Final Advaita (Feb-March 2016)-Tax

an analysis by Advaita Legal

February - March 2016

Sameeksha – taxation laws

© 2016 Advaita Legal. All rights reserved.

As we digest the finer nuances of the Union Budget proposals of 2016 and gear up for the alterations, it gives us immense pleasure to present to you this edition of 'Sameeksha' (tax).

From an indirect tax point of view, in the first article, we have an in-depth analysis of the amendments proposed by the Finance Bill, 2016 to bring the activity of lottery distributors within the service tax net in yet another attempt by the Union since 2010 to achieve the same. In the second article, we have dealt with the topical issue of levy of state-level taxes like VAT and Entry Tax on E-Commerce transactions, recent litigations in this regard and discussed the Constitutional tenability of some of the recent State amendments in these legislations.

From a direct tax perspective, we have an insightful note on a topic currently in vogue – the 'Equalization levy' as proposed under Union Budget 2016 which has been dubbed by the media as ‘google tax’. In this note we have provided an overview and background of the levy and discussed the key legal and constitutional issues emerging therefrom. In another article from the direct tax perspective, we examine the recent spate of Transfer Pricing litigation apropos incurring of Advertisement, marketing and promotion (AMP) expenses by Indian entities (tax payers) on brands owned by their Associated Enterprises (AE).

We sincerely hope that you will find these articles interesting. Thank you for your time.

Sujit GhoshPartner and National HeadAdvaita Legal

Contents ForewordIDT article: Ecommerce

The conundrum of state level taxes (VAT and Entry Tax)

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IDT article: Lottery amendment

Budget 2016 apropos service tax on distribution of lotteries: Government fights back against the sikkim high court decision in future gaming decision?

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DT article: Equalization levy

A brief analysis of the equalisation levy as proposed in the Finance Bill, 2016

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DT article: Maruti

AMP adjustments: Going back to basics 08 Sudipta Bhattacharjee

Principal, Advaita LegalEditor, Sameeksha


The conundrum of state level taxes (VAT and Entry Tax)- By Raj Singh (Associate, Advaita Legal). With guidance

from Sudipta Bhattacharjee (Principal, Advaita Legal).

IntroductionAs per the industry body ASSOCHAM, e-commerce industry is likely to touch USD38 billion mark by the end of this financial year. If we look back, in 2009 it was merely worth little above USD3.8 billion - this is a whopping 10 times growth, much higher than achievement of any other industry within this time frame.

The growth of e-commerce, has shook the whole retail and FMCG industry with more and more options available to the end-consumers which, in turn, has changed the whole gamut of preferences and the way we interact with the marketplace. Further, this industry has also perplexed the revenue authorities and has consequently stirred up much controversy about the taxation of sales made over these online portals.

To understand this, we have to analyse the various types of models implemented by the various e-commerce players.

E-commerce business modelsThere exist no strait jacket definition for the term e-commerce - it is generally understood to be a method of conducting business through varying use of electronic means rather than through conventional brick-and-mortar store. E-commerce has defied the traditional structure of retail trading bringing to the fore various business models. Few are discussed herein below.

Model-1: Stock and sell modelThis is a rather straight forward model among all. In this self-inventory model wherein the e-commerce player is the owner of the goods and operate online portal to receive booking/order. The operation is akin to the brick-and-mortar stores wherein the ownership of the goods are with the ecommerce player and it is directly passed to the end-consumer. The goods may or may not be delivered by the seller/e-commerce player on its own accord, or it may be outsourced to the third party vendors. This business model is used by e-commerce players such as Myntra.com.

Model-II: Marketplace modelIn this three (3) parties are involved - this model is akin to typical marketplace but online. The e-commerce player own the platform (normally a website or a mobile application), sellers play a key role in maintaining inventory and driving sales. The sellers leverage on high traffic on marketplace’s website and access their distribution network. The end-customer places orders on the portal of e-commerce Company, the same is routed to the individual concerned retailer who then processes the order. Normally, the distribution network is owned by the

IDT article: Ecommerce

e-commerce company which collects the goods from the vendor and delivers it to customer. Vendor raises an invoice on the customer and property in goods is directly transferred to ultimate customer. For the whole transaction and delivery, the e-commerce player gathers certain commission which is normally ad-valorem in nature.

Model-III: Fulfilment centre modelThis is an iteration of marketplace model of e-commerce Company (cos.), wherein although the individual vendor owns the goods however, the inventory is maintained by the e-commerce cos. in their warehouse which is registered as an additional place of business of the vendor. Goods, on receipt of order, are dispatched by e-commerce cos. to the ultimate consumer from the warehouse of e-commerce cos., the invoice is raised in the name of supplier/vendor. The property in goods is transferred from the vendor to the company. Consideration, in this case also, is received by the E-commerce company who after retaining the commission remits the same to the vendor/seller. This business model is used by e-commerce players such as Amazon.com.

E-Commerce: The VAT conundrumThe abovementioned marketplace method is more popular and is a frequently adopted method. Wherein e-commerce cos. is to act as platform facilitator between the sellers and the buyers. In this model, E-commerce company does not purchase the inventory but instead asks the third party sellers to sell by using its platform to the customers who log on the E-commerce company’s platform. Importantly, the e-com company charges commission/delivery charges and undertakes to perform packing and marketing/delivery of the goods to the customer. Obviously, the invoices are made at the end of independent sellers directly to the customers. Crucially, in order to ensure quick availability of products with E-commerce company these sellers are required to keep certain fast moving goods in the facilitation centres owned by e-commerce companies, for the same sellers amend their registration to include the space/premise with E-commerce Company as “Additional place of business (if already registered with main office”) based on rent/lease/Service agreement entered into between the sellers and E-commerce Company. For example in Delhi it is undertaken by amendment filed with DVAT department in DVAT – 07.

However, when it comes to taxing the sale by e-commerce business, the state revenue authorities have rarely followed the motto of ‘Ease of Doing Business’. As reported by several dailies, it is learnt that the issue mainly arises in case of e-commerce companies that undertake storage of goods procured from various sellers in their warehouse before dispatching them to the respective buyers. This arrangement being inscrutable, the VATauthorities are of the view that in such cases, the e-commerce companies are involved in supplying and

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distribution of goods and, therefore, would qualify as ‘dealers’. The authorities are also of the view that these companies act as commission agents or consignment agents of sellers. Therefore, these companies are covered under the definition of ‘dealers’ and, therefore, are liable to discharge VAT.

Before discussing the VAT aspects further, we will discuss few of the notable developments in this realm, starting from attempts to levy VAT on e-commerce by Karnataka Government.

Amazon – Where it all startedIn the case of Amazon, goods of the vendors are stored at a warehouse/fulfilment centre owned by the Amazon. On receipt of order placed by customer on the web-portal of Amazon, the goods are delivered from the warehouse/fulfilment centre to the respective customers. The consideration is remitted by Amazon to the vendor after retaining a commission.

This operation pattern of the Amazon, raised the eyebrow of the Karnataka VAT Authorities. They were of the view that in above case Amazon qualify as a ‘Dealer’ as contemplated in the Karnataka VAT Act as the e-commerce companies are involved in supplying and distribution of goods. In light of this, the Karnataka government proposed to levy 1 per cent TDS on all payments made by Amazon to the sellers. Further, the VAT authorities proposed that Amazon undertake to register himself as a Dealer under VAT as it qualifies as a dealer under the category of commission agent engaged in supplying or distributing goods on behalf of the principle, consequently Amazon is liable to discharge VAT on transfer of goods from the warehouse to the customer as they qualify as local sales.

Amazon on other hand contended that the taxable event under the Karnataka VAT is the sale of goods. There is no sale within the state of Karnataka. Amazon is discharging service tax on the services provided to the seller for the same, advance ruling dated 24 August 2014 in case of Amazon Seller Services was obtained wherein the Authority held that Amazon is providing an online retail distribution channel and the associated logistical services. Thus, it was held that Amazon is clearly a service provider. Secondly, Amazon and the vendor transact on principal to principal basis. Hence, Amazon cannot be regarded as a commission agent. Thus, Amazon does not qualify as a dealer under the VAT Act as it is a mere facilitator and is not engaged in the buying or selling of goods.

Nonetheless, the questions that remain to be answered is firstly, whether sale of goods from the fulfilment centre to the customers within Karnataka would qualify as a local sale and leviable to VAT? Secondly, whether Amazon would qualify as a dealer as the definition of dealer under Karnataka VAT Act includes a person supplying or distributing goods? Lastly, if Amazon qualifies as a dealer can tax liability be fastened on Amazon?

Flipkart v. State of Kerala – highhandedness of revenueIn this case, the VAT authorities in the state of Kerala was seeking to levy VAT on e-commerce companies acting merely as facilitators for transactions of sale and purchase effected through their online portals.

Department with a pre-determined mind issued the Show Cause Notice to Flipkart contending that the sale was a local sale as the goods were delivered within the state of Kerala from an online portal whose situs was Kerala. Therefore, even if Flipkart is not the seller, it is liable to VAT under section 16(13) of the Kerala VAT Act.

However, the order of the Hon. Kerala High Court quashing the demand of penalty was based on the lack of findings in the show cause notice as to why the transaction are to be treated as local sales as against inter-state sales, and this judgment does not deal with merits of the case and contended point of law - thus, cannot be of much precedential value. However, Hon. High Court did make an observation that the situs of the sale is irrelevant for determining whether a sale is a local sale or inter-state sale and as the seller (W.S. Retail, a seller/vendor on Flipkart.com portal) had declared nil turnover on the basis that the entire turnover pertained to inter-state sales, the revenue authorities cannot levy tax or impose penalty on Flipkart with respect to the same turnover.

Few other notable legislative developmentsIn this foray to tap the revenue from transactions taking place, many amendments are being introduced under various VAT and entry tax laws. Few notable ones are:

VAT amendmentsDelhi government vide Notification No. F.3 (20)/Fin (Rev-I)/2015-2016/dsvi/906 dated 12.11.2015 made it compulsory for all Dealers conducting sales through web portals/e-commerce companies to furnish details of such sales in the prescribed form.

Taking the cue, state of Rajasthan also vide Notification No. F.16 (708) TAX/CCT/2015/7307 dated 31.12.2015 made such information compulsorily to be furnished. However, recently Rajasthan government taking it one step further made compulsory for transporter and courier cos. effecting such deliveries and receiving such monies in relation with goods sold through e-commerce cos. to also make such declaration and furnish information.

Kerala government also amended and appended Section 54A to the Kerala VAT Act to read as all companies and entities maintaining an e-commerce website shall file monthly details of goods sold through websites in the prescribed format w.e.f 29 July 2015.

Entry tax amendmentsWhile the very validity of levying entry tax is being examined by the larger bench of the Hon. Supreme Court, this has not deterred the States in attempting to fill up the coffer in form of money demanded in form of interim demands by using tactics such as confiscation of goods or

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not allowing waybills to be generated without making mandatory deposit of tax of security. E-Commerce cos. have emerged as a lucrative new target in this regard.

Few of the notable legislative developments in this area are:

Normally the incidence of tax falls on the person who imports the goods into the state - however, the state of Bihar by amending the definition of Dealer in their Entry tax Act to include persons supplying goods within the state through system of electronic commerce has made all goods couriered in the state of Bihar to be exigible to entry tax at the hands of courier cos. and in return the e-commerce cos. This amendment, however, errs on various tenets of taxing/fiscal statutes like:

− Section 3 (charging section) of the Bihar Entry Tax Act provides for levy of tax on a dealer who is liable to pay VAT under the Bihar VAT Act on import of goods for the development of trade commerce and industry in Bihar. However, Explanation III to the said section goes beyond the charging section in that it provides for every person to be a dealer who merely supplies goods to a buyer (even if he is not paying VAT under the Bihar VAT Act).

− Further, usually, online purchases of goods cannot be said to be for development of trade commerce or industry but they are merely for personal use and consumption.

The state of West Bengal also in a similar fashion vide Trade Circular dated 10.07.2013 and in the garb of facilitating e-commerce sales has made it mandatory for all the courier cos. making such deliveries in the state of West Bengal to register themselves with the revenue authorities and generate waybills only by way of an official portal and only after making a mandatory pre-deposit of entry tax. This coercive practice, notably being done even when the whole entry tax act of 2012 was struck down by the Hon. Calcutta High Court in the batch of Writ Petitions titled Bharti Airtel Ltd. vs. The State of West Bengal & Ors. (WP 464 of 2012 being the lead matter).

This practice was also followed by Assam government by amending Section 9A of Assam Entry tax Act, which empowered the Commissioner to issue such notification prescribing a procedure for collection of entry tax on entry of goods made through online purchase or e-commerce and also for collection of entry tax from a person other than an importer but on behalf of the importer. Subsequently the notification was issued to that effect. It is to be noted that the Section 9A intends for the levy of tax only on those parties, which operate on behalf of the importer, be it the seller or the buyer. However, notification which seeks to lay down procedure for collection of entry tax from transporters, courier, agents or any other person goes beyond section 9A as it seeks to levy entry tax on parties acting on a principal to principal basis and not on behalf of the importer as contemplated under section 9A.

Uttarakhand, similarly, issued notification under the amended Section 4A of Uttarakhand Entry tax Act for prescribe a ‘simple’ procedure for collection of entry tax on entry of goods made through online purchases. The notification further lays down the rate of entry tax of 10 per cent on the value of goods which were purchased. In this regard, it can be said that Section 4A which provides for collection of entry tax on the entry of goods inside the local area of the State made through online purchase or e-commerce, firstly, neither has clarity as to the taxable person nor does the notification prescribe for a procedure as has been mandated by section 4A of the UttarakhandEntry Tax Act. Recently, Uttarakhand High Court granted stay to Instakart Services (P) Ltd. (Flipkart Group Company) against entry tax on goods purchased through e-commerce, the issue in challenge is this Section 4A in Uttarakhand Tax on Entry of Goods into Local Areas Act, 2008, imposing entry tax on goods ordered online or through e-commerce and consigned into local area of the State. High Court passed an interim order directing release of seized goods upon furnishing of bank guarantee, however the issue is still pending before the Hon. High Court and same is sub-judice.

Parting thoughtConsidering the amount of revenue e-commerce companies are generating and the growth forecast being stronger than ever, it becomes understandable that the revenue authorities will not turn a blind eye towards huge amounts of possible tax revenue. Additionally, the complex business models of e-commerce entities has baffled the tax authorities.

However, it has to be kept in mind that the issue at hand will get complicated only if we try to make it. Seeking of information of all e-commerce transactions to prevent revenue leakage is understandable - however, trying to extract VAT/entry tax from Ecommerce players by going beyond the charging sections of the relevant VAT/entry tax statutes are untenable in law and ought to be avoided.

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Budget 2016 apropos service tax on distribution of lotteries: Government fights back against the sikkim high court decision in future gaming decision?- By Rajat Mittal and Nandita Narayan (Associates, Advaita

Legal) with inputs from A R Madhav Rao (Senior Attorney, Advaita Legal). The authors led by Mr Rao represented Future Gaming before the Sikkim High Court. This article has been recently published in Taxsutra.

1. The amendments proposed by the Finance Bill, 2016 to bring the activity of lottery distributors within the service tax net is yet another attempt by the Union since 2010 to achieve the same.

2. The amendment has been proposed to get over the decision of the Sikkim High Court in Future Gaming Hotel Services Pvt. Ltd. V Union of India [TS-564-HC-2015-(SIK)-ST].

3. As was discussed in the previous article published on 28 October 2015 (Link: http://www.idt.taxsutra.com/ experts/column?sid=181) , the Sikkim High Court has held that the activity of the lottery distributor is essentially purchase and sale of lotteries and is not liable to service tax as the same is outside the scope of ‘service’. It was also held by the Court that the transaction of sale and purchase of lottery tickets is covered under the scope of ‘betting and gambling’ which is a State subject and the Union cannot levy tax on the same. In brief, the Finance Act of 2015 amended the definition of ‘service’ which specifically excluded 'transaction in money or actionable claim' by inserting an Explanation whereby the expression 'transaction in actionable claim' was not to include 'any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out (a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other manner. Section 66D of the Finance Act, 1994 which included betting, gambling and lottery within the ambit of Negative List was also amended to the effect that activities specified in the Explanation introduced will not get covered under the Negative List. The decision rendered by the Court while interpreting the aforesaid amendments made by the Finance Act 2015, held that the amendment made to the Act cannot tax a transaction which is essentially a sale, and the Explanation seeking to expand the scope of Section 66D is unconstitutional and ultra vires the provisions of section 66 D itself.

IDT article: Lottery amendment

4. The Finance Bill, 2016 amends the above Explanation to specifically provide that the activity of the lottery distributor or selling agent as amended by the Finance Act 2015 shall be in accordance of the Lotteries Regulation Act 1998 and shall be carried out on behalf of the State Government. The explanatory Letter of the Tax Research Unit refers to Section 4 (c) of the Lotteries (Regulation) Act, 1998 that the State Government shall sell the tickets either itself or through distributors or selling agents. According to the TRU the provisions of the Lotteries (Regulation) Act, 1998, render the transaction between the State Government and the distributors or selling agents as between a principal and agent. That any contract to the contrary would be ultra vires the provisions of the Indian Contract Act, 1872 and not legally enforceable. From this it is concluded that notwithstanding the lottery distributor buying the tickets as a principal from the State Government, there is an agency relationship between the distributor and the State Government subject to the levy of service tax.

5. Thus the amendments as per the Finance Bill 2016 have been carried out on the premise that the Lottery Regulation Act provides for an agency relationship and the contract entered with the State Government showing that there is buying and selling of lottery tickets is, according to the TRU clarification, an unenforceable agreement. Thus in sum and substance lottery distributor or selling agent to the State Government is working on an agency basis and hence service tax is leviable.

6. Whether this amendment will be able to bring within the tax net the activity of buying and selling lottery which is essentially a ‘sale’, is highly doubtful, and the amendment suffers from various lacunae as outlined below:

− At the outset, it is pertinent to note that by merely stating that the activity of the lottery distributor shall be in accordance with the Lottery Regulation Act, 1998 does not create any substantial change to the earlier provision as the term ‘lottery distributor’ was already defined to mean a distributor in terms of the Lottery Regulation Act under the definition clause under Section 65B (31A). This definition of lottery distributor was also inserted vide the Finance Act 2015, and was construed by the Hon’ble Sikkim High Court as evidencing as per the contract only a buying and selling relationship with the State Government. Further, it needs to be tested in a court of law whether a third party, namely the Central Government, which has no privity to the contract between the State and the distributor appointed by the State Government, can unseat a contract which fulfils all the conditions of a valid

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contract by merely contending that the contract is unenforceable under the Indian Contract Act. It is a settled principle that service tax is levied on the basis of the transaction between the parties evidenced from the terms of the contract, as laid down by the Supreme Court in the case of Rashtriya Ispat Nigam v Dewan Chand Ram Saran reported at 2012 (26) STR 289 notwithstanding any law to the contrary laid down by the Service Tax provisions itself.

− Secondly, though the amendment tries to establish that the activity undertaken by the distributor is a ‘service’, however, the Union seeking to tax Lotteries i.e. betting and gambling which is a State subject is impermissible. In the decision rendered by the Sikkim High Court, the transaction in lottery tickets undertaken by the lottery distributor has been held to fall within the purview of legislative competence of the State Government on account of specific entries in the State List viz., ‘betting and gambling’1 (which is a State subject under entry 34 of List II to the Constitution) and ‘taxes on betting and gambling’ (which is also a State subject under entry 62 of List II to the Constitution). Thus betting and gambling is a State subject and only the State has power to levy tax on the same

8. Thus the aforesaid lacunae set out hereinabove will form the basis of challenge to the amendments carried out by the Finance Bill 2016 seeking to levy service tax on the lottery industry once again.

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1 Also, several judicial precedents have held that lottery tickets are ‘actionable claims’.


A brief analysis of the Equalization Levy as proposed in the Finance Bill, 2016- By Kamal Sawhney, Arijit Chakravarty (Senior Principals,

Advaita Legal) and Shikhar Garg (Associate, AdvaitaLegal). With guidance from Sujit Ghosh, National Head,Advaita Legal.

IntroductionIn 2013, the Organisation for Economic Cooperation and Development (OECD) along with G20 governments embarked upon a process to revise international tax rules to align them to developments in the world economy, and ensure that profits are taxed where the concerned economic activity arose. This process came to be called the Action Plan on Base Erosion and Profit Shifting (BEPS) and the core issues it sought to address were: introducing coherence in the domestic rules that affect cross-border activities, reinforcing substance requirements in the existing international standards and improving transparency, as well as certainty for businesses that do not take aggressive positions.Action Plan 1 was aimed at addressing BEPS issues in the digital economy, primarily due to the challenges to the application of existing tax rules, e.g., characterisation of income, establishing nexus between transaction, activity and jurisdiction, etc. A preliminary element of the Action Plan was the equalisation charge on advertisement revenues and related transactions, which could be levied by the country where the revenue was generated.

Equalization Levy under the Finance Bill 2016India, in its Finance Bill 2016 (part of Union Budget 2016), has proposed to introduce this kind of a charge under the name ‘Equalization Levy’. Chapter VIII of the Finance Bill defines the term ‘equalization levy’ to mean the tax leviable on consideration received or receivable for any specified service under the provisions of this Chapter1. Further, ‘specialised service’ is defined as online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf1.The levy is sought to be imposed at the rate of 6 percent of the amount of consideration for any specified service received by a person, being a non-resident from an Indian resident carrying out business or profession in India or a non-resident having a permanent establishment in India. The charge however shall not be attracted in situations wherein the non-resident has a permanent establishment in India and the specified service is effectively connected with such permanent establishment or a situation wherein the payment for the specified service was not for the purpose of business or profession.

DT article: Equalization levy

The chapter also provides for penalty and interest in situations wherein the levy has not been deducted or deposited by the assesse (i.e. the receiver of the specified service).

Analysis of the proposed scheme Dual tax on same incomeThis is not the first attempt to tax income by way of revenues from advertisements on websites/online portals located outside the country. There have been a number of cases where assessing officers have sought to tax the said income as being fee for technical services or even royalty under the definitions available under the double tax avoidance agreements (DTAA) or under section 9 of the Income Tax Act,1961('Act'). The stand taken in these assessment proceedings was that these payments fall within the ambit of fee for technical service or royalty, and the assesse making the payment should have deducted tax at source under section 195 of the Act. Since the assesse had failed to deduct the tax under section 195 these payments were liable to be disallowed as a deduction in computation of income under section 40(a)(i) of the Act. These orders have not been able to pass judicial scrutiny, and courts have taken the view that these payments do not satisfy the definition of fee for technical service or royalty, either under the Act or the treaty. In fact the decisions have explicitly held these to be in the nature of the business income of the non-resident payee. It has been further held that in the absence of a permanent establishment (PE), such payments could not be taxed in India. The revenue has taken these matters in further appeal and the fate of these assessments would in all likelihood be decided by the Hon’ble Apex court. Therefore, the revenue has not in any manner given up its stand that these payments fall within the ambit of either fee for technical service or royalty.

Through the Finance Bill, a fresh attempt has been made to tax these payments under the nomenclature of 'Equalization Levy'. Notwithstanding this nomenclature, it is believed that the tax is ultimately nothing but a tax on income. This view is supported by the various decisions that have held the nature of these payments to be the business income of the payee. Therefore, the attempt today appears to be to impose a fresh levy in the nature of a tax on income on payments which are already being assessed as either fee for technical service/royalty under the Act/DTAA.

Further as per the memorandum to the Finance Bill, the basis of the charge is the introduction of the BEPS Project under Action Plan 1. The memorandum states that OECD suggests the inclusion of a virtual fixed place of business in the concept a PE. This would obviously necessitate amending the definition of PE under the various DTA’s entered into by India. It goes on to further state that one of the measures suggested by the OECD as per the action plan is the imposition of a withholding tax in the nature of an equalization levy.

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1 Clause (d) of Section 161 of Finance Bill, 2016.


However a careful perusal of the Final Action Plan Report shows that this proposal has not been included therein. For a variety of reasons the OECD had in its Final Report not recommended the imposition of such a tax and member countries were free to go ahead with any of the options they felt appropriate ‘provided they respected the existing treaty obligations’2.

However, the fact that the proposed levy is sought to be kept outside of the Income tax Act, (even while effectively taxing income) clearly shows that the DTAA provisions have been specifically sought to be not made applicable. Such an attempt can be questioned in view of treaty obligations that the Government has undertaken and the specific Constitutional mandates in this regard.

Assesse being rendered remediless against the imposition of the levyAlso what needs to be considered is the lack of effective and efficacious remedies available at the hands of the assesse. Section 171 provides an appeal only against the imposition of the 'penalty'. The proposed chapter nowhere provides any mechanism for the assesse (the payer) to dispute the actual levy imposed upon the assesse. To put it in simple terms suppose the assessee believes that the payment in question does not fall within the four corners of the equalization levy but the assessing officer directs the assesse to pay the equalization levy in addition to imposing penalty. In such a situation as the proposed chapter today stands, the assesse can only file an appeal against the order imposing the penalty.

Therefore, for all practical purposes, the adjudication of the assessing officer on the imposition of the levy becomes a final adjudication without any recourse to the assessee. This could very possibly make the proposed chapter liable to be challenged on grounds of arbitrariness.

Intent to tax B2B transactionsThe Chapter on equalization levy also provides a limit of INR1 lakh as a threshold for this tax. Sub-section (1) of Section 163 provides that an equalization levy shall be deducted at the rates specified in Section 162, if the aggregate amount of consideration for specified services in a previous year exceeds one lakh rupees.

Keeping in mind the nature of the services which are sought to be taxed under this chapter, the threshold limit of INR1 lakh seems a paltry sum to exempt. This clearly shows that the intention of the legislature seems to be to further widen the tax net and bring under its radar virtually all kinds of B2B transactions.

Other constitutional issuesThe very legislative competence to introduce this levy is under a shadow of doubt given current scheme of division of taxation powers between Central and State Governments under the Constitution of India.

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2 http://www.business-standard.com/article/opinion/equalisation-levy-warrants-public-debate-116030600693_1.html.

3 Pg. 106, Committee Report on Taxation of E-Commerce.

Committee report on taxation of e-commerce Although the concept of an equalization levy was initially proposed by the OECD Action Plan 1, however in the case of India, it was recommended by the Committee on Taxation of E-Commerce, set up by the CBDT. What is interesting is that even though the report acknowledges and takes into account the fact that the concept was first floated at the BEPS Project, it fails to appropriately consider that the final report of the OECD in this regard had not recommended the implementation of the levy in its present form and the reasoning behind the de-recommendation.

The CBDT Report has also recommended the limitation of the levy to payments made for intangible services, including payments for the use or right to use any intangible, access a digital, telecommunication or similar network, or avail any service or other benefit received from a foreign company or person outside India, provided the services are either received, utilised, provided or performed in India and thus have a nexus with India, irrespective of whether the payment is made by a resident or a non-resident person3.

This will ensure that the levy can be imposed on intangible services like cloud computing, designing, creating, hosting or maintenance of website, digital space for website, advertising, e-mails, blogs, online content, online data or any other online facility or service for uploading, storing or distribution of digital content.

The government has, keeping in line with the above recommendation, therefore provided an expansive definition to the term ‘specified service’ by providing the Central government with the power to expand the scope of the levy to include any other service as it may deem fit. This further clarifies the stand of the government and evidences its intention to eventually tax not only digital advertisements but also any other services of an intangible nature, which it may not be able to tax under the existing taxation scheme.

Conclusion To conclude, this seems to be the emergence of a new tax regime which seeks to somehow get a slice of the burgeoning digital economy.

However, as the proposals stand today, it is likely to be highly litigation prone and may defeat the purported objective of the Government to reduce litigation and bring transparency in the tax policy.


AMP adjustments: Going back to basics - By Harsh R. Shah, Associate and Harsh Kapadia, Associate.

In a new wave of TP disputes, incurring of Advertisement, marketing and promotion (AMP) expenses by Indian entities (tax payers) on brands owned by their Associated Enterprises (AE) had caught the fancy of the tax department. Such AMP expenses incurred by the Indian entities, according to the Indian exchequer, ought to have been charged to the foreign AE owning the brand, that too with an arm’s length mark up. When this issue first came to light, it seemed as if Tax Officers were too optimistic and aimed the stars. The word ‘optimistic’ is appropriate in this statement because, unlike jurisdictions viz. U.S., Australia and New Zealand, India had no express substantive provision in its statute books to enable the revenue authorities to carry out an upward AMP Transfer Pricing adjustment. However, this did not deter the TPOs at all and we saw Transfer Pricing adjustments of hundreds of crores being made in cases of numerous Indian entities, who used brands owned by their foreign AEs. Taxpayers certainly did not feel this claim of the tax authorities was plausible and thus, knocked the doors of the appellate authorities. The fate and legality of such adjustments was to be decided only by the Courts of this Country.

Normally, for any transfer pricing adjustment, there are four broad steps needed to be carried out:

i. Existence of a ‘transaction’ between the taxpayer and its AE, within the meaning of Section 92F of the Income tax Act, 1961 (‘Act’).

ii. If yes, whether it is an 'international transaction'? what is the actual price of such an ‘international transaction’?

iii. Determination of the arm’s length price of the international transaction in terms of the methods prescribed under the Act.

iv. Comparison of the actual price and arm’s length price of the international transaction.

At the outset, the very existence of ‘transactions’ with respect to the AMP Transfer Pricing adjustment was challenged before the courts. Section 92F of the Act defines this term to include 'an arrangement, understanding or action in concert whether or not it is formal or in writing or intended to be enforceable by legal proceeding'. Based on this definition, taxpayers contended that AMP expenses incurred were for the purpose of trade and not at the behest of its AEs. Therefore, it was argued that there was no ‘transaction’ within the meaning of Section 92F between the taxpayers and its AEs.

DT article: Maruti

This argument came to be first tested by a Special Bench of the Hon’ble Income-tax Appellate Tribunal in the case of L.G. Electronics India Private Limited v. ACIT1. The Hon'bleTribunal while rejecting the contention, observed that in cases where there was a formal or written agreement between two AEs, the answer to the question as to the existence of a transaction became patent. Further, in cases otherwise, existence of a transaction had to be judged on the basis of circumstantial evidence by way of conduct of the parties. The Hon’ble Tribunal held that when it is a fact that a taxpayer incurred AMP expenses not just on its products but also on the brand of the foreign AE, coupled with the fact that the taxpayer’s AMP expenses were proportionately higher than those incurred by other comparable cases, what is commonly known as 'Bright Line Test' (BLT), an inference of a transaction between the taxpayer and its AE could be drawn. Perhaps, before concluding the aforesaid decidendi, one cannot rule out the possibility of the Hon’ble Tribunal being swayed by the fact that the revenue authorities were able to demonstrate a clear and unique advertisement strategy adopted by the LG Group namely 'Blue Ocean Strategy'. It was exhibited that the global policy mandated all LG entities to implement advertisement strategy uniformly across all jurisdictions. Nevertheless, the aforesaid ratio of the Hon’ble Tribunal in LG’s case sealed the fate of all other taxpayers at the Tribunal level.

It was the Hon’ble Delhi High Court who tested this Special Bench verdict in the case of Sony Ericsson & Ors2. However, the conclusion of the Hon’ble High Court did not help the taxpayers as according to the Court, existence of a ‘transaction’ could not be challenged as it was accepted by the petitioners. Nevertheless, the finding of the Hon’bleHigh Court that BLT is a method alien to the Act and could not be resorted to by the Revenue certainly was a silver lining.

The disappointment soon translated and it was the Hon’bleDelhi High Court itself who was first to answer the primary issue in the case of Maruti Suzuki India Ltd. v. CIT3. The Hon’ble High Court held in these many words that “the very existence of an international transaction cannot be a matter for inference or surmise.” It also held that burden was on the Revenue to first demonstrate the existence of a transaction. In absence of any machinery provision in the Act for determining the existence of a transaction involving AMP expenses, the existence of a transaction would have to be established de hors the Bright Line Test. Thus, the Hon'ble Court placed the onus of proving the existence of a transaction on the tax department. Not only was the burden on the revenue, the Hon’ble Court even clipped the department’s wings by holding that Chapter X as a whole, does not permit such an adjustment. This was a critical observation, which had lost sight. One failed to appreciate

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1 L.G. Electronics India Private Limited v. ACIT [2013] 140 ITD 41 (Delhi-Trib) (SB).2 Sony Ericsson Mobile Communications India (P) Ltd. & Ors [2015] 374 ITR 118 (Delhi).


that, unlike other tax jurisdictions viz. U.S., Australia and New Zealand, India’s taxing statute did not contain any substantive provision or any machinery provision to enable the Revenue to carry out such TP adjustments. To the relief of the taxpayers the aforesaid principle has been reiterated by the Hon’ble Delhi High Court again4.

One more interesting issue that arises in cases where TPOs have made AMP Transfer Pricing adjustment based on Bright Line Test is that do we really need to investigate existence of an international transaction to decide the fate of these litigations. The Hon’ble Delhi High Court has in both Maruti’s case and Sony’s case held that Bright Line Test is not a method prescribed under the Act. Hence, when a TPO makes a Transfer Pricing adjustment based on a method not prescribed under the Act, it straight away affects his jurisdiction and such orders are liable to be struck down being bad in law. This proposition has been upheld by the Hon’ble Tribunal in the case of Kodak India (P.) Ltd. v. ACIT5 and also Watson Pharma (P.) Ltd. v. DCIT6 . Hence, this should very well be argued and tested even in cases where AMP adjustments have been made using BLT.

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3 Maruti Suzuki India Ltd. v. CIT [2016] 237 Taxman 256 (Delhi).4 Yum Restaurants (India) (P.) Ltd. [2016] 380 ITR 637 (Delhi).5 Kodak India (P.) Ltd. v. ACIT [2013] 155 TTJ 697 (Mumbai – Trib.)6 Watson Pharma (P.) Ltd. v. DCIT [2015] 168 TTJ 281 (Mumbai - Trib.)

The Hon’ble Delhi High Court has certainly ceased the department’s run on AMP issue having held that the extant provisions of the statute did not permit an upward adjustment unless the Revenue Authorities prove existence of some kind of an arrangement between the AEs. The approach to determine the presence of a 'transaction' followed till date (viz. BLT) was held to be incorrect and this fact finding exercise will have be de-hors the BLT approach. This indeed is a herculean task and would require substantial efforts from the Department. The Finance Bill 2016 too did not come of any assistance to the Revenue Authorities. Nevertheless, the Hon’ble Supreme Court’s view on this issue is eagerly awaited as SLPs have already been filed by disheartened taxpayers in Sony’s case.

It would be interesting to see how the chapter on AMP adjustments unfolds. Will it be a glorious victory for the Taxpayers or will we see a turnaround? Currently the odds are however tipped towards the taxpayers.

A boutique law firm specializing in (a) Tax litigation; (b) Infrastructure/contract documentation/Government advisory; (c) Corporate/M&A; (d) Contractual dispute resolution (including arbitration/mediation) and (e) Employment and labour laws.

After the very first year of its existence, Advaita Legal was listed in ‘The Legal 500 – The Clients Guide to the Asia-Pacific Legal Profession’. Advaita has been mentioned by International Tax Review as one of the ‘Firms to watch out for’ vis-à-vis Transfer Pricing litigation. Advaita Legal has been recognised as a leading law firm in India in 2015 by Chambers and Partners and Magic Law.

Led by Sujit Ghosh, Partner and National Head at Advaita Legal

Sujit has over 20 years of experience across the entire spectrum of indirect taxes. Sujit is also an Arguing Counsel and appears regularly before all major High Courts, the Supreme Court, and various tax tribunals. He has been listed by International Tax Review, 2014 as well as 2015 as one of the leading tax litigators of India. Sujit is a well-known thought-leader in the realm of taxes and has many innovative litigation solutions as well as thought-provoking articles/speeches to his credit, including on GST. Sujit led

the first legal team in India to devise and successfully implement a litigation strategy for challenging constitutional validity of DGFT’s powers of recovery (which was affecting the entire power sector) in 2014 (in the case of Alstom-decision by Gujarat High Court) - this judgment has been hailed by Taxsutra as one of the top 10 indirect tax decisions of 2014. He is regularly invited by the National Judicial Academy, Bhopal for taking training for various batches of High Court judges. Sujit was invited by the Rajya Sabha Standing Committee on GST to present various issues and propose amendments. Sujit led several client engagements for strategic advisory and comprehensive hand-holding for transition from sales tax regime to VAT regime, across various states during 2004-2006. Sujit is currently the Chairman-Tax Committee of the Indian National Bar Association of India; and Vice Chairman-state of Haryana for the AIFTP.

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Representation before Rajya Shabha Committee on GST Constitutional Amendment BillArticle analysing Indirect tax aspect of the recently proposed Civil Aviation Policy http://www.idt.taxsutra.com/experts/column?sid=189

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Advaita in recent news

Service tax on lottery struck down Advaita Legal won relief for lottery distributors by securing an order from the High Court of Sikkim declaring the Finance Act, 2015 insofar it levies service tax on lottery distribution as ultravires the Constitution of India. http://www.legallyindia.com/bar-bench-litigation/advaita-wins-service-tax-relief-for-lottery-distributor-future-gaming

Da Vinci deal Advaita Legal advised Berlin based educational television channel Da Vinci on forming a joint venture with Indian digital magazine ‘The Quint’,

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Final Advaita (Feb-March 2016)-Tax

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