendering testing services as
royalty and alternatively as fees for
technical services, both under the IT
Act and the India-Finland DTAA. The
Assessee objected to the additions
made, on the basis that the income
from sale of designs and drawings was for the sale of a
copyrighted product and was business income not
taxable in absence of a PE in India, and the income
from rendering of testing services was not taxable
basis Article 12(5) of India-Finland DTAA as the
testing services were rendered outside India.
However, the AO rejected the contentions of the
Assessee and proceeded to bring the income to tax.
The additions made by the AO in the draft assessment
order were conrmed by the DRP. Thus, the additions
were sustained in the nal assessment order.
Aggrieved by the order of the AO, the Assessee went
on to appeal before the ITAT.
ISSUES
• Whether the income from ‘sale’ of designs and
drawings by the Assessee constituted royalty
taxable in India?
• Whether income derived from rendering testing
and other services in Finland for Indian
customers constituted fees for technical
services taxable in India?
ARGUMENTS
In relation to the sale of designs and drawings, the
Assessee argued that the Assessee had standard
technologies available with it, based
on which the designs and drawings
were prepared outside India, and the
sale was effected outside Indian
territory with the consideration
received outside India in foreign
currency, and therefore, the same
would not be taxable in India. Relying
on the ITAT orders in the case of the
Assessee’s group concerns for past AYs, the
Assessee submitted that the income was neither
royalty nor FTS, and that the business income was not
chargeable to tax in the absence of a PE in India. On
the contrary, the IRA drew attention to the ‘sale’
“”
FTS under Article 12(5) of theIndia-Finland DTAA is
taxed where the services are‘used’, immaterial of where
they are ‘performed’.
2 Outotec (Finland) Oy, Kolkata v. DCIT, ITA No. 2601/Kol/2018, decided on May 31, 2019.
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agreements, which seemed to allude that the
Assessee only grants the Indian customers the right to
use the designs and drawings and no title in designs
and drawings was transferred. Further, the IRA
argued that the designs were customized as per the
needs of the Indian customers and then imbedded into
their plants.
Second, with regard to the income from testing
services, the Assessee invoked the uniquely worded
special carve-out provided within Article 12(5) of the
India-Finland DTAA, under which unlike the taxability
in the source country, fees received in respect of
technical services is taxed in the country where the
services are performed. The Assessee claimed that
since all the services were rendered in Finland and no
employees of the Assessee visited India at any point
for this purpose, the same would be taxable only in
Finland and not in India. The IRA on the other hand,
sought to apply the source rule, which is codied in the
rst sentence of Article 12(5) of the India-Finland
DTAA. The source rule directly confers the right of
taxation to the country in which the payer is a resident.
The second sentence appears as a carve-out to the
source rule in the India-Finland DTAA. The IRA
contended that not applying the source rule would
amount to a selective reading of the Article which
would be inconsistent with the scheme of Article 12(5).
As per the provisions of section 9(1)(vii) of the IT Act,
since the services, although rendered in Finland, had
been availed in India for the business in India, the
source country, i.e., India would have the right to tax
the income.
DECISION
On the question of taxability of the sale consideration
for drawings and designs, the ITAT largely deferred to
the observations of the Kolkata ITAT in the case of the 3
Assessee’s sister concern pertaining to an earlier AY.
In that case, the ITAT had, upon studying the context of
the transfer of designs and drawings, had held that the
income from such transfer did not amount to royalty,
on the basis of the fact that transfer was for the use of a
copyrighted product and not the copyright itself.
Further, it had been noted that there were restrictions
on the commercial usage or exploitation of the
drawings, i.e., they were to be used by Indian
customers for internal purposes of setting up their
plant, and not for commercial exploitat ion.
Accordingly, the ITAT had held that any payment for a
product that could not be readily commercially
exploited, would not constitute royalty. The ITAT in the
Assessee’s case concurred fully with the view taken
by the ITAT in the case of the Assessee’s sister
concern. Further, the nding of the DRP regarding
FTS was reversed by the ITAT. Thus, it was held that
the consideration was paid for sale of a product which
was to be embedded in the plant set up by Indian
customers, and was, therefore, not in the nature of
royalty or FTS, but was in the nature of business
income. As the Assessee did not have a PE in India,
the income was held as not taxable in India.
Next, on the issue of income from testing services, the
ITAT engaged in a reading of the second sentence of
Article 12(5) of the India-Finland DTAA and concluded
that the same does not apply to the Assessee’ case,
since the results of the Finnish testing services were
‘used’ in India. Since the payment in question was
made not for the testing process itself, but for the
results of the testing, which were utilized in India by the
Indian customers (i.e. service recipients), the same
would be taxable in India under the provisions of the IT
Act.
SIGNIFICANT TAKEAWAYS
In respect of royalty, the ITAT has meticulously set out
its views on the issue relating to income from sale of
copyrighted material not being royalty / FTS, but
business income which is not taxable in India in the
absence of a PE.
However, with regard to testing services, the ITAT
appears to have combined the provisions in the India-
Finland DTAA pertaining to royalty and FTS. Under
Article 12(5), while the royalty paid for ‘use’ of a right or
property is taxed in that state where the same is used,
FTS is taxed in the state where the services are
‘performed’. The ‘usage’ criterion is only associated
with royalty payments, and not with FTS payments,
the test for which relates to whether the services were
3 Outotec Gmbh v. DCIT, (2015) 172 TTJ 337 (Kolkata - Trib.).
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‘performed’ in one of the countries. In order to bring the
Assessee’s income to tax in India, it appears that the
ITAT has extended the IRA’s tax net beyond what is
contemplated in the second sentence of Article 12(5)
of the DTAA, without adducing reasons for taking such
a view. In effect, the ITAT has expanded the scope of
‘performance’ to include ‘usage’, whereas in a typical
service contract, the two are diversely different stages.
The application of this unduly broad ‘usage’ criterion to
levy tax on FTS takes away the special benet
envisaged for the residents of India and Finland under
the DTAA. In the absence of any other reported orders
interpreting this sentence of the India-Finland DTAA,
reliance on this judgment would not be advisable, and
one will have to wait for more judicial interpretations to
come out from the Courts to examine the real intention
of the special carve-out provision in this DTAA.
17
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NO WITHHOLDING TAX ON PAYMENTS MADE
FOR SERVICES RELATING TO GDR ISSUE
18
4In the case of Indusind Bank Ltd, the Bombay HC
held that the payment made to a non-resident towards
services in relation to issuance of Global Depository
Receipts (“GDR”) would not be taxable in India as
FTS, accordingly there would no requirement to
withhold tax.
FACTS
Indusind Bank Ltd. (“Assessee”), a scheduled bank
registered under the Banking Regulation Act, 1949,
proposed raise capital aboard, through issuance of
GDRs. The Assessee inter alia engaged Amas Bank
Ltd (“Banker”), being an entity incorporated in United
Arab Emirates, to render services as the global
coordinator and the lead merchant banker to the GDR
issue. Pursuant to the terms of engagement between
the Assessee and the Banker, the Assessee made
certain payments to the Banker towards the service
rendered in relation to the issuance of the GDRs,
without deducting any tax at source.
The AO was of the opinion that
services rendered in relation to GDR
issuance are in nature of FTS and
accordingly, tax was required to be
withheld by the Assessee on such
payments. While the CIT(A) upheld
the order of the AO, the ITAT set aside the CIT(A)’s
order and held that the said remuneration towards
services was not taxable in India and no tax was
required to be withheld by the Assessee. Being
aggrieved of the order of the ITAT, the IRA approached
the HC.
ISSUES
Whether the payments made to the Banker towards
services in relation to GDR issuance are in nature of
FTS and liable to tax withholding under Section 195 of
the IT Act?
ARGUMENTS
The Assessee argued that the services provided by
the Banker were not taxable in India, as the services
rendered by the Banker were not utilized or rendered
in India. The IRA on the other hand contended that
Section 9 of the IT Act, which deals with the accrual of
FTS in India, has been amended to provide that
whether the non-resident was resident in India and
had a place of business connection in India, or had
rendered services in India, would be inconsequential
in determining the taxability of FTS in India.
Accordingly, it was contended that the payment made
for the services were in the nature of FTS and
accordingly, the Assessee was liable to withhold tax
on the same.
DECISION
The Bombay HC at the very outset claried that as per
Section 9 of the IT Act, FTS would
not be taxable in the hands of a non-
resident taxpayer, if the resident
payer (i.e. Assessee) utilizes the
services, with respect to which FTS
is paid/payable, for business or
profession carried by it outside India
or for the purposes of earning
income from any source outside India. Accordingly,
the HC upheld the decision of the ITAT and held that in
the present factual matrix the payment made for the
services rendered by the Banker was not taxable in
India as FTS, as such services were not utilized in
India.
The HC also rejected the arguments adopted by the
IRA and claried that the concerned amendments to
Section 9 were aimed at de-linking the taxability of
FTS in India from factors such as whether or not the
non-resident had a business connection in India or
had rendered services in India, which is very different
from the service having been consumed/utilized in
“”
Service fees paid outside forservices obtained in relation to
GDR issue is not taxableas FTS in India.
4 CIT v. Indusind Bank Ltd TS-223-HC-2019 (Bombay HC).
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India. Accordingly, the HC reiterated that since the
services of the Banker were not used by the Assessee
for carrying on its business in India, payments made
for such services cannot be said to be accrue or arise
in India. The HC relied upon the SC decision of GE 5India Technology Center P. Ltd., wherein it was held
that the requirement to withhold tax under Section 195
of the IT Act would only arise only when the payment
was chargeable to tax in India and held that since the
payment made to the Banker was not taxable in India,
no tax was required to be withheld on the same.
SIGNIFICANT TAKEAWAYS
This decis ion of the HC c lar ies that the
aforementioned amendment to Section 9(1) of the IT
Act are merely claricatory in nature and the actual
test of accrual of FTS in India, continues to be whether
the services for which such FTS is paid, is being
utilized for the purposes of carrying on business or
profession in India or not. Further, it may also be noted
that the said judgement did not deal with the question
of whether the consideration paid for the services
rendered by the Banker as global coordinator and lead
merchant banker to a GDR issuance, would qualify as
FTS under the IT Act, which may have been a
pertinent factor in determining the taxability of
payments made to bankers in case of an issuance of
securities. However, in the case of Mahindra and 6
Mahindra, the ITAT special bench dealt with
the characterization of consideration paid to non-
resident lead bankers of a GDR issuance and the
tribunal held that management commission and
selling commission received by lead bankers was in
nature of FTS, while the underwriting commission
would not qualify as FTS since the underwriting
services are de hors any technical, managerial and
consultancy services.
5 GE India Technology Center P. Ltd v. CIT (2010) 327 ITR 456 (SC).6 Mahindra and Mahindra v. DCIT (2009) 30 SOT 374.
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DELHI ITAT HOLDS THAT CONSIDERATION RECEIVED
FOR PREPARATION OF DESIGN AND DRAWINGS
20
7In the case of PJSC Stroytransgaz, the Delhi ITAT
held that the share of revenue received by a non-
resident, as part of the consortium made for projects
executed in India, shall be treated as its business
income and not as royalty.
FACTS
PJSC Stroytransgaz (“Assessee”) is a Russian
company having a branch ofce in India. During the
relevant AYs (i.e. AYs 2004–05, 2005–06 and
2006–07), the Assessee participated in water supply
augmentation project and oil pipeline project, etc. As a
part of the water supply project, the Assessee entered
into a consortium with Essar Constructions and Indian
Oil Corporation to meet the requirement of technical
qualication. With the same consortium, the Assessee
also entered into a supplementary agreement for the
division of work, as per which the
Assessee was to provide project
management services. This was to
be provided by the branch ofce of
the Assessee and the Assessee
would provide specialist manpower
for undertaking these services.
Further, it was also agreed that the
Assessee would directly provide
technical expertise and technical know-how for an
amount of USD 10 million. Therefore, the revenue
from this project was bifurcated by the Assessee into
two parts, one in the nature of FTS, which was
received by the branch ofce of the Assessee, and the
other in the nature of royalty, which was received by
the Assessee for providing know–how and technical
expertise to the consortium.
The AO refused to treat the additional income received
by the Assessee as royalty but instead treated it as
business income in the hands of the Assessee. On
appeal to the CIT(A), the CIT(A) upheld the order of
the AO. Being aggrieved by the decision of the CIT(A),
the Assessee has led an appeal before the ITAT.
ISSUE
Whether the income received by the Assessee from
the consortium, for providing technical know-how and
expertise, was in the nature of royalty or business
income?
ARGUMENTS
The Assessee argued that the principal focus of
Assessee’s business (not that of its branch ofce) was
preparation of designs for construction of pipeline
systems. Therefore, the technical
know-how and expert ise in
relation to the project was to
be rendered by the Assessee
directly and in relation to that the
income earned by the Assessee
constituted royalty income only.
Further, the Assessee argued that the technical bid
preceded the nancial bid and the Assessee was
involved in the technical bid, therefore, the conclusion
of the IRA that the Assessee provided services at the
bidding stage only is an erroneous conclusion drawn
without understanding how the pipeline business
worked. For strengthening its argument, the Assessee
also relied on the decision of Delhi ITAT in the case of 8
Iveco Spa, wherein payment received by a non-
resident having branch ofce in India was treated as
“”
Share of the non-residentAssessee for services renderedas a part of consortium would constitute business income.
WOULD BE CONSIDERED AS BUSINESS INCOME,
AND NOT ROYALTY, WHEN THERE IS A PE IN INDIA
7 PJSC Stroytransgaz v. Deputy Director of Income Tax, Circle 2(2), New Delhi; [2019] 106 taxmann.com 114 (Delhi- trib.).8 Iveco Spa v. ADIT (IT); [2016] 160 ITD 348.
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royalty and not as business income.
On the contrary, the IRA argued that the Assessee was
one of the partners in all of the projects executed in the
year. As the Assessee was a part of the consortium,
royalty payment received by it amounted to paying
royalty to oneself. According to IRA, the matter of fact
is that the Assessee received its own share of income
from the projects executed during the year and it
chose to bifurcate such income into FTS for branch
ofce and royalty for itself. There was no “transfer” of
technical know-how. Moreover, the fact that branch
ofce constituted PE of the Assessee has not been
disputed by the Assessee at all. Thus, entire payment
received by it has to be attributed to the PE in India and
accordingly, ought to have been taxed as business
prot, and Article 12 of the DTAA was not applicable.
The bifurcation of revenue received by the Assessee
into FTS and royalty was irrelevant as per IRA.
DECISION
The ITAT concluded the case in favour of IRA by
holding that the Assessee being a member of
consortium cannot pay royalty to itself and the
payment received by it cannot be bifurcated into
royalty and FTS, but has to be attributed to the PE of
the Assessee and shall be subject to tax accordingly.
Insofar as the judicial precedent relied on by the
Assessee was concerned, the ITAT held that in the
said case, the branch ofce was only rendering liaison
services and did not participate in any revenue
generating activities including activities, payment for
which was treated as royalty by the Assessee.
Therefore, no income was attributable to the branch
ofce of non-resident.
SIGNIFICANT TAKEAWAYS
The ITAT did not agree with the contention of the
Assessee that the income earned by it through its
Project Ofce ought to be bifurcated into Royalty and
FTS and part of the income received outside India
should not be chargeable to tax in India and held that
the entire income ought to be attributed to the PE in
India. It also did not make any attempts of delving into
attribution of income to the PE and decided the case in
favour of IRA by holding that the Assessee cannot pay
royalty to itself.
It appears that the ITAT got carried away by the clause
forming part of Article 7 of most of the DTAAs executed
by India which provide that in determining the prots of
the PE, royalties paid to the head ofce by the PE
should not be taken into account. It must be noted that
royalties, in the instant case, were not paid by the
branch ofce but by the project owner who has
assigned the contract of pipelines to the consortium.
Even otherwise, it is worthwhile to note that India-
Russia DTAA does not have a similar case i.e. Article
7 of the India-Russia DTAA does not provide that
royalties paid by the PE to the head ofce should not
be taken into consideration. Therefore, the decision of
the ITAT to this extent is questionable.
It is a general practice to unbundle the EPC
contract into three different parts viz. preparation of
design and drawings; supply of materials; and
construction / execution of the project. Out of these
three activities, preparation of design and drawings
would not be subject to tax in India if the same is
supplied to India as a product (i.e. the project owner
should not have right to exploit the intellectual property
commercially but only use it for the contract in
question) and in cases where the project owner
reserves the right to commercially exploit it, the same
could be construed as royalties. In the instant case, it
is not clear whether the project owner reserved any
such right. Even if such right was retained by the
project owner, the same could only be construed as
royalty in the hands of the Assessee but should not
form part of the business income of the Assessee,
especially when the agreement specically divides the
consideration to be paid for such preparation of
designs/drawings and when the same is rendered
entirely from outside India. This proposition has been
conrmed by multiple decisions, including the Delhi 9
HC in the case of Linde AG . Therefore, the instant
decision of the ITAT can be construed to have taken an
aggressive position against the tax payer.
9 Linde AG, Linde Engineering Division & Anr v. DDIT in W.P. (C) NO. 3914/2012 & CM No.8187/2012.
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CASE LAW UPDATES
- DIRECT TAX
- TRANSACTIONAL ADVISORY
CASE LAW UPDATES
22
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RECEIPT OF SHARE APPLICATION MONEY RELEVANT
FOR TRIGGER OF SECTION 56(2)(VIIB) OF THE IT ACT
23
The Kolkata ITAT in the case of M/s Diach Chemicals 10& Pigments Pvt. Ltd, held that the application of
Section 56(2)(viib) of the IT Act would be triggered on
the date of receipt of application money for shares,
and not on the date of allotment of shares.
FACTS
Diach Chemicals & Pigments Pvt. Ltd (“Assessee”)
proposed to issue equity shares at a premium in FY
2011-12 and the received the share application money
for such shares in the same FY. However, the shares
were actually allotted in FY 2012-13. The AO
observed that the shares were issued for a price in
excess of the FMV of the shares and accordingly,
bought the excess amount of premium received by the
Assessee (i.e. the issue price less the FMV of the
shares) to tax, in its hands under Section 56(2)(viib) of
the IT Act. In appeal, the CIT (A) concurred with
argument of the Assessee and held that since Section
56(2)(v i ib) of the IT Act was
introduced with effect from FY 2012-
13 and the consideration for the
shares was received in FY 2011-12,
therefore, the provisions of Section
56(2)(viib) of the IT Act would not
apply in the instant case. Aggrieved
of the order of the CIT (A), the IRA
approached the ITAT.
ISSUES
Whether Section 56(2)(viib) of the IT Act, which came
into effect from FY 2012-13, would apply to shares for
which the share application money was received in FY
2011-12, while the shares were allotted in FY 2012-
13?
ARGUMENTS
The IRA argued that since the transaction was
completed in FY 2012-13 in which the shares were
allotted, the applicability of Section 56(2)(viib) should
be determined in such year. The IRA also placed
various evidences on record to show that a part of the
consideration for the shares was also received in FY
2012-13. Accordingly, it was argued that since money
was also received in the year in which Section
56(2)(viib) came into effect, the same should be
applicable.
On the other hand, the Assessee argued that since no
consideration was received in the relevant FY i.e.
2012-2013, therefore, Section 56(2)(viib) was not
applicable in the instant case.
DECISION
The ITAT noted that as per Section 56(2)(viib) of the IT
Act the year under consideration for
determining the applicability of the
said section is the year in which the
consideration for issue of shares is
received and the year in which
shares are allotted would not be
relevant. Thus, ITAT held that since
the consideration for issue of shares
i.e. the share application monies was received in FY
2011-2012, and the Section 56(2)(viib) became
effective from FY 2012-13, Section 56(2)(viib) would
not be applicable in the instant case.
SIGNIFICANT TAKEAWAYS
This judgement provides a much needed relief for
taxpayers who have been litigating this issue before
the lower tax authorities. However, this judgment may
sought to be distinguished by tax authorities on the
“”
Section 56(2)(viib) is triggeredin the year in which
share application moneywas received.
10 ACIT v. M/s Diach Chemicals & Pigments Pvt. Ltd ITA No. 564/Kol/2017 (Kolkata ITAT).
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premise that the ITAT did not rule on merits relating to
the share application being split in both FY 2011-12
and FY 2012-13. Additionally, the Delhi ITAT in the 11case of M/s Cimex Land and Housing Pvt. Ltd., in a
similar fact pattern has rendered a contrary
judgement. The Delhi ITAT held that though the share
application money was received in the year in which
Section 56(2)(viib) of the IT Act was not applicable, but
the fact that the shares were actually allotted in the
year in which Section 56(2)(viib) of the IT Act, was
applicable would make the taxpayer liable to justify the
valuation under the said section.
This contrary decision may add to the woes of the
taxpayers litigating this issue and one would have to
wait for a higher court to clarify the issue of time at
which applicability of provisions of Section 56(2)(viib)
of the IT Act should be tested.
11 M/s Cimex Land and Housing Pvt. Ltd. v. ITO ITA No. 5933/Del/2018 (Delhi ITAT).
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AMOUNTS PAID TOWARDS DISCHARGE OF MORTGAGE
OBLIGATION IN CONNECTION WITH A PROPERTY –
NOT COST OF ACQUISITION
12The Madras HC in the case of D. Zeenath, held that
monies paid towards discharge of mortgage in relation
to a property, created by the taxpayer himself/herself,
will not be regarded as the cost of acquisition of such
property.
FACTS
Smt. D. Zeenath (“Assessee”), along with two other
individuals, had purchased a land. The said land was
mortgaged by deposit of title deed, to secure a loan
obtained by M.O. Hassan Kuthos Maricar Pvt. Ltd.
(“Borrower”) from the State Bank of India (“Bank”)
and the Assessee and co-owners of the land, stood as
guarantors for the said loan.
Since the loan was not repaid, the Assessee and co-
owners of the land consented to sell the property to a
third party buyer and paid the consideration from the
sale towards the settlement of the loan.
The Assesse, in response to a notice issued by the
AO, claimed that she was not
liable to pay any capital gains
on the sale of the land, as the
entire consideration from the sale
was paid towards the repayment
of loan, which amounted to
diversion of income. The AO
rejected the claim of the Assessee
and held that the use of proceeds
from the sale towards payment of loan merely
amounted to application of income and accordingly,
the Assessee was liable to capital gains taxes. In
appeal, the CIT(A) and the ITAT upheld the order of the
AO. The Assessee being aggrieved of the said orders,
approached the HC.
ISSUE
Whether in the facts and circumstances of the case,
the Assesse was liable to pay tax on the gains arising
from the sale of land?
ARGUMENTS
The Assessee argued that she was not liable to pay
any tax on the gains arising from the sale of land, as
the proceeds of such sale were diverted towards the
settlement of loan and no income accrued to her.
Further, the Assessee also contended that the amount
received from the sale of land should be added to the
cost of acquisition of the land as it paid towards
clearing the title of the assets i.e. the land which had
been mortgaged to the Bank.
On the other hand, the IRA argued that the Bank had
no independent authority to alienate the land and the
Assessee and the co-owners of the property had
consented to sell the property for discharging the loan.
Accordingly, it was asserted that it
was only application of income
and not diversion of income.
Further, the IRA relied upon
various case laws to contend that
where the transferor creates a
charge on a property after
acquiring the same, the amounts
paid to clear such charge would
not be included in the cost of acquisition of the
property.
DECISION
The Madras HC observed that the mortgage was
created by deposit of title deeds and held that by such
a mortgage the Bank would not even acquire the title in
”“Amount paid to clear a charge on
asset, created by the transferorhimself after acquiring the asset,shall not be included in the cost
of acquisition of the asset.
12 D. Zeenath v. Income Tax Ofcer (2019) 263 taxman 69 (Madras HC).
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a property, much less an overriding title. Accordingly,
the HC rejected the argument of the Assessee and
held that the co-owners voluntarily sold the property
for discharging the loan and it was only an application
of sale proceeds, rather than a diversion income.
Further, the HC inter alia placed reliance on the 13
Supreme Court decision of R.M. Arunachalam,
where the court had held that payment towards
discharge of a mortgaged property would be
considered to be part of the cost of acquisition of such
property where the mortgage had not been created by
the taxpayer, but was created by the person from
whom the taxpayer had acquired the title and the
mortgage was subsisting at the time the title was
acquired by the taxpayer. Accordingly, the HC held
that in the instant case, the Assessee had herself
mortgaged the property, therefore, any payment made
by her for the discharge of property is not to clear the
title over the property but merely to clear the interest or
charge over the property. Thus, the HC held that such
payment could not be included in the cost of
acquisition and upheld the order of the lower
authorities.
SIGNIFICANT TAKEAWAYS
This decision claries the position that only payment
made towards clearing the title of a property at the time
of purchase of the property may be included in the cost
of acquisition, however payments made towards
clearing a charge on the property created by the
transferor itself cannot be included.
While the judgment has been rendered only in the
context of mortgage of property and discharge of loan
by a guarantor, the principle enunciated above would
apply equally in relation to debt restructuring, involving
sale of property to discharge a debt, undertaken in
relation to nancially distressed companies or
restructuring proposed under resolution plans of
Insolvency and Bankruptcy Code, 2016.
Further, it is a settled position that in order to construe
a particular receipt as diversion of income by
overriding title, the income should have been diverted
before it reaches the tax payer. While there would be
certain obligations on every case, but the nature of
obligation is the decisive factor to determine the
diversion of income. Legal obligation to pay out the
lenders upon the sale of mortgaged property is just an
application of the income received since the property
was mortgaged to borrow certain money which was
utilized by the borrower. Therefore, the obligation to
pay out the lenders arises from the default in
repayment of mortgage amount and not from the sale
of assets.
13 R.M. Arunachalam v. CIT (1997) 227 ITR 222 (SC).
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BOMBAY HC HAD HELD ADDITION UNDER SECTION 68
OF THE IT ACT CANNOT BE MADE MERELY DUE TO
14 PCIT v. Aditya Birla Telecom Ltd. in IT Appeal No. 1502 of 2016.
27
14In the case of Aditya Birla Telecom Ltd., the
Bombay HC held that large investments coming
through multiple corporate entities would not make a
transaction a sham transaction by itself and rejected
IRA’s plea that the investment was made through a
‘complex web of transactions’.
FACTS
Aditya Birla Telecom Ltd (“Assessee”) is an Indian
listed company and is engaged in the business of
providing telecommunication services. During the
scrutiny proceedings for AY 2009-10, the AO noticed
that the Assessee had issued 1,925,000 preference
shares at INR 10,890 per share to P5 Asia Holding
Investment (Mauritius) Ltd. (“P5 Mauritius”) where
each share had a face value of INR 10. By virtue of this
allotment of shares, the Assessee had received the
share amount of INR 19,250,000 and total premium of
INR 20.963 billion.
P5 Mauritius was entitled to dividends at the rate of
0.00001% per annum on the face value of the
preference shares. Upon completion of period of ten
years of issuance of preference
shares, the same would be converted
into equity shares at a premium of
INR 10,890 per share. The AO noted
that the Assessee's holding company
is Idea Cellular Limited (“Idea”) and
its nominee owned 10,000,000 equity
shares of INR 10 each and held that
the Assessee had received share
capital towards preference shares from P5 Mauritius
at terms which were so adverse to P5 Mauritius, that
no prudent businessman would agree to subscribe to
preference shares on such terms. Therefore, the AO
had concluded that the subscription of preference
shares by P5 Mauritius is a colourable device and not
a genuine transaction and should be taxed in the
hands of the Assessee under Section 68 of the IT Act,
based on the following ndings:
• The Assessee had utilized only INR 73.1 Million,
of the total INR 20 Billion (approximately)
received from P5 Mauritius, for its business
purposes and the rest of the money was
transferred to its parent entity, Idea, and its other
group companies for the purpose of other
investments;
• The Assessee is entitled to a meagre dividend of
0.00001% on the total investments made;
• The Assessee had failed to produce the
assessment order of P5 Mauritius; and
• The Assessee had opened bank account in
HSBC only for receipt of funds from P5
Mauritius, which was closed shortly after the
transfer of funds.
The CIT(A) upheld the order of the
AO by citing paucity of time, since
the HC while adjudicating the stay of
recovery proceedings, had provided
3 months’ time to the CIT(A) to
complete the appeal proceedings.
In the second appeal, the ITAT had
veried the documents submitted by
the Assessee to establish the identity, genuineness
and creditworthiness of P5 Mauritius and concluded
that the P5 Mauritius is a company belonging to the
LARGE INVESTMENTS MADE THROUGH AN
INVESTMENT VEHICLE
”“The transaction cannot be
construed as a colorabledevice merely because large
investments were made through a Mauritius entity.
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Providence Equity Partners ("PEP"), a global private
i nves tmen t g roup spec ia l i z i ng i n med ia ,
entertainment, communication and information
companies, managing funds of USD 22 billion and
having investments in over 100 companies spread
over 20 countries. P5 Mauritius has registered itself as
a Foreign Venture Capital Investor ("FVCI") with the
Securities and Exchange Board of India ("SEBI"). The
investment in compulsorily convertible preference
shares of the Assessee was made after P5 Asia
registered as a FVCI with SEBI and after having
obtained the necessary approvals from the FIPB. In
view of the same, the ITAT held that all the three
ingredients of Section 68 of the IT Act (i.e. identity,
genuineness and creditworthiness of investor) are
duly established and therefore, addition made under
the said provision should be deleted.
Aggrieved against the same, the IRA preferred an
appeal before the HC.
ISSUES
Whether the amount received by the Assessee, on
account of issuance of preference shares, was a
colorable transaction and should be included in the
total income of Assessee under Section 68 of the IT
Act?
ARGUMENTS
The IRA argued that the AO had examined the facts
thoroughly and arrived at a conclusion that the entire
transaction was not genuine since the Assessee had
merely routed its own money through a complex web
of corporate structures. It was further contended by
the IRA that there is no commercial rationale for
investing such huge sums of money through a shell
company for such a meagre return on investments i.e.
dividend.
On behalf of the Assessee, it was contended that the
AO had proceeded entirely on erroneous basis and
that the funds were raised through share subscriptions
on account of the cellular licenses obtained for
providing telecommunication services in Bihar and
Jharkhand blocks. Further, the investment was made
by a leading US based private equity investor, PEP,
through a specially constituted Mauritius based
investment vehicle i.e. P5 Mauritius. Moreover, the
requirement of issuing shares at such high premium
was obvious as the shareholders of the Assessee did
not want to lose the majority stake in the Assessee
company.
The Assessee also submitted that the AO had veried
the source of such funds and adverse nding was
pointed out by the AO. Addition under Section 68 of the
IT Act should not be made merely because a huge
investment was made through an investment vehicle
based out of Mauritius and that receipt of dividend is
not the only form of return of investments for an
investor. In order to establish that the transaction was
not a colorable device, the Assessee further added
that P5 Mauritius had subsequently sold the
investments and made sizeable prots from such sale.
DECISION
The HC held that the primary onus to establish
genuineness, creditworthiness and identity of the
payer and the source of funds would be on the
Assessee. In the instant case, P5 Mauritius made
investments after obtaining approvals from FIPB
wherein full details of investment, the transaction,
terms of the agreement and the identity of the investor
as well as the group was provided. The HC had noted
that ITAT had veried the nancial statements which
disclosed the ow of funds in P5 Mauritius and held
that merely because multiple entities were involved in
the transaction process, the AO cannot make adverse
inference regarding the nancial capacity of P5
Mauritius. It was further held that an investor does not
only look for dividends but also expects returns on
such investment through capital appreciation, when
the investment nally gets converted into equity
shares.
The HC held that full enquiry of source of funds and
other relevant factors in relation to the investment in
question was elaborately carried out by the AO as well
as the ITAT. Therefore, while the initial suspicion of the
AO could be justied, but when all the relevant factors
were properly explained, including the fact that
payment of dividend was not the sole attraction for the
investor and that the investor could expect a fair return
on investment through capital appreciation also, the
AO should have adverted to all such materials on
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record in proper perspective. Merely because multiple
entities were involved in the entire process of
accumulating funds in P5 Mauritius, then investing in
the Assessee by itself would not be sufcient to
establish a sham transaction or colorable device.
SIGNIFICANT TAKEAWAYS
Routing of investments through Special Purpose
Vehicles (“SPVs”) is an established practice and in the
instant case, the IRA had made an unwarranted
addition under Section 68 of the IT Act by questioning
the said practice. The instant addition was made by
the AO only on the basis that there were multiple
entities involved in routing the money to Assessee and
a large sum of money was received by the Assessee
through issue of shares to an investor. Therefore, the
HC rightly deleted the additions made under Section
68 of the IT Act.
It must be noted that the AO questioned the
commercial rationale of the transaction by alleging
that no prudent businessman would agree to
subscribe to preference shares which promises a
dividend of 0.00001%. The requirement to establish
the commercial rationale could not be invoked for the
purposes of Section 68 of the IT Act but only for the
purposes of invoking General Anti-Avoidance Rule,
which became applicable only from the April 1, 2017
and did not apply to year in which the instant
transaction took place. Further, investment in shares
by residents where the primary subscription takes
place at a high premium can also be taxed in the hands
of the company receiving such investments under
Section 56(2)(viib) of the IT Act, if the quantum of
premium cannot be justied by way of a valuation
report. Therefore, transactions in the nature of share
subscriptions should be undertaken after considering
the applicable law relating to share premium and
requirement of commercial rationale.
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MADRAS HC DISMISSES COGNIZANT'S WRIT OVER
SHARE BUY-BACK CHARACTERIZATION
15 Cognizant Technologies Solutions India (P) Ltd. v. Deputy Commissioner of Income-tax; [2019] 106 taxmann.com 388 (Madras).
30
15In the case of Cognizant Technologies, the HC
dismissed the appeal of Assessee against the order of
AO characterizing remittances made to shareholders
under buy-back scheme, as remit tance of
accumulated prots to be categorised as dividends to
shareholders.
FACTS
Cognizant Technologies India (P) Ltd. (“Assessee”) is
a private company incorporated under Companies
Act. In 2013, the Assessee had undergone a buy-back
of its own shares. Thereafter, in 2016, under Scheme
of Arrangement and Compromise (“Scheme”), the
Assessee proposed another buy-back of 9,400,534
equity shares for a consideration of INR 190.80 Billion.
The Scheme was approved by the Madras HC in April,
2016.
The capital gains arising in the hands of the
Assessee’s shareholders as a result of buy-back was
offered to tax by the shareholders subject to treaty
benets and a total of INR 8.98
Billion of capital gains tax was paid.
In 2017, the IRA attempted to tax
the receipts of buy-back of 2013 in
the hands of the Assessee’s
shareholders as income from other
sources. Given the same, the
Assessee led an application
before the AAR for the buy-back
proposed in 2016.
However, in 2018, the IRA passed an order asking the
Assessee to pay Dividend Distribution Tax (“DDT”),
under Section 115-O of the IT Act, at 15% on
remittance of INR 1.94 Billion to its shareholders in
May 2016. Against this order, the Assessee has led a
writ before the Madras HC in 2018.
ISSUES
• Whether a show cause notice or an enquiry is
required for passing an order in relation to
Section 115-O of the IT Act?
• Whether there has been a breach of principles
of natural justice because of such order being
passed by the AO?
• Whether Section 245RR of the IT Act prohibits
the AO from passing any order in relation to the
transaction for which an AAR has already been
led?
• Whether the writ led by the Assessee against
the order of the AO is maintainable?
ARGUMENTS
The Assessee argued that an application in relation to
the transaction has already been led before the AAR
under Section 245Q of the IT Act. Section 245RR of
the IT Act states that no income-tax authority or ITAT
can proceed on any issue in relation
to which an application has been
led before the AAR under Section
245Q of the IT Act. Further, as per
the Assessee, no show cause
notice was issued to the Assessee
in relation to DDT which was in
violation of principles of natural
justice.
Countering the arguments of the Assessee, the IRA
responded saying that the Assessee had remitted an
amount of INR 1.94 Billion to its non-resident
shareholders in May, 2016, on which no DDT was
paid. Once this remittance came to the notice of IRA, a
letter was issued to the Assessee by the IRA in
November, 2017 asking details of various remittances
made to the shareholders by the Assessee during FY
”
“HC dismisses Assessee’ s writagainst the order of AO
demanding DDT on remittancesmade under buy-back scheme and
holds that the matter shouldbe decided through the
normal appellate process.
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2015-16 and 2016-17. Further, IRA also relied on
Section 245R(2) of the IT Act which stated that the
AAR shall not take cognizance of an application,
where the questions raised in the application are
already pending before IRA. The IRA also contended
that the buy-back scheme proposed by the Assessee
is nothing but a means to distribute accumulated
prots by the Assessee and therefore the remittances
have to be treated as dividends under Section 2(22)
(d) of the IT Act. The IRA, in this regard, contended
that there was no dispute or necessity to le a petition
for approval of the Scheme under Section 391 to 393
of the IT Act. Hence, 15% tax must be paid by the
Assessee under Section 115-O of the IT Act. Lastly,
the IRA contended that Section 115-O of the IT Act
does not prescribe any specic order to be passed. It
is self-declaratory and the taxpayer is required to remit
the taxes on its own and any failure on the part of the
Assessee to do the same would render the Assessee
in default and the IRA can commence the recovery
measures.
In the rejoinder afdavit led by the Assessee, the
Assessee contended that the letter received from IRA
in November, 2017, did not have any reference to
Section 115-O of IT Act. Further, the Assessee has
duly responded to the said letter. The Assessee
admitted that there were informal discussions and
meetings between the Assessee and the IRA but that
could not be a substitute to a show-cause notice from
IRA. The Assessee argued that the buy-back of 2016
was happening under the Scheme under Section 391
to 393 of the Companies Act, 1956. However, prior to
its amendment in June, 2016, explanation to Section
115QA of IT Act limited the denition of buy-back to
that undertaken under Section 77A of Companies Act,
1956. Since the Assessee had undertaken the buy-
back prior to the June 2016 amendment, the aforesaid
buy-back of 2016 did not fall under the provisions of
buy-back under Section 115QA of the IT Act. Further,
as per Section 46A of IT Act, buy-back shares is
considered as a capital gain. Thus, on buy-back of
shares from non-resident shareholder from US, the
US shareholder had paid a capital gain tax of INR 8.98
Billion. The other non-resident shareholder was from
Mauritius and entitled to exemption under India-
Mauritius DTAA. Therefore, due to benet of DTAA, no
tax was payable by such shareholder. Lastly, due to
applicability of Section 245RR of IT Act, the order
passed by the IRA was not valid.
On the other hand, the IRA also raised a preliminary
objection on the maintainability of the writ petition
stating that the Assessee had an effective alternative
remedy. Further, the IRA added that as per Section
2(22)(d)/ 2(22)(a) of the IT Act, any reduction in share
would amount to distribution of dividend and the
domestic company is liable to pay DDT on the same.
Non-compliance with the same would render the
Assessee as “assessee-in-default”. There is no
requirement of issuing notice or conducting an inquiry.
Lastly, the IRA argued that when the Scheme was
approved, it was observed in the order that approval
would not be considered as order granting exemption
from payment of statutory dues.
DECISION
On the rst issue of whether Section 115-O of the IT
Act mandates passing of any show-cause notice or
enquiry before passing an order, the HC held that
Section 115-O is a charging provision in itself and
does not require any show-cause notice to be
separately issued. While there are provisions for tax
assessments which require issue of notice, Section
115-O is a special provision where the Assessee has
to suo-moto pay tax within a specied time period.
There is no requirement on the AO to issue notice
before holding the assessee in default under these
provisions.
On the second issue of breach of principles of natural
justice, the HC responded saying that it is established
that a show-cause notice is not required under Section
115-O of IT Act. Despite the same, a letter was issued
to Assessee asking for information on the foreign
remittances made by the Assessee post which
discussions were also entered into by Assessee. The
HC held that the stand taken by Assessee, that the
letter issued by the IRA does not amount to a proper
show-cause notice, is incorrect. As per the HC, the
purpose of issuing a show-cause notice is to give a
notice the actions that tax authorities proposes to
initiate. Given the same, even the argument of the
Assessee, that there was a violation of principles of
natural justice, does not hold substance as per the HC.
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On the third issue, the HC observed that the
application before AAR was led in March, 2018 when
the issue was pending before the AO. Section 245R
(2) clearly states that if the enquiry is pending before
the IRA an application before the AAR cannot be led
on the same issue. Thus, the AAR had no jurisdiction
to entertain the application led by the Assessee
under Section 245Q of the IT Act. Consequently, the
order passed by the AO also does not face any bar
under Section 245RR of the IT Act.
On the last issue of maintainability of the writ petition,
the HC held that rstly, there is no merit in the
argument of the Assessee that the remittances made
subsequent to buy-back of shares were to be treated
as capital gain and not dividends. Secondly, the HC
found merit in the argument of the IRA that every
assessee who denies its liability to pay taxes can le
an appeal under Section 246 of the IT Act. In this
regard, the HC placed reliance on the SC judgement in
the case of Central Provinces Manganese Ore Co. 16
Ltd., and few other judgements which state that
Section 246(c) of the IT Act provides for appeal
against any order where the assessee denies its
liability to be assessed under the IT Act or against any
assessment order. Given the same, the HC held that
the Assessee did have an alternate remedy by way of
appeal under Section 246 of the IT Act and the writ was
led to bypass the said appeal remedy. Therefore, the
writ petition led by the Assessee was held as not
maintainable by the HC.
SIGNIFICANT TAKEAWAYS
One of the contentions of the Assessee was that the
denition of “buy-back” under Section 115QA of the IT
Act, prior to 2016, restricted the meaning of buy-back
to purchase of its own shares undertaken by the
Company under Section 77A of the Companies Act,
1956. This denition was widened through Finance
Act, 2016, to include buy-back undertaken under any
law. This was done to address the anomaly in law
which allowed companies to circumvent buy-back tax
by undertaking buy-back under provisions other than
Section 77A of Companies Act, 1956.
On the other hand, Section 2(22) of the IT Act denes
the term “dividend” and also provides an exhaustive
list of exclusions from the term “dividends”. One of the
exclusions under sub-clause (iv) of Section 2(22)
states that any payment made by a company of its own
shares from a shareholder under Section 77A of
Companies Act, 1956 [which has now been amended
to Section 68 of Companies Act, 2013]. Thus,
remittance made by company on account of buy-back
of shares should not be considered as dividend and
accordingly, DDT cannot be imposed on the same.
However, while for applicability of buy-back tax, a
wider denition of buy-back has been used, whereas
for exclusion from purview of dividend, only buy-backs
undertaken under specic provision has been
excluded. This would give a leeway to the tax
authorities to treat remittances for buy-back
undertaken under any other provision, as distribution
of accumulated prots, and accordingly impose DDT
on the same along with the buy-back tax, leading to
double taxation. In order to prevent misuse of the
anomaly by the IRA, amendment akin to the 2016
amendment may be required.
Alternatively, it may be pertinent to note that CBDT 17
had issued a Circular in 2016 clarifying that
consideration received on buy-back of shares during
April 01, 2000 to May 31, 2013 would be treated as
capital gains in the hands of recipient shareholder
under Section 46A of the IT Act. Such amount would
not be treated as dividend on account of sub-clause
(iv) of Section 2(22) of the IT Act. Similar clarication
maybe required from CBDT, in order to prevent double
taxation in the hands of Assessee, as DDT as well as
buy-back tax.
16 Central Provinces Manganese Ore Co. Ltd. v. Commissioner of Income Tax (1986) 27 Taxmann 275 (SC).17 Circular No. 3/2016 dated February 26, 2016.
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MUMBAI ITAT HOLDS BUY-BACK OF FCCB AT
DISCOUNTED PRICE NOT BUSINESS INCOME
33
18 In the case of M/s. Pidilite Industries Ltd., the
Mumbai ITAT held that the buyback of FCCB at a
discounted price did not constitute business income of
the Assessee as the gain was in the nature of capital
receipt and not revenue receipt.
FACTS
M/s. Pidilite Industries ltd. (“Assessee”) is a company
resident in India and is engaged manufacturing of
adhesives. For AY 2010-11, the Assessee led its
return of income declaring income of INR 1.20 Billion.
However, after the scrutiny assessment of the
Assessee, the AO determined the total income at INR
2.23 Billion, wherein inter alia an
addition of INR 21.3 Million on
account of discount received on
Foreign Currency Convertible
Bonds (“FCCB”) buy-back. During
FY 2007-08, the Assessee issued
zero coupon FCCB mainly for
capital expenditure and funding international
acquisition. The size of FCCB was USD 40 million and
denomination of each bond was USD 100,000. On
maturity, the FCCBs were to be redeemed at a
premium of 39.37% of the issue price. The net
proceeds of approximately USD 39 million was partly
used for investment in foreign subsidiaries and partly
for ongoing capitalization programs. Thereafter, the
Assessee sought permission from RBI to buy-back the
FCCB and once the permission was granted by RBI,
the Assessee bought back 17 bonds at a discount of
25%, thereby earning a total discount of USD 425,000
which in Indian currency amounted to INR 21.3 Million.
On this discount, the Assessee claimed deduction
while computing its business income stating that the
same is in the nature of capital receipts. However, AO
disallowed the deduction claimed by the Assessee
and treated it as income under Section 28(iv) of the IT
Act. In this regard, the AO relied upon the decision of 19 Bombay HC in the case of Solid Containers.
Against the order of the AO, the Assessee led an
appeal before the CIT(A) and the CIT(A) decided in
favour of the Assessee by holding that the discount on
FCCB cannot be treated as gains as envisaged under
Section 28(iv) of the IT Act. The CIT(A) observed that
as per RBI circular, the proceeds of FCCB could be
used only for purpose of import of capital goods, new
projects, expansion and modernization or overseas
direct investment in joint ventures/ wholly owned
subsidiaries and expressly prohibits the usage of
FCCB proceeds for working capital, general corporate
purpose and repayment of rupee
loans. The CIT(A) observed that
s ince the Assessee was not
engaged in the business of giving
and taking loans through debt
instruments, the reduction in loan
liability could not be said to be on
account of appellant’s business or
profession. Further, CIT(A) relied on the decision of 20
Bombay HC in the case of Bombay Gas Co., to state
that waiver of loans for acquiring capital assets would
be on capital account and considering that the bonds
were not used for trading purposes, discounts on
repurchase could not be treated as gains. The CIT(A),
therefore, proceeded with the deletion of addition
made by the AO.
Against the order of CIT(A), the IRA preferred an
appeal before the ITAT.
ISSUES
Whether discount on the buy-back of FCCB
constituted gains under Section 28(iv) of the IT Act and
should be considered while calculating business
income?
”“Discount on buy-back of FCCBs
taken for capital purposes isnot a revenue receipt.
18 DCIT v. M/s Pidilite Industries Ltd.; ITA Nos. 7351 & 7352/ Mum/ 2017.19 Solid Containers v. DCIT, 178 Taxmann 192.20 Bombay Gas Co. Ltd. v. ACIT, ITA Nos 646 and 1188 of 2009.
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ARGUMENTS
The Assesse contended that the while the buy-back of
FCCB did happen at a discounted price of 25%, the
proceeds from these FCCBs were initially utilized
partly for investment in foreign subsidiaries and partly
for ongoing capitalization programs. Further, the RBI‘s
terms for issue of bonds prohibit utilization of proceeds
from trading purposes. Therefore the gains made by
the Assessee were on the capital account only.
The IRA on the other hand contended that Section 28
of the IT Act deals with what constitutes prots and
gains for business and profession and clause (iv) of
the said Section considers value of any benet or
perquisite, whether convertible in money or not,
arising from the business, as business income. Given
the same, the benet derived by the Assessee in
buying back the FCCB at discounted price amounts to
gain as per Section 28(iv) of the IT Act.
The Assessee further contended that the gain under
Section 28(iv) of the IT Act has to be in some form
other than in money and in this regard placed reliance
on the SC decision in the case of Mahindra and 21 Mahindra Ltd.
DECISION
The ITAT held that the gains arising from buying back
the FCCBs at discount cannot be considered revenue
receipts but only as capital receipts since these
FCCBs were issued to raise money for capital
expansion purposes but not for trading purposes. The
ITAT also decided that the decision of the SC in the
case of Mahindra and Mahindra squarely applies to
the factual matrix of the Assessee.
The ITAT further observed that similar view has been
taken by the Bombay HC in the case of Xylon 22
Holdings Pvt. Ltd., and in the case of Santogen 23
Silk Mill.,s .
Therefore, the appeal of the IRA on this issue was also
dismissed.
SIGNIFICANT TAKEAWAYS
The issue of reduction of loan liability can be
considered as income in the hands of borrower has
been a subject matter of litigation for a long time now, 24
until the SC in the case of Mahindra and Mahindra,
had put a pull stop. While Section 41 of the IT Act
provides that any allowance/reduction in the trading
liability would be considered as income in the hands of
the borrower, the confusion arose in cases where the
loans were obtained for capital purposes (i.e. not a
trading liability but a capital liability). The IRA was
increasingly bringing the reduction in the capital
purposes loan under the ambit of Section 28(iv) of the
IT Act which provides that any benet or perquisite
arising from a business would be considered as
income from business. The HCs were divided on the
issue of whether the reduction in the capital purposes
loan can be taxed in the hands of borrower.
Last year, the SC in the case of Mahindra and 25
Mahindra, had held categorically that reduction in
capital purpose loan could only be construed as
capital receipts and not a revenue receipts and
accordingly, the same cannot be taxed in the hands of
borrower. In the instant case, FCCBs were issued by
the Assessee for investment in foreign subsidiaries
and capital expansion purposes and therefore, the
same was rightly considered as capital purpose loan
and the addition made by the IRA was deleted.
The said decision of SC can be said to have given
timely relief to many of the loss-making entities which
are under liquidation as per the Insolvency and
Bankruptcy Code, 2016 since in almost all such cases,
lenders were required to take a haircut on their loan
amount, and the treatment of resultant reduction in
loan liability as income would have created an
unwarranted burden not just to the borrowing
company but also to the lenders since the extent of
haircut would be determined based on the tax liability
of the company.
21 CIT v. Mahindra and Mahindra Ltd.; 93 Taxmann.com 32.22 CIT v. Xylon Holdings Pvt. Ltd.; 211 Taxmann.com 108.23 CIT v. Santogen Silk Mills; 57 Taxmann.com 208.24 CIT v. Mahindra and Mahindra Ltd.; 93 Taxmann.com 32.25 CIT v. Mahindra and Mahindra Ltd.; 93 Taxmann.com 32.
34
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- MISCELLANEOUS
CASE LAW UPDATES
35
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BANGALORE ITAT TREATS CUSTOMER RELATIONSHIP
RIGHTS AS GOODWILL ELIGIBLE FOR DEPRECIATION
36
In the case of M/s. Incap Manufacturing Services 26Pvt. Ltd., the Bangalore ITAT has held that customer
relationship rights are in the nature of goodwill and has
accordingly allowed depreciation on the same.
FACTS
M/s. Incap Manufacturing Services Pvt. Ltd.
(“Assessee”) is a subsidiary of Incap Oyj Finland
(“Incap Finland”) and is engaged in the business of
manufacturing electrical equipment, sub-systems,
inverter, power products and power electronic
products, etc. For AY 2009-10 the Assessee led its
return of income declaring a loss of INR 119.7 Million.
However, after completion of
assessment proceedings by the
AO, the losses were reduced to INR
107 Million as the AO disallowed the
depreciat ion c la imed by the
Assessee amounting to INR 12.6
Million on customary relationship
rights. The said depreciation claim was rejected by the
AO on account of the fact that depreciation on goodwill
is not allowed.
The CIT(A) upheld the order of the AO and the
Assessee led appeal before ITAT. The ITAT
remanded the matter back to the AO to decide in the
light of SC’s judgement in the case of Smifs 2 7
Securit ies . The Assessee fur ther led a
miscellaneous petition against the order of ITAT, which
was allowed by the ITAT, but the question on
depreciation was remanded back to the AO.
The AO acknowledged that the Assessee had
considered customer relationship rights as intangibles
on which depreciation was claimed. Therefore, the
matter before the AO was on two issues; rst, whether
depreciation can be claimed on intangible assets and,
second, whether customer relationship rights
constituted intangible assets. On the rst part of
whether depreciation can be claimed on intangible
assets, the Assessee relied on the SC decision of 28Smifs Securities, to contend the same. On the
second issue of whether customer relationship rights
can constitute intangible assets, the AO relied on the
Bangalore ITAT judgement in the case of M/s. Sanyo 29
BPL, which held that the customer distribution
networks do not result in intangible asset. Further, the
AO also opined that the ITAT has already rejected the
claim of the Assessee that customer relationship
rights constituted intangible assets, vide order of the
ITAT on the miscellaneous petition. Given the same,
the AO rejected the depreciation claim of the
Assessee on account of the fact that
customer relationship rights do not
constitute intangible assets.
Against the order of the AO, the
Assessee led an appeal before the
CIT(A), which was dismissed by the
CIT(A) again and thus, the matter landed up before the
ITAT.
ISSUES
• Whether the customer relationship rights are in
the nature of intangible assets?
• Whether depreciation can be claimed by the
Assessee on intangible assets?
ARGUMENTS
The Assessee argued that customer relationship
rights gained by the Assessee were a part of the
Business Transfer Agreement (“BTA”) executed as
slump sale for which the Assessee had paid a lump
sum consideration. However, in its books of accounts
it had valued xed and intangible assets separately.
26 M/s Incap Manufacturing Service Pvt. Ltd. v. Deputy Commisioner of Income-tax; ITA Nos. 2214 to 2216/ Bang/ 2018. 27 CIT v. Smifs Securities Ltd., 348 ITR 3022.28 Supra.29 M/s. Sanyo BPL Pvt. Ltd. v. Deputy Commissioner of Income-tax (75 taxmann.com 253) (Bangalore Trib.).
”“Depreciation on customer
relationship rights allowed byBangalore ITAT.
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Under the head of intangible assets also, the
Assessee had valued customer relationship rights and
goodwill separately. According to the Assessee, the
amount of customer relationship rights was to be
treated as non-compete fees were also paid to the
seller against an undertaking for non-participation in
any jurisdiction as an owner, partner or shareholder or
in any capacity in business of contract manufacturing
services. Further, the Assessee also contended that
the AO has not considered the directions of the ITAT.
The IRA argued that there was no specic direction
from the ITAT and, therefore, AO was correct in grant
of depreciation on the component of goodwill only and
not on the component of customer relationship rights.
DECISION
The ITAT allowed the appeal of the Assessee for the
claim of depreciation on customer relationship rights.
Not only did ITAT found force in the claim of the
Assessee but the ITAT found that on previous appeal
of the Assessee, the co-ordinate bench had made an
observation that the AO, before disallowing the claim
of depreciation, had himself taken a view that the
customer relationship rights are in the nature of
goodwill. Thus, the fact that customer relationship
rights are goodwill remains undisputed.
Further, the position that goodwill is an asset and is
eligible for depreciation has already been settled by 30
the SC in case of Smifs Securities .
Therefore, the claim of the Assessee was allowed by
ITAT.
SIGNIFICANT TAKEAWAYS
The decision of ITAT in this case is fairly on a settled
position of law. Delhi HC in the case of Triune Energy 31Services, has settled the position that excess
consideration paid over assets taken over constituted
goodwill. Further as per Smifs Securities the
depreciation over intangible assets (which includes
goodwill) is allowed. Therefore, for the AO to deny the
Assessee’s depreciation claim twice may not have
been justied in the light of the aforesaid decisions.
However, IRA ofcers taking a very theoretical
approach and trying to somehow make an adjustment
to the taxable income of taxpayers has not been
reduced in a signicant manner and such approach by
the IRA gives rise to unnecessary and unwanted
litigation on various levels of tax authorities. This kind
of litigation is a wastage of time and resources for the
assessee as well as tax authorities and hence, the
CBDT should take strict action against ofcers of the
IRA who keep violating settled principles of law.
30 Supra.31 Triune Energy Services (P) Ltd. v. Deputy Commissioner of Income Tax & Others; ITA Nos. 40 and 189/ 2015.
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MUMBAI ITAT DELETES NOTIONAL RENTAL ADDITION
ON UNSOLD INVENTORY HELD AS STOCK-IN-TRADE
38
The Mumbai ITAT in the case of Kanakia Spaces Pvt. 32Ltd., has held that for AYs prior to AY 2019-20, unsold
inventory held by builders and developers should be
considered as stock-in-trade and should not be
subject to notional rent under Section 23 of the IT Act
in the hands of the builder or developer.
FACTS
Kanakia Spaces Pvt. Ltd. (“Assessee”) was engaged
in the business of construction of housing projects. In
AY 2013-14 and AY 2014-15, the Assessee in its return
of income, showing certain unsold ats in various
projects as stock-in-trade. The AO
sought to tax the annual letting
value (“ALV”) of the unsold ats as
income from house property of the
Assessee. The AO proceeded to
tax the ALV of the unsold houses in
the hands of the Assessee. The
Assessee appealed before the
CIT(A) without success and hence,
an appeal was preferred before the ITAT.
ISSUES
Whether the ALV of unsold housing units may be taxed
in the hands of the builder as income from house
property for AYs prior to AY 2019-20?
ARGUMENTS
The Assessee claimed that it did not intend to hold the
unsold ats as investment and earn rental income
therefrom, but only as stock-in-trade. Such stock-in-
trade constitutes a business asset of the Assessee
and no notional ALV could be assessed as income
from house property in the hands of the Assessee.
While the AO had placed reliance on the decision of
the Delhi High Court in Ansal Housing Finance and
33Leasing Company Ltd., which had treated ALV of
nished housing units held by the developer as
income from house property, the Assessee relied on a
contrary judgment of the Gujarat High Court in Neha 34 Builders Pvt. Ltd. The IRA simply relied on the
holding in Ansal to support its contention that the ALV
must be taxed as income from house property.
DECISION
The ITAT took note of Section 23(5) of the IT Act which
was inserted by way of the Finance Act, 2017, with
effect from April 1, 2018, i.e., AY 2019-20, and
subsequently amended in 2019.
This section deems the ALV of
unsold housing property in the
hands of the developer or builder
as nil for two years after the
completion of the project. However,
since the assessments in the case
of the Assessee pertained to AY
2013-14 and AY 2014-15, section
23(5) was not applicable.
The ITAT acknowledged that the two differing High
Court judgments relied by the Assessee and the IRA
were not decisions of its jurisdictional High Court, i.e.,
the Bombay High Court. While the Delhi High Court in
Ansal had concluded that ALV from unsold houses
should be taxed as income from house property, since
the only issue of consideration for assessment under
the head of income from house property is ownership
of the property by the assessee while the Gujarat High
Court in Neha Builders had considered that in case
the property was held as stock-in-trade, then such
property would partake the character of the stock,
income from which would be business income and not
income from house property. The ITAT upon careful
consideration of the precedential value of the two
conicting High Court judgments, deferred to the law
“”
If two reasonable constructions of a taxing provision are possible,
that construction which favorsthe tax payer must be
adopted.
32 Kanakia Spaces Pvt. Ltd. v. DCIT, ITA No. 7288/Mum/2017, decided on April 23, 2019.33 CIT v. Ansal Housing and Finance and Leasing Company Ltd., (2013) 354 ITR 180 (Del HC).34 CIT v. Neha Builders Pvt. Ltd., (2008) 296 ITR 661 (Gujarat).
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espoused by the Supreme Court in Vegetable 35Products. The Apex Court had ruled that when faced
with two different interpretations of a taxing statute,
the interpretation which favors the assessee must be
adopted. Accordingly, the ITAT concluded that absent
a decision of the jurisdictional High Court on the issue,
the interpretation favourable to the Assessee must be
accorded, and proceeded to remove the addition
made by the AO.
SIGNIFICANT TAKEAWAY
An important principle on the binding nature of
contradictory precedents in tax litigation, as endorsed
by the Apex Court in earlier instances, emerges from
this order of the ITAT – that if it is possible to develop
two contrary constructions of a specic provision of a
tax statute, the one in favour of the taxpayer must
necessarily be preferred over the other. This would be
the case only in the absence of a direct binding
decision of a higher Court or the appropriate
jurisdictional Court on the issue in question.
35 CIT v. Vegetable Products, (1973) 88 ITR 192 (SC).
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SC VACATES STAY GRANTED BY DELHI HC ON
NOTIFICATION ENABLING RETROSPECTIVE EXERCISE
40
OF POWERS UNDER BLACK MONEY ACT
36The SC in the case of Gautam Khaitan, has vacated
stay granted by the Delhi HC wherein it was held that
the Central Government cannot exercise powers
under an Act before it has been made effective.
FACTS
The Assessee had led writ petition before the Delhi
HC under Articles 226 and 227 of the Constitution of
India, challenging the constitutional validity of
Sections 10 (1) and 54 of the Black Money
(Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015 (“Black Money Act”). The
Central Government had promulgated an order under
Section 84 of the Black Money Act (“Order”) which
claried that the Black Money Act shall come into force
on July 1, 2015 from the original date of April 1, 2016
i.e. AY 2016-17. The petitioner was alleged to have
wilfully evaded tax and prosecution proceedings
under Section 51 of the Black Money Act was initiated.
The IRA had issued order sanctioning prosecution,
which is required mandatorily under Section 55 of the
Black Money Act before commencing prosecution
proceedings. The petitioner had also sought stay on
operation of this Order and to restrain the assessment
ofcer from taking any action against the petitioner.
ISSUES
Whether the Government can exercise powers under
the Black Money Act prior to the statute coming into
force?
ARGUMENTS
Before the Delhi HC, the petitioner argued that Section
1(3) of the Black Money Act explicitly stipulates that
the said Act shall come into force on April 1, 2016 and
therefore, the CBDT cannot issue notications for the
purposes of advancing the applicability of the said
provisions to advance the said date from April 01,
2016 to April 01, 2015.
On the other hand, the IRA argued that under Section
86 of the Black Money Act empowers the CBDT to
remove difculties so as in order to give effect to the
provisions of the said Act and hence, the notications
issued to prepone the applicability of the said Act are
valid.
DECISION
The Delhi HC held that that the Government could not
have exercised its powers under the Black Money Act
before it came into force and as the legislature in its
wisdom decided April 1, 2016 as the date of entry of
force of the said statute.
The HC had acceded to the arguments of the
Assessee and had held that the Government ought
not to have given effect to a statute prior to the date it is
expressly stipulated to come into force by Parliament
in the said enactment. The HC also observed that, in
the instant case, the CBDT has invoked the provisions
of the Act before even the said Act was given effect to.
Therefore, the prosecution initiated against the
Assessee under the Black Money Act would result in
grave prejudice and accordingly, the HC ordered the
assessing ofcer to restrain from taking or continuing
any action against the petitioner.
The SC in the SLP summarily vacated the interim relief
granted by the Delhi HC and held that the IRA is free to
prosecute the Assessee in accordance with the
provisions of the Black Money Act, subject to the nal
decision about the constitutional validity of
notications.
36 Gautam Khaitan v Union of India, (2029) 308 CTR (Del) 676.
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SIGNIFICANT TAKEAWAYS
The decision is silent as to why the stay granted by the
Delhi HC was vacated but merely stated that the IRA is
free to prosecute the Assessee, without even
discussing the merits of the case.
It may be noted that Section 86 of the said Act merely
empowers the IRA to remove the difculties in giving
effect to the provisions of the said Act. However, in the
instant case, the IRA seemed to have applied the Act
before it became effective, which could be contended
as expanding the scope of the Act and hence,
impermissible. Surprisingly, the SC decision does not
discuss any of these aspects and hence, the order
seems to have complicated the matter instead of
resolving it.
It is also worthwhile to highlight that Section 85(3) of
the said Act explicitly provides that the IRA is
empowered to give retrospective effect to the rules
forming part of the Act, from a date not earlier than the
date of commencement of the Act itself and also that
no retrospective effect shall be given to any such rules
which prejudicially affect the interest of the tax payers.
Although the said provision deals only with providing
retrospective effect to the rules and not to the
provisions of the Act itself, the legislative intent is
clearly made available in the said provision i.e. the IRA
cannot even make a rule, retrospectively applicable, if
the same is prejudicial to the interest of the tax payers.
In view of the above discussions, it may be
summarised that the HC had correctly stayed the
prosecution proceedings and it is not clear as to why
the SC has allowed the IRA to continue with the
prosecution proceedings. As the order passed by the
SC is not a speaking order, it is also not possible to
understand the rationale behind it. The instant order of
the SC is not only prejudicial to the Assessee, it may
create signicant hurdles for other tax payers who
may be charged with similar violations and it could
also create enormous administrative burden on the
IRA if the dispute were to be ultimately decided in
favour of the tax payers.
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CASE LAW UPDATES
- INDIRECT TAX
- AAR RULINGS
42
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ITC CAN BE CLAIMED WHEN CONSIDERATION IS PAID
THROUGH BOOK ADJUSTMENT
43
37In the case of M/s Senco Gold Limited, the AAR,
West Bengal held that the GST legislations and rules
do not restrict a recipient from claiming ITC when
consideration is paid through book adjustment.
FACTS
M/s Senco Gold Limited (“Applicant”) was engaged in
the manufacturing and retailing jewellery and other
articles under the brand name, “Senco Gold &
Diamonds”. The Applicant also entered into franchise
agreements with franchisee(s) for operation of
showrooms. The Applicant raised tax invoices on the
franchisee(s) for supply of jewellery as well as for
franchise support services. The
franchisee in turn raised tax invoices on
the Applicant for supply of old gold,
silver etc., received from customers.
The Applicant intended to settle the
mutual debts through book adjustments
and approached the AAR to seek a ruling on whether
ITC was admissible in the said scenario.
ISSUE
Whether book adjustment constitutes a valid form of
consideration, as dened under Section 2(31) of the
CGST Act?
ARGUMENTS
The Applicant argued that Section 16(2) of the CGST
Act provided that the amount of ITC availed by a
recipient would be added to his output tax liability if he
failed to pay the supplier, the value of supply, within a
period of 180 days from the date of issuance of
invoice. The Applicant made reference to the West
Bengal VAT Act, 2005 wherein the claim of ITC was
restricted to such transactions where payment was
made by cheques/draft/electronic banking, only.
Further, the Applicant submitted that no such
restrictive provision existed under the CGST Act. The
Applicant also put forth the contention that payment
through adjustment of book debts was a prevalent
commercial practice, which was also recognized
under the prescribed Accounting Standards.
On the other hand, the Revenue contended that
Section 16 of the CGST Act provided for the
availability of ITC only when the conditions and
restrictions under Section 49 of the CGST Act were
fullled. Section 49 provided that every deposit
towards tax liability should be through internet
banking, NEFT/RTGS, credit
or debit cards or by any other
prescribed mode. Therefore,
the Revenue took a view that
all transactions between the
supplier and recipient had to be made through online
banking system, for the recipient to be eligible to claim
ITC.
DECISION
The AAR observed that Section 49 of the CGST Act
encompassed within its ambit the payments made by
a supplier, towards his tax liability, to the Government
and not transactions between the supplier and
recipient. The AAR also opined that Section 49 of the
CGST Act did not prohibit the Applicant from reporting
ITC in returns, when consideration was paid by book
adjustment, or in any other manner.
The AAR gave a broad interpretation to the word,
“consideration”, as dened under the CGST Act, and
held that such denition included almost every form of
payment. The AAR observed that a payment was a
”“This definition of “consideration”
includes any form ofpayment.
37 In re: M/s Senco Gold Limited, 02/WBAAR/2019-20.
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transfer of an asset to the payee for discharge of an
obligation arising out of transactions involving goods,
services or other legal obligations. The most common
class of asset used for payments was money.
However, other assets unless specically excluded by
law could be used, provided that the payee accepted
payment by such assets, other than money, as good
and sufcient discharge of the obligation. Therefore, a
reduction in the book debt (an asset in the payer’s
books of account) was a valid form of payment.
Accordingly, the AAR ruled that the Applicant could
pay the consideration for inward supplies by way of
setting off book debts, given that the GST legislations
did not restrict the recipient from claiming ITC where
consideration was paid through book adjustments.
SIGNIFICANT TAKEAWAY
The ruling will provide aid to taxpayers, specically
sectors in which businesses have multiple branch
ofces, project ofcers, franchisees, etc., by reducing
the burden of carrying out the processes associated
with exchange of money, as consideration in relation
to intercompany transactions. It is in line with the spirit
of GST of offering reduced compliances and simplied
methods of carrying out business.
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CASE LAW UPDATES
- INDIRECT TAX
- OTHER JUDICIAL PRONOUNCEMENTS
45
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© 2019 Cyril Amarchand Mangaldas
SALE OF GOODS BY A DUTY FREE SHOP NOT
EXIGIBLE TO GST
46
38In Atin Krishna, the Division Bench of the Allahabad
HC held that supply of goods to passenger incoming to
India or going outside India, from a retail outlet
operating in the arrival or departure terminals of an
international airport, i.e. duty free shop(s) ("DFS") was
exempt from GST.
FACTS
Atin Krishna (“Petitioner”) led a Public Interest
Litigation (“PIL”) before Allahabad HC contending that
revenue loss was taking place as DFS at Chaudhary
Charan Singh International Airport, Lucknow
("Airport") were neither discharging IGST on the
goods imported into the territory of
India nor CGST and SGST on the
sale of goods to passengers prior to
January 31, 2019. Moreover, it
contended that DFS were incorrectly
permi t ted to c la im re fund o f
accumulated ITC of GST paid on
procurement of domestic goods and services.
ISSUES
• Whether GST was payable on supply of goods
by a DFS?
• Whether a DFS can c la im re fund o f
accumulated ITC of GST paid on procurement
of domestic goods and services?
ARGUMENTS
The Petitioner argued that the goods would be
construed to be imported into India when they cross
the territorial waters of India. Thus, such goods would
be exigible to IGST under Section 5 of the IGST Act.
Additionally, supply of goods by a DFS to passenger
would be an intrastate supply in terms of Section 8(1)
of the IGST Act as the location of supplier and the
place of supply were in the same state. The Petitioner
argued that the essential ingredients to qualify as an
export of goods as derived from judicial precedents is
that goods must have a specic destination, a
condition not satised by a DFS. Thus, the Petitioner
contended that sales to passenger at the departure
terminal were exigible to CGST and Uttar Pradesh
GST (“UPGST”).
The Respondent contended that supply of goods
imported into the territory of India till they cross the
custom frontier shall not be treated as supplies of
goods in the course of interstate trade or commerce.
Customs frontiers of India was
dened to mean as the limits of a
customs area as dened under
Customs Act. Further customs area
means the area of a customs station
or a warehouse and includes any
area in which imported goods or
goods for export were ordinarily kept before clearance
by the Customs Authorities. The DFS were located in
the area of customs station (customs airport) or
warehouse. Accordingly, the supply of goods imported
to and from DFS did not cross the custom frontier of
India. Thus, it would not be exigible to CGST and
UPGST.
Additionally, IGST on import of goods was levied at the
time of levy of customs duty. The taxable event for levy
of customs duty on imported goods occurred when the
bill of entry for home consumption of goods was led.
As DFS was supplying goods to the passenger before
its clearance for home consumption the DFS was
neither liable for customs duty nor IGST.
Similarly, where goods were not cleared for home
consumption, they could be cleared for exports
without payment of customs duty after ling of
shipping bill for export. In this regard, where the
”“ Duty free shops are
eligible to claim refund of unutilised ITC.
38 Atin Krishna v. U.O.I. Thru Secy. Ministry of Finance and Ors., TS-372-HC-2019(ALL)-NT.
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passenger going to another country purchased goods
from DFS, an invoice was issued by DFS. Such
invoice was deemed to be a shipping bill for purpose of
exports. Therefore, the Respondent contended that
such supplies would be zero- rated supply and refund
of unutilized ITC could be claimed.
DECISION
HC relied on SC rulings and observed that in case of
DFS, goods were imported from outside India and
were kept in customs warehouse and exported
therefrom. Thus, the stage for payment of customs
duty did not arise. HC also elucidated that such goods
were cleared for home consumption by the
passengers, when they crossed the customs frontier
at the airport along with such goods as bona-de
baggage without payment of customs duty. Thus, it
concluded that DFS was not liable to pay customs duty
including IGST for supply of goods at arrival terminal.
Further, the HC held that the supply of goods by the
DFS to passengers departing from India to a foreign
destination at the departure terminal were never
cleared for home consumption. The passenger acted
as a carrier of goods out of India and received invoices
which were deemed shipping bills. Exports were zero-
rated supply under GST legislations. Hence, the HC
concluded that the DFS were eligible to claim the
refund of unutilized ITC.
SIGNIFICANT TAKEAWAYS
Last year, an order of the AAR eliminated the incentive
for DFS to operate at airports where they end up
paying heavy rentals as it held that the supplies by a 39
DFS were exigible to GST. The aforementioned
judgement resettles the position that DFS were free
from levy of tax which was disturbed by it. The said
judgement also extensively discusses the principles of
import and export of goods from customs frontier of
India.
Moreover, the favourable interpretation provided by
the judgement that the goods supplied by DFS would
not be exigible to IGST. This would deter the
department from raising a show cause notice against
the DFS for non-payment of GST on supplies made by
it to passengers. Moreover, various products for
exports do not require to comply with particular
standards. Many DFS are engaged in supplying such
products. Accordingly, the said ruling also prevents
various government authority from challenging
violation of laws which are applicable in relation to
supply of goods within India. The said position has
also been upheld by the Bombay HC in the judgment 40
of Sandeep Patil . The said judgment claried that
the goods sold at DFS at departure terminal were
export. Accordingly, the requirement of mandatory
labelling of health warnings on tobacco products
under Cigarettes and Other Tobacco Products
(Prohibition of Advertisement and Regulation of Trade
and Commerce, Production, Supply and Distribution)
Act, 2003 would not be applicable. Accordingly, sale of
products from DFS would not be disturbed.
39 In re M/s Rod Retail Pvt. Ltd. 2018-TIOL-08-AAR-GST.40 Sandeep Patil. v. Union Of India & Another, 2019 (2) TMI 1628.
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WRIT IS MAINTAINABLE FOR PRE-ARREST BAIL IN
CASE OF OFFENCES UNDER GST LEGISLATIONS
48
41In P.V. Ramana Reddy, the Division Bench of the
Telangana HC held that a taxpayer cannot be granted
a r e l i e f a g a i n s t a r r e s t e v e n w h e r e t h e
assessment/adjudication has not been completed.
FACTS
Taxpayers in the State of Telangana (“Petitioner(s)”)
were summoned by the department (“Respondent”)
due to inter alia issuance of fake invoices, circular
trading, invoicing without supply of goods/services,
fake e-way bills, and availment of fraudulent ITC. The
Petitioners, in apprehension of arrest by the proper
ofcer, led writ petitions before the Telangana HC to
obtain a relief against such arrest.
ISSUES
• Whether the Petitioners can be arrested prior to
assessment or launch of prosecution?
• Whether a petition akin to anticipatory bail can
be led as a writ petition?
ARGUMENTS
In relation to the maintainability of
the petit ion, the Petit ioners
contended that there was no rst
information report led against
them before their arrest under
Section 69(1) of CGST Act.
Therefore, they could not le for anticipatory bail.
Filing a writ petition was the only alternative available
to them.
In relation to arrest, the Petitioners argued that a
person could not be arrested in terms of Section 41
and 41A of the Code of Criminal Procedure, 1973
(“CrPC”) till the person complied and continued to
comply with notices of appearance before the
summoning authority. Moreover, in terms of Section
41A(3) of the CrPC, in case where a person had been
compliant with not ices of appearance, the
discretionary power to arrest could only be exercised
for reasons to be recorded. The Petitioners stated that
as the maximum punishment prescribed under
Section 132 of the CGST Act was imprisonment for
ve years and they were compliant with notices of
appearance, there was no necessity for their arrest
under Section 69(1) of the CGST Act.
The Petitioners also contended that the CGST Act
provided for the procedure of assessment even in
cases where there was discrepancy in information
furnished in return. The Respondent had an option to
scrutinize book of accounts and other documents
during assessment. Accordingly, an offence under the
CGST Act would materialize post assessment or
special audit. Thus, there was no necessity to arrest
till an adjudication occurred in terms of the CGST Act.
The Petitioners argued that power to arrest under
Section 69(1) of the CGST Act was available only in
cases where the Respondent had reason to believe
that a person had committed a cognizable and non-
bailable offence. An ofcer under the CGST Act, not
being a police ofcer, could not seek custody of an
arrested person for completing the
investigation. Such an arrest would
amount to punishing a person
without trial. The Petitioners also
stated that offences under the
CGST Act were compoundable,
thus arrest was not required.
On the other hand, the Respondent contended that a
writ petition was not maintainable, as the petitions
were in the nature of an application for anticipatory
bail led in the form of a writ petition, in the absence of
criminal proceedings.
Sections 41 and 41A of the CrPC were applicable only
post arrest in terms of Section 69(3) of the CGST Act,
and in criminal proceedings. In the instant case, no
”“GST officer may arrest withoutconducting an assessment.
41 P.V. Ramana Reddy and Ors. v. U.O.I., Ministry of Finance and Ors. 2019 (4) TMI 1320.
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arrests were made and the prosecution was not
launched (i.e. not criminal proceeding). The
provisions of CrPC were not applicable in the instant
case. Thus, the HC could not interfere in such
proceedings.
The Respondent also contended that the Petitioners
were guilty of circular trading as they claimed ITC
without procuring inputs, and passed on the same to
companies without selling any goods. Such an act was
a cognizable and non-bailable offence and the
Respondent had power to arrest such person under
Section 69(1) of the CGST Act.
DECISION
The HC observed that there was an incongruity
between Section 69(1) and Section 132(4) and (5) of
the CGST Act. Section 69(1) of the CGST Act provided
for the power of the commissioner to order arrest of
person only in cognizable and non-bailable offences.
However, Section 69(3) discussed about the
applicability of CrPC in case of arrest in non-
cognizable and bailable offences. The HC highlighted
that it was unclear as to how a person who had
committed a non-cognizable and bailable offence
could be arrested under the GST legislations.
In relation to the applicability of CrPC, the HC
disagreed with the Respondent’s contention that the
Petitioners could not rely on Section 41 and Section
41A of the CrPC. It was of the view that Section 70(1)
of the CGST Act was the parallel provision for Section
41A of CrPC, as they both deal with summoning of
person for enquiry.
In relation to maintainability of the writ, the HC relied
on SC rulings and observed that in case of exceptional
circumstances, the HC was empowered to issue the
writ of mandamus to direct an ofcer not to effect 42
arrest. However, it held that writ must not restrict the
proper ofcer from performing his statutory function.
Although the HC held the writ petition to be
maintainable, it did not grant relief to the Petitioners
against arrest. The HC observed that GST was in a
nascent stage. The taxpayers had exploited the law by
projecting huge turnover which remained on paper
and availed ITC to the tune of INR 250 crores. Thus,
there was nothing wrong in the Respondent
apprehending the person involved in fraudulent claim
of ITC should be arrested. Moreover, the list of
offences included under Section 132(1) of CGST Act
have no co-relation to an assessment. Thus, the
argument that prosecution can only be launched post
completion of assessment was not valid.
The HC also recorded that Section 69(1) of CGST Act
used the phrase “reasons to believe” whereas Section
41A(3) of CrPc used phrase “reasons to be recorded”.
Therefore, there was no requirement to record
reasons to believe in the order to authorize arrest.
SIGNIFICANT TAKEAWAYS
Under the erstwhile service tax regime, it was a settled
position of law that a person could be arrested only
post an enquiry was conducted, and an opportunity
was granted to such person, sought to be arrested, to
defend his/her/their stand.
However, the aforementioned judgement is contrary
to the said position in context of GST legislations. 43
Relying on its own ruling in P.V. Ramana Reddy the 44
Telangana HC in Ferrous Enterprises Pvt. Ltd.,
held that when arrest was not prohibited prior to
assessment, any coercive action which was less
grave than arrest, would also not be prohibited.
Although, the aforementioned Telangana HC
judgement of P.V. Ramana Reddy was challenged by
way of a special leave petition before the SC, the same
was dismissed. Similar stand has also been taken by 45 various HC of other States.
46 47 However, certain HCs , and the SC in Meghraj,
granted pre-arrest bail in the matters of wrongfully
availing ITC. Thus, another special leave petition was
led before the SC. The said special leave petition has
been referred to a three judge’s bench and is pending 48for hearing. It would be worthwhile to wait and watch,
whether the SC settles the position for the GST regime
in a manner similar to the erstwhile service tax regime.
42 Km. Hema Mishra v. State of U.P., 2014 (4) SCC 453; Kartar Singh v. State of Punjab, 1994 (3) SCC 569.43 Makemytrip India Pvt. Ltd. v. Union of India (2016) 44 STR 481 afrmed by the SC in Union of India v. Makemytrip India pvt. Ltd. (2019-SCConline SC 560).44 Ferrous Enterprises Pvt. Ltd. v. Union of India, TS-417-HC-2019(Tel).45 Mahendra Kumar Singhi v. Commissioner of State Tax, 2019 (5) TMI 310 (Mad HC); Meghraj Moolchand Burad v. Directorate General of GST (Intelligence) , Pune, 2019 (2)
TMI 1150 (Bom HC).46 Sapna Jain and Ors v. Union of India, 2019 (5) TMI 1610; M/s. Jayachandran Alloys (P) Ltd. v. The Superintendent of GST And Central Excise, 2019 (5) TMI 895 (Mad HC).47 Meghraj Moolchand Burad v. Directorate General of GST (Intelligence), Pune, 2019 (1) TMI 1563 (SC).48 Sapna Jain and Ors v. Union of India, [TS-381-SC-2019-NT].
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TRANSFER OF LAND DEVELOPMENT RIGHTS NOT A
TAXABLE SERVICE
50
In the case of DLF Commercial Projects 49
Corporations, the Chandigarh Bench of the
CESTAT held that where the assessee developer had
entered into a land development agreement which
was only in the nature of acquisition of land, it would
not constitute a taxable service under the FA.
FACTS
DLF Commercial Projects Corporations (“Appellant”)
was engaged in the business of construction and
development of integrated township as well as certain
other services. It entered into a Land Development
Agreement (“Agreement”) with DLF Ltd. In terms of
the Agreement, the Appellant were required to transfer
the development rights (“TDR”) which it had acquired
from Land Owning Companies (“LOC”), to DLF Ltd. In
lieu of this TDR, DLF Ltd. would have transferred a
fund to the Appellant, and the Appellant in turn, was to
transfer such to the LOCs, in the form of a refundable
deposit, towards the purchase of
such rights. However, in reality, the
Appellant had neither purchased
nor transferred the land or the TDR
to DLF Ltd. DLF Ltd. gave advances
from time to time to the Appellant for
purchase of land. Such advances
were received as ‘refundable performance deposit’ by
the Appellant, which were subsequently transferred to
the LOC to enable them to purchase the land. Such
refundable performance deposit was to be refunded to
DLF Ltd. in future, as and when sale deeds for sale of
land/transfer of TDR were executed between the
LOC, DLF Ltd. and prospective buyers.
In light of the clauses of the Agreement, a show-cause
notice was issued to the Appellant seeking to levy
service tax on the refundable performance deposit,
considering the same to be a consideration for transfer
of TDR to DLF Ltd.
On adjudication, the assessing authority conrmed
the said levy. The Appellant, thereafter, led this
appeal against the adjudication order before the
CESTAT.
ISSUES
• Whether the Agreement was an agreement for
transfer of TDR?
• If yes, whether service tax was payable on the
said Agreement?
ARGUMENTS
The Appellant argued that there was no actual transfer
of TDR under the Agreement as it was merely futuristic
in nature. Since, service tax was levied on the actual
provision of services only, no service tax could be
levied on a future supply.
The Appellant further argued that
the “Refundable Performance
Deposit” remitted to them was not in
the nature of a consideration
towards transfer of TDR by it, since
no part of the amount was retained
by the Appellant. The Appellant also
produced a Chartered Accountant’s certicate in
support of its contention that it neither purchased land
nor any TDR from the LOCs.
The Appellant further argued that TDR was a benet
arising out of land and therefore would be treated as
an “immovable property”. As such, even if there was a
transfer of TDR, such a transaction would be a transfer
of an immoveable property, and excluded from the
meaning of ‘service’, as dened under Section 65B
(44) of the FA. Hence, no service tax could be levied
on the same.
”“TDR when transferred with
land is in the nature of animmoveable property.
49 DLF Commercial Projects Corporations vs. Commissioner of Service-Tax, Gurugram [2019] 105 taxmann.com 344 (Chandigarh – CESTAT).
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The Appellant also contended that DLF Ltd. had made
several enquiries with the authorities to ascertain
whether transfer of TDR was exigible to service tax.
The Appellant also submitted that the demand, for the
substantial period in dispute, was barred by limitation.
On the other hand, the Revenue Authorities
(“Respondent”) argued that the Appellant had indeed
transferred TDR to DLF Ltd. under the Agreement.
The transaction between the LOCs and the Appellant
was mutually exclusive of the transaction between
DLF Ltd. and the Appellant under the Agreement. The
former transaction was not under scrutiny in the
present case. The funds provided by DLF Ltd. were in
the nature of a business advance paid to the Appellant
for the procurement of TDR.
The Respondent further contended that the balance
sheet of the Appellant reected such advance
amounts received towards TDR as ‘inventory’, which
clearly indicated that there was a transfer of TDR from
the Appellant to DLF Ltd. Thus, such transfer was not
futuristic in nature. Therefore, the Respondent argued
that the Appellant was liable to pay service tax on such
advances received from DLF Ltd. in terms of Rule 3 of
Point of Taxation Rules, 2011, which provided for the
time of receipt of any advance as the point of taxation.
DECISION
The CESTAT noted that the Agreement did not
encourage the actual transfer of TDR by the Appellant.
The Agreement was futuristic in nature as the transfer
of TDR could be effected only after the acquisition of
the concerned land. As throughout the transaction, the
Appellant would never be the owner of the land, it
would have no right to transfer any TDR.
The CESTAT observed that in order to render a
transaction liable for service tax, the nexus between
the consideration agreed and the service activity to be 50
undertaken should be direct and clear and the money
received should be directly attributed to an identied 51activity. However, this was not the case in the instant
matter. Therefore, the CESTAT held that the funds
provided by DLF Ltd. could not be considered as
consideration for service provided.
The CESTAT further observed that in terms of Section
3(26) of General Clauses Act, 1897, TDR being in the
nature of a benet arising out of land, would be treated
as an “immoveable property” in the instant case.
Therefore, transfer of the same was outside the
purview of “service” under Section 65B (44) of the
Finance Act.
The CESTAT also noted that since the Respondent
had not responded to the letters of DLF Ltd., seeking
clarity on the levy of service tax on transfer of TDR, it
can be inferred that the Respondent was not clear on
whether such a transaction was a taxable service or
not. Thus, there was no mala de on part of the
Appellant. Accordingly, the CESTAT held that the
demand of service tax conrmed by the assessing
authority was unsustainable and the same was set
aside.
SIGNIFICANT TAKEAWAYS
The levy of service tax on TDR has always been a
disputed issue under the erstwhile service tax regime.
The aforesaid ruling of the Chandigarh CESTAT is the
rst decision of its kind wherein the CESTAT claried
that in the instant case, TDR would be treated as an
immoveable property and hence, its transfer would not
a taxable service under the FA. However, it must be
noted that the Hon’ble CESTAT has restricted its
analysis of taxability of TDR to the factual matrix of the
instant case, and has not examined the nature of TDR
in general. Hence, the issue of levy of tax on TDR still
remains a grey area.
It may also be noted that under the GST legislations,
TDR has been explicitly treated as a supply, exigible to
GST at the rates prescribed in this regard. However, a
writ petition has already been led before the Bombay
HC challenging the constitutional validity of levy of 52
GST on TDR.
51
50 Mormugao Port Trust v. CC, CE&ST, Goa - 2017 (48) S.T.R. 69 (Tri. - Mumbai).51 Cricket Club of India v. Commissioner of Service Tax, 2015 (40) S.T.R. 973.52 Nirman Estate Developers Pvt. Ltd. v. Union of India W.P. 3357 of 2018 Bombay HC.
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ITC AVAILABLE ON CONSTRUCTION OF IMMOVABLE
PROPERTIES FOR LETTING OUT
52
53In the case of M/s Safari Retreats Pvt Ltd and Anr.,
the Orissa HC held that ITC would be available on
GST paid on procurement of goods and/or services
utilized for construction of a mall, which includes GST
payable on the rental income.
FACTS
M/s Safari Retreats Pvt. Ltd. and Anr. (“Petitioners”)
were engaged in the business of construction of
shopping malls and letting them out on rental basis.
They procured various inputs and input services for
the purposes of construction, and
paid GST on the same. The
Petitioners were desirous of setting
off the ITC of the same against their
output GST liability on renting of
immovable property. However, in
view of the restriction on availability
of ITC under Section 17(5)(d) of the 54
CGST Act , the GST authorities (“Respondent”)
advised the Petitioners to deposit the GST amount
without utilizing the ITC. Therefore, the Petitioner
challenged the denial of the benet of ITC under
Section 17(5)(d) of the CGST Act.
ISSUES
Whether ITC can be claimed on goods and/or services
utilized/consumed in the construction of malls for the
purpose of letting it out?
ARGUMENTS
The Petitioners argued that the provisions of Section
17(5)(d) of the CGST Act would not be applicable to
this case. They were entitled to avail benet of ITC of
GST paid on procurement of goods and/or services as
GST was payable by them on the rentals income
received from letting out of the mall. It was also
submitted that as there would be no break in the
supply chain of the Petitioners, ITC were to be made
available to the Petitioners.
The Petitioner contended that Section 17(5)(d) of the
CGST Act was not made applicable to builders who
sold units in buildings before the issuance of a
completion certicate, considering that GST was
payable on the output supply. However, ITC was
denied under Section 17(5)(d) of the CGST Act to
builders who were letting out their buildings for renting,
even though GST was payable on the letting out.
The Petitioner argued that Section
17(5)(d) of the CGST Act classied
the aforesaid taxable persons under
two different categories, even though
both were carrying continuous
business without any break in supply
chain. Such classication was not a
reasonable classication and was
egregiously arbitrary and discriminatory, and hence,
was violative of Article 14.
The Petitioners also contended that the denial of ITC
under Section 17(5)(d) of the CGST Act had led to a
sharp and inevitable increase in cost which the owner
of the building was compelled to incur. This had also
rendered the construction uncompetitive as compared
to similar built-up units existing previously. Therefore,
such a discrimination was violative of the fundamental
right to carry on business granted under article
19(1)(g) of the Constitution of India.
Lastly, the Petitioners argued that it was a settled
posit ion of taxat ion statute that only such
interpretation was to be adopted which avoided or
obviated double taxation. However, denial of ITC in
the instant case, was clearly against the intention of
the legislature and frustrated the object sought to be
achieved by the legislature in enacting the GST
legislations.
”“ ITC shall be available tobuilders engaged in constructionservices for letting out of units.
53 M/s Safari Retreats Pvt Ltd and Another v. Chief Commissioner of Central Goods and Service Tax and Others, 2019-VIL-223-ORI.54 Section 17(5)(b) of the CGST Act states that ITC shall not be available on “goods or services or both received by a taxable person for construction of an immovable property
(other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.”
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On the contrary, the Respondent argued that the
assessees could not claim ITC as a matter of right and
a provision under the GST legislations could not be
rendered unconstitutional merely because the set off
of ITC was restricted under it. Further, they contended
that the legislative intent under Section 16 of the
CGST Act was not to provide an absolute entitlement
to ITC. This was evident from the power provided
under Section 16(1) to restrict the availment of ITC.
The Respondent also contended that the decision of
the legislature to allow or disallow the ITC could not be
challenged under the judicial review mechanism as
the legislature was the best judge of the community.
Lastly, the Respondent argued that a legislation or a
provision could be invalidated only when it evidently
violated the provisions of the Constitution. Where two
views on a provision were possible, the one upholding
the constitutionality of the statute had to be preferred,
even if the same resulted in narrow construction.
DECISION
The HC held that a narrow interpretation of Section
17(5)(d) of the CGST Act, as suggested by the
Respondents, would frustrate the very purpose of the
legislations. The HC observed that the Petitioner
would have to pay a huge sum without any basis. The
HC stated that the transaction at hand could not be
equated with construction of an immovable property
which was meant to be sold after obtaining a
completion certicate since this lead to a break in the
supply chain where ITC could not be claimed. The HC
held that the instant case was different as the intention
of the builder was to let out the immovable property
and not sell it. In such a situation, there could be no
break in the supply chain and denial of ITC was
arbitrary, unjust and oppressive.
In light of the above, the HC held that the interpretation
of Section 17(5)(b) of the CGST Act, as contended by
the Respondents, was not acceptable. The HC,
therefore, held that Section 17(5)(b) of the CGST Act
would not be applicable to assessees who are
engaged in construction of buildings for supply for
rental services.
SIGNIFICANT TAKEAWAYS
This decision of the HC is yet another instance
wherein the court exercised its power to construct the
law and amplify the scope of a statute so as to reduce
the tax blockage, in the spirit of GST. However, the HC
has clearly ignored certain settled position of law
including that a literal interpretation shall be given to
taxing statute, and that ITC cannot be claimed an
absolute right.
It other petition have petitions challenging This
decision also comes up as a major relief for builders
(especially those engaged in construction of
commercial properties such as malls, hotels,
restaurants, ofces) who are currently burdened with
a huge amount of accumulated ITC resulting in high
operation costs. Such burden was furthered by higher
GST liability on such output supplies, which ultimately
lead to an increase in cost for the end consumer.
However, recently, in a ruling passed by the AAR, it
was held that ITC would not be available to hotels on
certain inputs used in renovation of hotel considering
the same to be ‘construction of immovable property’.
Though, the ruling of the AAR is not binding on anyone
other than the applicant itself, the stand of the
department is leading to a state of confusion.
Additionally, it is most likely that the GST authorities
will le an appeal before the SC. In such a case, it will
be worthwhile to wait for the nding of the SC on this.
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TRANSITIONAL CREDIT PERMISSIBLE WHERE NO
REFUND WAS CLAIMED UNDER ERSTWHILE LAW
54
55In M/s Magma Fincorp Limited , the division bench
of the Telangana HC observed that where the revenue
admitted that the taxpayer was entitled to refund of a
Net Credit Carried Forward (“NCCF”) at the time of
bifurcation of Telangana and Andhra Pradesh, the
taxpayer is entitled to claim transitional relief against
such NCCF under the Telangana GST Act.
FACTS
Magma Fincorp Limited (“Petitioner”), registered
under Central and State GST Act and erstwhile
Telangana VAT Act, 2005, was engaged in the
business of leasing and nancing of vehicles and
equipment. The Petitioner was entitled to ITC of INR
1.79 crore, as on the date of bifurcation of the state of
Andhra Pradesh and Telangana i.e. June 2, 2014.
Pursuant to the b i furcat ion of the s tates,
Commissioner of Commercial Taxes issued a circular
dated May 12, 2015 whereby, Petitioner became
entitled to claim NCCF in the state of Telangana (the
state to which the Petitioner migrated upon
b i fu rca t ion) . The to ta l ITC
available to the Petitioner, as on
the date of migration, was INR
1.77 crore. By July 1, 2017, i.e.,
the date of implementation of GST,
the balance ITC was of INR 1.43
crores. The Petitioner led its
returns up to June 30, 2017, under
the Telangana VAT Act, 2005.
Section 140 of the Telangana GST Act, 2017 entitles
the registered dealers to take the amount of credit
carried forward in their returns furnished under the
erstwhile law, in their electronic credit ledgers.
Accordingly, the Petitioner led TRAN-1 under the
Telangana GST Act, 2017 for transfer of ITC of INR
1.43 crores as transitional credit available to it. The
Assistant Commissioner vide notice dated May 28,
2018 advised the Petitioner to not claim such
transitional credit. Petitioner led a reply to this notice,
however, no adjudication orders were passed on the
same. The Assistant Commissioner issued another
notice dated October 5, 2018. The Assistant
Commissioner after the ling of reply by the Petitioner
and granting personal hearing to the Petitioner,
passed an order rejecting the transitional relief and
demanded payment of an equivalent amount on the
ground that it was an excess claim. The Petitioner
assailed this order by ling the present writ petition.
ISSUES
Whether Petitioner was entitled to carry forward the
transitional credit reecting as per returns furnished
under the erstwhile law, in its electronic credit ledger
under Telangana GST Act, 2017?
ARGUMENTS
The Petitioner contended that it was entitled to
transitional relief under section 140(1) of the
Telangana GST Act, 2017 and
none of the three conditions
limiting the applicability of section
140(1) prescribed in the proviso to
section 140(1) were satised in the
present case. Additionally, the
Petitioner argued that (i) multiple
notices by persons holding ofce
at different points of time were bad in law; (ii) the
impugned order was passed on the basis of provisions
of law which were inapplicable; (iii) the circular issued
by Commissioner of Commercial Taxes had no
application to GST law.
The revenue contended that the Petitioner ought to
have utilized the benets of its NCCF against the
liabilities in the monthly VAT or CST returns or the
assessed liabilities under both VAT and CST; or
”“ Purposive interpretation
should be given to transitional provisions under the GST law.
55 Magma Fincorp Limited v. State of Telangana, Finance Department, Hyderabad and Others, Writ Petition No. 46792 of 2018.
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claimed a refund. As (i) the Petitioner did not avail
these options, (ii) assessment for the period was
already completed and (iii) Telangana GST Act, 2017
does not provide for utilization of NCCF as transitional
relief, the Petitioner was not entitled to the transitional
relief under Section 140 (1) of the Telangana GST Act,
2017.
DECISION
The Telangana HC observed that the Petitioner was
entitled to refund against the amount of NCCF or seek
adjustment of their liability under the GST regime.
The HC stated that as (i) there were no provisions in
the Telangana GST Act, 2017 to suggest that NCCF
were inadmissible as ITC under the Telangana GST
Act, 2017; and (ii) Petitioner had furnished all the
returns required under the erstwhile law, the
conditions limiting the grant of transitional relief in the
rst proviso to section 40(1) of the Telangana GST
Act, 2017 were not satised and as such, the
Petitioner was entitled to transitional relief under
section 140(1) of the Telangana GST Act, 2017. The
HC observed that when the revenue itself admitted
that the Petitioner was entitled to refund against the
unutilized NCCF, the revenue ought to have given a
purposive interpretation to section 140 of the
Telangana GST Act, 2017. In light of these
observations, the HC remanded back the matter to
Assistant Commissioner of Sales Tax for fresh
consideration in light of the aforementioned
observations.
SIGNIFICANT TAKEAWAYS
The decision is in line with the approach of the higher
judiciary in previous cases involving the question of
availability of transitional credit to tax payers. The
courts have been liberal in their approach in allowing
taxpayers to le their claims for input credit and have
passed orders directing concerned ofcers to allow
easy access to the por ta ls and ass is t in 56implementation and administration of GST law.
While the nal order of the Assistant Commissioner of
Sales Tax is not traceable, it is expected that the order
of the Assistant Commissioner of Sales Tax would
ensure smooth transition from pre-GST regime to
GST regime.
The decision is a welcome ruling for all the taxpayers
facing issues in claiming transitional credits under the
GST regime. The ruling reinforces the settled
principle of law that substance should be preferred
over form, and if a taxpayer is entitled to a relief under
a statute, then such relief should not be denied on
mere technicalities.
56 Abicor & Binzel Technoweld (P.) Ltd. v. Union of India, [2018] 91 taxmann.com 187 (Bombay); Continental India (P) Ltd v. Union of India, Writ (Tax) No. 67 of 2018.
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NOT MANDATORY TO SET UP PERMANENT BENCH
OF TRIBUNAL AT PLACE WHERE PERMANENT SEAT
56
57In Oudh Bar Association , the Allahabad HC held
that the State Bench of the GST Tribunal in Uttar
Pradesh, would be set up at Lucknow based on the
rst proposal written regarding constitution of GST
Tribunal.
FACTS
A proposal was made by the State Government
recommending that the State Bench of the GST
Tribunal should be established at Lucknow. The
proposal was revised on March 15, 2019 on account of
an order of the Allahabad HC dated 58
February 28, 2019 , which relied on
the decision of the Supreme Court 59in Madras Bar Association . It
was thus proposed to set up the
State Bench of GST Tribunal at
Allahabad instead, due to the
Principal Bench of the HC being situated there.
Aggrieved by the revised proposal / letter, the Oudh
Bar Association (“Petitioner”) led a writ petition
before the Allahabad HC praying quashing of the
revised letter/proposal.
ISSUE
Whether the permanent Bench of a Tribunal can be set
up only where the “Principal Seat” of the HC is
situated?
ARGUMENTS
The Petitioner submitted that the judgment of Madras 60
Bar Association did not mandate constitution of
Tribunal where the Principal Bench of the HC was
situated. Furthermore, the interlocutory order passed
by the Allahabad HC did not give directions for
constitution of State bench of the GST Tribunal at
Allahabad, it was merely an observation. The only
direction given by the HC was with regards to giving a
cut-off date by which the bench of the Tribunal should
be set-up. Therefore, the observation made by the HC
was in the nature of an obiter dicta and not binding.
The Petitioner submitted that section 109 of the CGST
Act, provides that the Government may on
recommendation of the GST Council, by notication,
constitute regional benches as may be required.
Accordingly, the Petitioner argued that under the
CGST Act, constitution of benches
of GST Tribunals falls within the
domain of the Government based
on the recommendation of the GST
Council. The HC had no power to
interfere in such a matter.
It was further submitted that the rst
proposal had been consciously made by the State
Government, keeping in mind the various aspects of
the pre-GST Tribunal. The Respondent had no
occasion to revise its proposal without recording due
reasons.
61The Petitioner also relied on a decision of the SC to
state that there was no permanent seat of the HC at
Allahabad. The seats at Lucknow and Allahabad were
of equal status. It was thus open for the State
Government to constitute the GST Tribunal at either of
the two places, or even at both the places.
The respondent, on the other hand, argued that the
revised proposal was sound under the provisions of
the CGST Act as the requisite procedure was followed.
It was further argued that the order of the HC was
directory in nature and required a revision of the earlier
proposal under law.
”“Permanent Bench of Tribunal
can be set up wherever a Seatof the HC is situated.
OF HC IS SITUATED
57 Oudh Bar Association High Court, Lucknow through General Secretary and Another v. UOI through Secretary, Ministry of Finance & Ors. PIL Civil No. 6800 of 2019. 58 Writ Petition No. 655 (Tax) of 2018.59 Madras Bar Association v. UOI, (2014) 10 SCC 1. 60 Madras Bar Association v. UOI, (2014) 10 SCC 1.61 Nasiruddin v. STA, Tribunal, (1975) 2 SCC 671.
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DECISION
The Allahabad HC noted that the judgment in Madras 62Bar Association did not use the word “Principal Seat”
for establishing a permanent Bench of a Tribunal. The
words used were “Seat of the HC”.
The HC relied on judicial precedents to observe that
while there were two seats of the HC, none of them
were permanent. Therefore, the State Bench of the
GST Tribunal could be set up at either Lucknow or
Allahabad or at both.
The HC accepted the Petitioner’s contention that its
earlier order was observatory and in the nature of an
obiter dictum. There was thus no occasion for the
State Government to review its earlier proposal. Thus,
it was held that the revised proposal was not
sustainable on facts and in law.
The HC did not venture into the merits of opining
where the State Bench of the GST Tribunal should be
situated as such a decision was exclusively under the
domain of the Government and the GST Council
under the CGST Act.
Accordingly, the revised proposal was quashed and it
was ordered that the earlier proposal be acted upon
within three months. Further, the HC also observed
that various tribunals and forums are not working on
account of there being no Presiding Ofcer, and the
same is causing serious prejudice and difculties to
litigants. Therefore, the HC directed the Chief
Secretary of the State to ensure that the unlled posts
in the Tribunal and other Forums are lled within 12
weeks and submit compliance report at the end of 12
weeks.
SIGNIFICANT TAKEAWAYS
In this judgment, the HC has recognized and
respected the domain of the Government and the GST
Council under the CGST Act and has consciously
refused to overstep beyond its domain and interfere
with the decisions of the Government in relation to
setting-up of a State bench of the GST Tribunal.
The HC has also recognized the hardship and
prejudice being caused to litigants due to non-
functioning of various Tribunals and Forums. The HC
has therefore directed the Chief Secretary of the State
to make an earnest endeavour and ensure all unlled
posts are lled within the specied time to protect the
right to appeal of the litigants and ensure justice is
imparted in an efcient and effective manner.
62 Madras Bar Association v. UOI, (2014) 10 SCC 1.
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DGAP IS LEGALLY BOUND TO INVESTIGATE A
PROFITEERING CASE ONCE REFERRED OR NOTICED
58
63In M/s Puri Constructions Pvt. Ltd., the NAA held
that where a person engaged in real estate business
did not periodically transfer the benet of ITC to its
buyers, such person was liable for proteering.
FACTS
M/s Puri Construction Pvt. Ltd. (“Respondent”) was
engaged in the business of construction and sale of
ats and buildings in the State of Haryana. A complaint
was led by Ms. Pallavi Gulati and Abhimanyu Gulati
(“Applicants”), who had purchased a at in the
‘Anand Vilas’ Project, Faridabad, Haryana, (“Project”)
launched by the Respondent. The Applicants alleged
that the Respondent had not passed on the benet of
increase in available ITC pursuant to the change in tax
regime.
The DGAP issued a notice of initiation of investigation
to the Respondent on March 14, 2018, and granted
opportunity to the Respondent to
inspect the non-condential
documents submitted by the
Applicants. It also offered the
Applicants opportunity to inspect
non-condent ia l documents
submitted by the Respondent.
Subsequently, the Applicants informed the DGAP that
they had discussed the matter with the Respondent,
and were satised with the clarication provided. They
did not have any further grievances, and therefore, the
complaint could be treated as withdrawn. Thereafter,
the Respondent made submissions to the DGAP,
intimating it of withdrawal of the complaint. The
Respondent, in order to express his bona de, also
submitted that it intended to compute the benet of
ITC and pass the same to the Applicants, but this could
be done only after completion of the Project.
However, a detailed investigation had already been
conducted by the DGAP and it was concluded that the
Respondent had proteered. Based on the
investigation the Respondent was issued an SCN
alleging the Respondent’s proteering and seeking to
impose penalty for the same.
ISSUES
1. Whether withdrawal of complaint was sufcient
to stop anti-proteering proceedings?
2. Whether penalty could be levied under the anti-
proteering provisions?
ARGUMENTS
The Respondent argued that since the Applicants had
withdrawn their application, the investigation of the
DGAP should have stopped and the report submitted
by them was not to be accepted.
The Respondent pleaded that he had
never denied to pass on the benet to
the buyers and the same is evident
from the communication made by
him to the buyers. He further argued
that the computation of the benet or
loss could not be done before
completion of the project as the
calculation, if done earlier would not have given the
true account of the actual benet accruing to it.
Additionally, he pleaded that sale of a building after
issuance of Occupancy Certicate (“OC”) required
reversal of ITC availed and if some of the ats
remained unsold till that time, it would be incorrect to
pass the ent ire benet accruing to buyers
immediately.
The Respondent further argued that he was also
required to follow the guidelines of the Real Estate
Regulatory Authority, Haryana (“RERA”). In terms of
the RERA legislations, as he was not allowed to
increase the prices, in case he passed on the benet
”“DGAP is legally bound to
complete its investigation against profiteering.
63 Ms. Pallavi Gulati vs. Puri Constructions (P.) Ltd., [2019] 105 taxmann.com 250 (NAA).
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accrued to it immediately (without taking into account
the reversal of credit) he would not be able to recover
the losses computed on completion of the project.
The Respondent argued that a difference in ITC
availed did not tantamount to him proteering under
the new regime. The increased ITC was simply due to
an increase in the tax paid by him on inputs and did not
amount to proteering. The Respondent argued that
penalty could not be imposed as it lacked mens rea to
justify imposition of penalty. The Respondent always
intended to pass on the benet post the completion of
the project and the same was also communicated to
the buyers. This is further proved by the fact that he
had transferred benet, after completion, post-GST, in
his other projects as well. It was argued that the anti-
proteering clause had been introduced recently
under the GST regime and the DGAP should act
leniently with respect to imposition of penalty. For this,
he relied on the statements made by the Finance
Secretary which stated that the DGAP would only
investigate cases of mass impact.
The Respondent further argued that penalty could not
be legally imposed under the anti-proteering
provision. This was since penalty could only be
imposed under Section 122-127 of the CGST Act read
with Rule 133 of the CGST Rules. None of these
provisions provided for imposition of penalty when the
person in question had proteered. Allowing penalty to
be imposed, in the absence of a specic provision,
would amount to “excessive delegation”. Further, the
SCN issued to him mentioned the aforementioned
Sections but did not specify the exact allegations
which allowed for attraction of said Sections. Thus, the
SCN itself was vague and arbitrary, and therefore bad
in law.
The Respondent argued that the methodology of
computation of proteered amount applied by the
DGAP was arbitrary as there was no prescribed
procedure under the CGST Act and a standard
method could not be applied by the DGAP to various
industries. Moreover, there was no nexus between the
taxable turnover and ITC as construction continued
even if instalments were not paid by the buyers. The
DGAP had thus failed to take into account crucial
factors of the business of the Respondent for its
computations.
The Respondent lastly argued that the DGAP had
travelled beyond its power by extending the scope of
its investigation by including other units and projects of
the Respondent, apart from the unit in the Project for
which the investigation was initiated. This was done
without any recording of reasons in relation to
furthering the investigation.
On the other hand, the DGAP submitted that though
the proceedings were required to ow from an
application, there was no legal provision which
allowed the withdrawal of the application. Additionally,
it submitted that since an application was led by the
Applicants, the DGAP was bound to complete its
investigation and hence, mere withdrawal of
application was not a valid reason for the closure of the
investigation.
The DGAP further argued that even if the exact
amount of benet of ITC could only be calculated at
the time of handover of possession, it had no bearing
on the legal responsibility of the Respondent under the
provisions of the CGST Act to pass on the benet of
ITC. The DGAP submitted that even if some of the ats
got cancelled, the Respondent could have taken its
losses into account while determining the price of the
at to be paid by the prospective buyers.
The DGAP presented evidence to show that the
Respondent had in fact benetted from additional ITC
during the post-GST period. He further contended that
the addi t ional ITC would have resul ted in
commensurate reduction of cum-tax price for the
Respondent. Moreover, the benet of additional ITC
was greater than the increase in the rate of tax. The
DGAP also incorporated the changes due to the
mitigating factors alleged by the Respondent, and
revised its initial report to re-compute the proteered
amount. The DGAP also submitted detailed evidence,
justifying the methodology used by him for
computation of the proteered amount. The DGAP
also contended that the Respondent had passed
lesser benet than what the buyers were entitled to,
even in his other units/projects. Accordingly, the
DGAP thus concluded that the Respondent had
proteered from the Applicants.
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DECISION
The NAA noted that no provision for withdrawal of
complaint was available under the GST legislation.
The DGAP was legally bound to investigate into the
offence of proteering, once it came to its notice.
The NAA observed that the Respondent had taken
benet of ITC regularly for six years and he could not
be allowed to unjustly enrich himself at the cost of the
buyers till the completion of the project. He was legally
bound to periodically transfer the benet to the buyers.
Any contingencies, as alleged, could have been
factored in by the Respondent during calculation of the
benet. Moreover, change in tax rates would be duly
reected in the quantum of ITC available to the
Respondent.
The contention of the Respondent regarding unsold
ats remaining with him was not held to be tenable, as
he was only required to transfer benet to those
buyers who had paid instalments post-GST. The NAA
held that the transfer of benet of ITC was not
dependent on the supplier himself getting benet from
its vendors. Every registered supplier was legally
required to transfer benet to the buyer. It was further
ruled that the Respondent could not question the
method adopted by the DGAP in calculating the
proteered amount as the methodology varies on a
case-to-case basis. The NAA accepted the
Respondent’s contention that no penalty could be
levied for proteering in the absence of a specic
provision. However, the consistent denial of benet to
buyers by the Respondent showed mala de on his
part. The NAA held that the Respondent could not
claim that the scope of the investigation was ultra vires
when he himself had furnished details of his other
projects as evidence. Furthermore, even the revised
report by the DGAP reected undue gains on the part
of the Respondent. The revised report was based on
information provided by the Respondent and had not
been challenged by the Respondent.
Accordingly, the Respondent was ordered to transfer
the proteered amount, as calculated by the DGAP.
SIGNIFICANT TAKEAWAYS
As the anti-proteering law is still evolving, every other
decision of the NAA gives clarity on new aspects
relating to anti-proteering. With this judgment, the
NAA has claried the stern nature of the anti-
proteering provision under the Act. The NAA claried
that it is not a right given to the complainant but a
method for the authorities to gure out if an offence is
being committed. This is in line with the present
government’s stringency in checking against
proteering under the GST regime.
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REGULATORY DIRECT
TAX UPDATES
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INDIA-MARSHALL ISLANDS TAX INFORMATION
EXCHANGE AGREEMENT NOTIFIED
55 The CBDT vide Notication dated May 21, 2019, has
notied the provisions of Tax Information Exchange
Agreement (“TIEA”) between India and the Marshall
Islands. The Marshall Islands is a chain of volcanic
islands and coral atolls in the Pacic Ocean, between
Hawaii and the Philippines. The TIEA, signed on
March 18, 2016, came into force on December 6,
2018, with the completion of relevant procedures for
ratication by governments of India and the Marshall
Islands. The TIEA will enhance mutual cooperation
between India and the Marshall Islands by providing
an effective framework for exchange of information on
tax matters which will help curb tax evasion and tax
avoidance.
The text of the TIEA is largely consistent with the
OECD Model TIEA. The TIEA, aimed at facilitating the
exchange of information between the governments of
India and the Marshall Islands, covers information
pertaining to all Central, state and local taxes levied in
either country. The information shared would be
restricted to that which is ‘foreseeably relevant’ to the
administration and enforcement of tax laws in the
country making the request for information. Further,
the information may be requested regardless of
whether it is sought for the purpose of tax
assessments in the country making the request. It may
also be noted that the TIEA does not incorporate a
provision for assistance in tax collection, which is
present in certain other TIEAs, such as the India-
Argentina TIEA. Accordingly, India would not be in a
position to request the Marshall Islands to collect
Indian taxes from a defaulter on behalf of the Indian
Government, and vice versa.
Both Marshall Islands and India are already
signatories to the Multilateral Competent Authority
Agreement for Automatic Exchange of Information
(“MCAA”), under which information is required to be
automatically exchanged and such information need
not be ‘foreseeably relevant’ to tax assessment in any
country. While Marshall Islands has notied India,
India has currently not notied Marshall Islands as a
jurisdiction with which it shall engage in automatic
exchange. A bilateral relationship under the MCAA
does not become effective until both jurisdictions have
listed each other in their notications. Therefore, the
exchanges between India and the Marshall Islands
are currently limited to that within the scope of the
TIEA.
What is of particular import is that the TIEA does not
provide for a particular date or nancial year starting
which the exchange request regime may be activated.
For instance, the TIEA with Liechtenstein allows for
requests for information with regard to tax years
beginning on or after 1st April, 2013. For period before
April 01, 2013, it has been agreed by way of Protocol
that the information may be sought only in limited
cases like in case of an ongoing investigation.
However, the Marshall Islands TIEA does not
contemplate any such limitation period. The CBDT’s
Manual on Exchange of Information declares that
once the tax treaty is in force, information may be
requested for a period prior to the entry into force of the
treaty, in both civil and criminal tax matters, unless
specic provisions to the contrary are incorporated in
the treaty.
Accordingly, individuals, companies and other entities
with assets or investments in either jurisdiction must
be aware of the risk of information requests pertaining
to activities, even if prior to December 6, 2018.
62
55 Notication No. S.O. 1789(E) dated May 21, 2019.
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TAX UPDATES
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APPLICABILITY OF GST ON ADDITIONAL/PENAL
INTEREST
Circular No. 102/21/2019-GST, dated June 28, 2019
claried the applicability of GST on additional/penal
interest imposed for delayed payment of equated
monthly installments (“EMI”) in the following
scenarios:
(I) Where the supplier of goods provides an option
to the customer to buy goods on EMI basis and
charges additional/penal interest for delayed
payment. In such a scenario, EMI is charged
towards the supply of goods. Therefore, any
additional/penal interest for delay would be
included in the value of goods supplied and
taxed accordingly, irrespective of the manner of
invoicing adopted by the supplier.
(ii) Where the recipient of goods takes a loan from a
third-party other than a supplier of goods. Such
loan services provided by third-party would be
exempted, where the considerat ion is
represented by way of interest. It claried that
additional/penal interest for delayed payment
satises the denition of “interest” existing
under the exemption notication, Notication
No. 12/2017- Central Tax (Rate) dated June 28,
2017. Such additional/ penal interest do not fall
within the ambit of entry 5(e) of Schedule II of the
CGST Act i.e. “agreeing to the obligation to
refrain from an act, or to tolerate an act or a
situation, or to do an act”.
TREATMENT OF POST-SALES DISCOUNTS
UNDER GST
Circular No. 105/24/2019-GST, dated June 28, 2019
claried the following in relation to secondary or post-
sale discounts:
(i) Where a post-sale discount is given by a
supplier of goods to a dealer without any further
obligation or action required from the dealer’s
end, then such discount would not form part of
value of supply, subject to prescribed
conditions.
(ii) Where the dealer is required to undertake any
activity like special sales drive, advertisement
campaign, etc., for receiving discounts as post-
sale incentive, such activity undertaken would
be treated as a separate transaction and the
dealer would be deemed to be the supplier of
such additional supplies. Such supply would be
exigible to GST on this value.
(iii) Where additional discount is given by the
supplier of goods to the dealer to offer a special
reduced price to the customer of dealer to
increase volume of sales, the same would be
treated as consideration and form part of the
value of supply.
(iv) Where post-sale discount, unknown at the time
of agreement, on supply of goods is granted
through commercial/nancial credit note, the
same is not permitted to be excluded from the
value of supply. However, the recipient would
remain eligible for ITC on the original amount of
tax paid.
CLARIFICATION REGARDING PLACE OF SUPPLY
IN RESPECT OF SERVICES PROVIDED BY PORTS
Circular No. 103/22/2019-GST, dated June 28, 2019
claried that the services provided by a port authority
such as services in respect of arrival of wagons at port,
haulage of wagons inside port area up-to place of
unloading, siding of wagons inside the port, unloading
of wagons, movement of unloaded cargo are ancillary/
related to cargo handling. Therefore, the place of
supply of such services would be the location of
recipient, in case of a registered person or in case of
an unregistered Indian recipient the address existing
on record. In other cases, it would be the location of
the supplier.
REFUND OF TAXES TO THE RETAIL OUTLETS
ESTABLISHED IN DEPARTURE AREA IN AN
I N T E R N AT I O N A L A I R P O R T B E Y O N D
IMMIGRATION COUNTERS ON MAKING TAX
F R E E S U P P LY T O A N O U T G O I N G
INTERNATIONAL TOURIST
The Central Government vide Notication No. 56
31/2019 – Central Tax, dated June 29, 2019 inserted
Rule 95A in the CGST Rules in relation to refund of
taxes to retail outlet located in the departure area of an
international airport, beyond immigration counters.
64
56 Read with relevant State Notication; or Notication No. 10/2019-Integrated Tax (Rate), dated June 29, 2019.
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The refund of tax shall be available to them on
fulllment of following conditions:
(i) the inward supplies of goods were received by
the said retail outlet from a registered person
against a tax invoice;
(ii) the said goods were supplied by the said retail
outlet to an outgoing international tourist against
foreign exchange without charging any tax;
(iii) n a m e a n d G o o d s a n d S e r v i c e s Ta x
Identication Number of the retail outlet is
mentioned in the tax invoice for the inward
supply; and
(iv) such other restrictions or conditions, as may be
specied, are satised.
Such retail outlet shall furnish the application for
refund claim in Form GST RFD-10B.
REGULATIONS NOTIFIED FOR ELECTRONIC
INTEGRATION DECLARATION (“EID”) IN
RELATION TO EXPORT OF GOODS
The Central Government vide Notication No.
33/2019-Customs (N.T.), dated April 25, 2019 notied
the Shipping Bill (EID and Paperless Processing)
Regulations 2019, which is applicable to exports from
customs stations wherein the Indian Customs
Electronic Data Interchange System (“ICEGATE”) is
in operation.
The exporter or a person authorized by him
(“Authorized Person”) is required to enter the
particulars relating to the export of goods on the
ICEGATE along with uploading support ing
documents, by afxing his digital signature. The
Authorized Person is permitted to avail the services at
the service centre for the same.
The shipping bill shall be deemed to have been led
and self-assessment completed, respectively, when a
shipping bill number is generated on ICEGATE. On
payment of export duty, if any, the order permitting the
clearance of the goods for export under Section 51 or
Section 69 of the Customs Act shall be generated,
which may be conveyed electronically to the
Authorized Person.
The assessed copy of the shipping bill as well as
original copies of all supporting documents relied
upon are required to be retained for a period of ve
years from the date of presentation of the shipping bill.
DGFT AMENDED THE IMPORT POLICY FOR
ELECTRONICS AND IT GOODS
DGFT vide Notication No. 50/2015-2020 dated
January 08, 2019 (“Notication”) had notied that
import of goods listed under the Electronics and
Information Technology Goods (Requirement of
Compulsory Registration) Order, 2012 (“Order”),
would be allowed on fullment of certain conditions.
Vide Notication No 5/2019-2020 dated May 07, 2019,
the DGFT further amended the Notication as follows:
(i) General Note No. 2(c) was amended such that
the goods, import of which was prohibited,
would include new as well as second hand
goods, whether or not refurbished, repaired or
reconditioned.
(ii) It was claried that if the importer failed to re-
export such prohibited goods, the Customs
Authority would deform the goods beyond use
and dispose them as per the provision.
(iii) The condition of prohibition of import of such
goods was reiterated vide insertion of Policy
Condition No. 2 under Chapter 84 and Policy
Condition No. 5 under Chapter 85 of the
ITC(HS) 2017.
(iv) Para 2.31(l)(a) of the FTP is revised. The
photocopier machine/ digital multifunction print
and copying machine is now not restricted for
imports even without authorization.
INCREASE IN THE VALIDITY PERIOD OF EXPORT
AUTHORIZATION
The DGFT vide Public Notice No. 01/2015-20 dated
April 04, 2019 revised Para 2.16(a)(i) of the HBP to
enhance the validity period of export authorization for
restricted (Non-SCOMET) goods from twelve months
to twenty four months.
MECHANISM TO VERIFY IGST PAYMENTS FOR
GOODS EXPORTED OUT OF INDIA
CBIC vide Circular No. 16/2019- Customs dated June
17, 2019 mentioned that the exporters have availed
ITC on the basis of ineligible documents, fraudulently
utilized the ITC for payment of IGST, and effected
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higher IGST pay outs by having a huge variation
between the FOB value declared in the shipping bill
and the taxable value declared in the GST return.
Therefore, CBIC has introduced a mechanism to
verify IGST payments, for goods exported out of India,
through respective GST eld formations. Accordingly,
it modied the procedure, specied in the Instruction
15/2017-Cus dated October 09, 2017, as below:
(i) Identication of suspicious cases: The Director
General (System) would decide the criteria to
identify the risky exporters at the national level
and forward the list of such risky exporters to the
authorities along with information about the past
IGST refunds granted to such risky exporters
(along with their bank details).
(ii) Inserting Alert in the System- Risk Management
Centre for Customs (“RMCC”) would be
required to insert alerts for all such risky
exporters and make 100% examination,
mandatory of export consignments relating to
those risky exporters. Further, alert would also
be placed to suspend IGST refunds in such
cases.
(iii) Examination of the export goods- The Customs
Ofcer would examine the consignment as per
the RMCC alert and clear the same only if the
outcome tallies with the declaration in the
Shipping Bill subject to compliance with other
requirements.
(iv) Suspension of IGST refunds- Notwithstanding
the clearance of the export consignments as
above, Shipping Bills would be suspended for
IGST refund by the Deputy or Assistant
Commissioner of Customs dealing with refund
at the port of export.
(v) Verication by GST formations- The GST
formation would furnish a report to the
respective Chief Commissioner of Central Tax
within 30 days specifying clearly whether the
amount of IGST paid and claimed/ sanctioned
as refund was in accordance with the law or not.
(vi) Action to be taken by customs formation- If no
malpractice is reported on verication, the
Customs ofcer at the port of export would
proceed to process the IGST refund to the
extent veried by the GST Authorities.
However, if it is found during the verication that the
exporter availed ITC fraudulently or on the basis of
ineligible documents and utilized the said ITC for
payment of IGST claimed as refund, the customs
ofcer would not process the refund claim.
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GLOSSARY
ABBREVIATION MEANING
AAR Hon’ble Authority for Advance Rulings
AAAR Hon’ble Appellate Authority for Advance Rulings
ACIT Learned Assistant Commissioner of Income Tax
AE Associated Enterprises
AO Learned Assessing Officer
AY Assessment Year
Customs Act Customs Act, 1962
CbC Country by Country Reporting
CBDT Central Board of Direct Taxes
CBEC Central Board of Excise and Customs
CCR CENVAT Credit Rules, 2004
CEA Central Excise Act, 1944
CENVAT Central Value Added Tax
CESTAT Hon’ble Customs, Excise and Service Tax Appellate Tribunal
CETA Central Excise Tariff Act, 1985
CGST Central Goods and Service Tax
CGST Act Central Goods and Service Tax Act, 2017
CGST Rules Central Goods and Service Tax Rules, 2017
CIT Learned Commissioner of Income Tax
CIT(A) Learned Commissioner of Income Tax (Appeal)
CRISIL Credit Rating Information Services of India Limited
CST Central Sales Tax
CST Act Central Sales Tax Act, 1956
CT Act Custom Tariff Act, 1975
CVD Countervailing Duty
DCIT Learned Deputy Commissioner of Income Tax
DIT Learned Director of Income Tax
DGFT Directorate General of Foreign Trade
DRP Dispute Resolution Panel
DTAA Double Taxation Avoidance Agreement
EPCG Export Promotion Capital Goods
FMV Fair Market Value
FTP Foreign Trade Policy
FTS Fees for Technical Services
FY Financial Year
GAAR General Anti-Avoidance Rules
GST Goods and Service Tax
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ABBREVIATION MEANING
GST Compensation Act Goods and Services Tax (Compensation to States) Act, 2017
HC Hon’ble High Court
IBC Insolvency and Bankruptcy Code, 2016
IGST Integrated Goods and Services Tax
IGST Act Integrated Goods and Services Tax Act, 2017
INR Indian Rupees
IRA Indian Revenue Authorities
IT Act Income Tax Act, 1961
ITAT Hon’ble Income Tax Appellate Tribunal
ITC Input Tax Credit
ITO Income Tax Officer
IT Rules Income Tax Rules, 1962
Ltd. Limited
MAT Minimum Alternate Tax
MLI Multilateral Instrument
MoU Memorandum of Understanding
MRP Maximum Retail Price
NAA National Anti-profiteering Authority
OECD Organization for Economic Co-operation and Development
PCIT Learned Principal Commissioner of Income Tax
PE Permanent Establishment
Pvt. Private
R&D Research and Development
SC Hon’ble Supreme Court
SEBI Security Exchange Board of India
SEZ Special Economic Zone
SGST State Goods and Services Tax
SGST Act State Goods and Services Tax Act, 2017
SLP Special Leave Petition
ST Rules Service Tax Rules, 1994
TCS Tax Collected at Source
TDS Tax Deducted at Source
TPO Transfer Pricing Officer
UK United Kingdom
USA United States of America
UTGST Union Territory Goods and Services Tax
UTGST Act Union Territory Goods and Services Tax Act, 2017
VAT Value Added Tax
VAT Tribunal Hon’ble VAT Tribunal
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ACKNOWLEDGMENTSWe acknowledge the contributions received from S. R. Patnaik, Daksha Baxi, Mekhla Anand, Surajkumar Shetty,
Ankit Namdeo, Shiladitya Dash, Thangadurai V.P., Jesika Babel, Rupa Roy, Bipluv Jhingan, Shivam Garg, Reema
Arya, Akshara Shukla, Sanjana Rao and Shrishma Dandekar under the overall guidance of Mrs. Vandana Shroff.
We also acknowledge the efforts put in by Madhumita Paul to bring this publication to its current shape and form.
DISCLAIMER This Newsletter has been sent to you for informational purposes only and is intended merely to highlight issues.
The information and/or observations contained in this Newsletter do not constitute legal advice and should not be
acted upon in any specific situation without appropriate legal advice.
The views expressed in this Newsletter do not necessarily constitute the final opinion of Cyril Amarchand
Mangaldas on the issues reported herein and should you have any queries in relation to any of the issues reported
herein or on other areas of law, please feel free to contact us at the following co-ordinates:
Cyril Shroff
Managing Partner
Email: [email protected]
Daksha Baxi
Head - International Taxation
Email: [email protected]
S. R. Patnaik
Partner
Email: [email protected]
Mekhla Anand
Partner
Email: [email protected]
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Cyril Amarchand Mangaldas
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Tel: +91 22 2496 4455 Fax:+91 - 22 2496 3666
Website: www.cyrilshroff.com
Other offices: New Delhi Bengaluru Hyderabad Chennai Ahmedabad
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