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India Tax KonnectJanuary 2018

Contents

International tax 2

Corporate tax 4

Transfer pricing 7

Indirect tax 9

Editorial

The Finance Minister is scheduled to unveil the Union Budget 2018-19 on the 1 February 2018. Various forums have suggested to lower corporate tax rate to boost investment in the country and remain competitive in the global market. Further, it has also been suggested to widen the individual taxpayers’ base with a vision to entail greater relief to small taxpayers and moderately higher rates for taxpayers falling in the higher bracket income. Keeping in view the inflationary trends in the economy, this suggestion will leave more disposable incomes in the hands of individual taxpayers.

Recent changes to the tax law in the U.S.A. may put pressure on the Indian government to move faster on its earlier commitment to reduce the corporation tax rate to 25 per cent. In the Union Budget 2015-16, the Finance Minister promised a reduction in the corporation tax rate, from 30 per cent to 25 per cent, over four years. To that end, the government had laid down a schedule to simultaneously phase out of exemptions available to the corporate sector. There were corporation tax cuts only for small businesses in the Union Budgets for FY 2016-17 and FY 2017-18.

The Mumbai Tribunal in the case of SPE Networks India Inc. held that an Indian group company of a U.S. company does not constitute a Permanent Establishment (PE) in India under the India-U.S. tax treaty since the taxpayer was carrying out its operations from the U.S. and not from India. The activities i.e. sale of advertisement inventory and distribution of channels were not carried out in India and the taxpayer did not have office premises or fixed place of business in India at its disposal. The Tribunal observed that none of the employees are based in India through whom the taxpayer could render the services in India. Further, the revenue earned by the Indian subsidiary was not on behalf of the taxpayer. It was making payment for the purchases and it was not subject to any control of the taxpayer as far as conducting of business in India was concerned. Further, the activities of the taxpayer were not devoted wholly or almost wholly for the taxpayer.

Till very recently, India had historically followed an approach of not accepting applications pertaining to Transfer Pricing (TP) Mutual Agreement Procedure (MAP) cases and bilateral Advance Pricing Agreements (APAs) wherein the Associated Enterprise (AE) of the Indian entity is resident of a country with which India has a tax treaty but such tax treaty does not contain Article 9(2) (or its relevant equivalent Article) relating to ‘corresponding adjustment’. Central Board of Direct Taxes (CBDT) has been receiving several references from time to time regarding the acceptance of such applications. CBDT evaluated the matter and decided to accept TP MAP and bilateral APA applications regardless of the presence or otherwise of Article 9(2) (or its relevant equivalent Article) in the tax treaties.

We at KPMG in India would like to keep you informed of the developments on the tax and regulatory front and its implications on the way you do business in India. We would be delighted to receive your suggestions on ways to make this Konnect more relevant.


International taxDecisions

Indian group company of a U.S. entity does not constitute a PE in India under the India-U.S. tax treaty

The taxpayer, a U.S. resident, engaged in the business of operating satellite television channels, marketing, and distribution of the television channels. During the year under consideration, the taxpayer was operating two channels namely ANIMAX and AXN. For the purpose of marketing its channels, the taxpayer had appointed SET India Private Ltd. (SET India) as a non-exclusive advertising and sales agent for canvassing airtime for the taxpayer’s channel on a principal to principal basis. The taxpayer had also granted rights to SET India to distribute TV channels in India for an agreed consideration at 70 per cent of the revenues collected by SET India from the distribution of ANIMAX channel in India with a minimum guarantee and 75 per cent of the revenue collected and the bonus fee in the case of AXN channel.

The taxpayer had claimed that it did not have a PE in India and therefore the income arising to it was not taxable in India under Article 7 of the tax treaty. The Assessing Officer (AO) held that the arrangements between the taxpayer and SET India was not of principal to principal and it was about sharing the actual revenue collected from advertisers and the cable operators. The taxpayer had a business connection in India, and hence, the income attributable to the business operations of the taxpayer was taxable in India. The taxpayer also had a dependent agent PE in India under Article 5(4) of the tax treaty. As per Rule 10 of the Income-tax Rules, 1962 (the Rules) the AO estimated the taxpayer’s income at 10 per cent of gross advertisements as well as subscription revenue received by SET India on behalf of the taxpayer in India. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the order of the AO.

The Mumbai Tribunal observed that from the perusal of the agreements, it becomes clear that the taxpayer was carrying out its operation from U.S. and not from India. Both the activities, i.e., Sale of advertisement inventory and distribution of AXN and ANIMAX channels were not carried out in India. The taxpayer did not have any office premises or a fixed place of business in India at its disposal, and none of its employees were based in India through whom it could render the services in India. Thus, it has been held there was neither fixed base PE nor service PE of the taxpayer in India.

Though the CIT(A) has endorsed the view of the AO that the taxpayer had agency PE, but nothing has been brought on record to prove that the agreements between the taxpayer and SET India was not on principal to principal basis. SET India had no authority to conclude any contract on behalf of the taxpayer in India.

On the other hand, while selling the airtime inventory and distributing AXN and ANIMAX channels in India, SET India would act in its own right and not on behalf of the taxpayer. It was not dependent on the taxpayer economically or legally. It is also a fact that SET India also carried out significant

marketing and estimation activities for other channels namely Set, Set Max and HBO. Therefore, SET India has to be treated as an independent entity which carried out its own business employing its own capital and bearing connected risks. It cannot be treated an agent, a dependent agent, of the taxpayer. SET India would purchase airtime from the taxpayer and would sell the same in India in its own right, and the taxpayer had no control over it.

The Tribunal observed that the revenue earned by SET India was not on behalf of the taxpayer. It was making payment to the taxpayer for the purchases made by it. It was not subject to any control of the taxpayer as far as conducting of business in India was concerned. The activities of SET India were not devoted wholly or almost wholly for the taxpayer. The Tribunal has also taken note of the facts that the revenue of the taxpayer was not entirely dependent on the earning of SET India. The employees of SET India would work only for SET India and not for any other entity of the group. The lower authorities have not alleged that the transaction between the taxpayer and SET India were not at arm's length. Further, in the Transfer Pricing (TP) orders the TPOs have held that no TP adjustments were required to be made to the income of the taxpayer on account of advertisement revenue or distribution.

SPE Networks India Inc. v. DCIT (ITA No. 652/Mum/2014) [2017-TII-208-ITAT-MUM-INTL]

Payment for intranet charges and SAP software is royalty under the Income-tax Act as well as under the India-Germany tax treaty

The taxpayer is a subsidiary of a German company, engaged in the business of supply of assemblies/sub-assemblies of metallurgical equipment, provisions of consultancy and technical services in design and engineering to ferrous and non-ferrous sectors. During the Financial Years (FYs) 1999-2000 to 2005-06, the taxpayer has made payment to its parent company towards internet charges, payment of SAP software, etc., in Germany without deduction of tax at source under Section 195 of the Act. During the FY 2004-05, the AO noticed that the taxpayer has remitted money to its parent company without deduction of tax and therefore, enquiry was made.

The taxpayer claimed that payments to group concern is in the nature of reimbursement of expenditure and hence the concept of mutuality applies. Accordingly, no tax was required to be deducted thereon. The AO held that payments to parent company on account of internet charges, SAP software, etc., constitute royalty under Section 9(1)(vi) of the Act and it has deemed to accrue or arise in India under Section 5(2) of the Act. Further, the payment is chargeable to tax as ‘royalty’ under Article 12(3) of the tax treaty. Therefore, tax should have been deducted under Section 195 of the Act thereon. Subsequently, the AO initiated Tax Deducted at Source (TDS) proceedings under Section 201(1)/201(1A) of the Act. The CIT(A) upheld the order of the AO.


The Delhi Tribunal held that payment made by the taxpayer to a non-resident company for software is covered under the term ‘scientific equipment’ and therefore taxable as royalty under the Act as well as under the India-Germany tax treaty. The Tribunal observed that the payments were made for the use of licensed software on the internet/intranet and it is also contingent on the basis of number of user license or number of sessions for which the software is used.

Further, the Tribunal held that the payment made by the taxpayer to a non-resident company for software cannot be termed as reimbursement of expenditure since the taxpayer has not produced any agreement, debit notes or working of such reimbursement. The Tribunal observed that when Indian subsidiary company incurs expenditure or avails any service from some third party abroad and payment to such third party is routed through its holding or related company abroad, provision for deduction of tax at source apply as if taxpayer has made payment to such independent party de hors routing of payment through holding company.

SMS Iron Technology Pvt. Ltd v. ITO (ITA No. 4480 to 4486/Del/2014)

Third party reimbursements routed through parent not taxable absent rendering of services

The taxpayer, a company incorporated and a tax resident of the U.S.A., engaged in the business of manufacturing and sale of bearings. The taxpayer entered into an agreement with Timken India Limited (TIL) pursuant to which the taxpayer agreed to render various services in the nature of business strategy development to TIL in the U.S. The services are incurred at centralised level for all the associated companies and the total costs incurred by the cost centers were allocated to the group companies on the basis of ‘allocation key’ on a scientific and actual basis. It was also agreed that the compensation payable by TIL to the taxpayer for the services would cover only the cost actually incurred by the taxpayer without any profit element or mark-up on the cost. TIL did not deduct tax on the payment made to the taxpayer contending that the sum payable to the taxpayer under the agreement represented only reimbursement of costs and there was no element of profit or income for the taxpayer in respect of such payment. Therefore, since there was no income chargeable to tax in the hands of the taxpayer, it was not required to deduct any tax on the payment made. The AO observed that the reimbursement of cost of services would be taxable in India as per Article 12 of India-USA tax treaty in the hands of the taxpayer. The CIT(A) upheld the order of the AO. Aggrieved, the taxpayer appealed before the Tribunal.

The Tribunal perused the agreement between the taxpayer and TIL and observed that the nature of services are purely in the nature of advisory services and nothing was made available to TIL by the taxpayer. The example 7 given under MoU between the India and the U.S.A. makes it clear that consideration for advisory services rendered cannot be treated as Fees for Included Services (FIS) under Article 12(4)(b) of the India-U.S. tax treaty. It further observed that there was no material on record to show that technology was made available and TIL was permitted to apply the technology in the sense that the fruits of the services remained available to TIL in some concrete shape such as technical knowledge, experience skill etc. Accordingly,

the Tribunal held that CIT(A) erred in holding that the monies received by the taxpayer from TIL constitute FTS within the meaning of Article 12(4) of the India-U.S. tax treaty, and are accordingly liable to be taxed in India. It further held that since, the taxpayer does not have any PE in India, the incomes so arising to them in India cannot be taxed under Article 7 as ‘business profits’.

Further, with respect to the payments received by the taxpayer from TIL on account of certain services rendered to TIL by some third parties for which the taxpayer made payments and which TIL reimbursed to the taxpayer (Charge Back Receipts), the taxpayer contended that it acted only as a conduit and derived no income from such reimbursements since they were at actual amounts spent by the taxpayer on behalf of TIL and no profit element was involved. Accordingly, such reimbursements were not taxable in India.

The Tribunal observed that the kind of services were ‘legal expenses’, ‘inspection and survey charges of cargo and vehicles’ and ‘travelling expenses’. The Tribunal observed it was third parties who had rendered services to TIL. The actuals billed by the third parties were paid by the taxpayer in the U.S.A. and were later on reimbursed by TIL to the taxpayer. Therefore, the Tribunal held that the payment of reimbursements were not in the nature of FTS as the taxpayer was not the ultimate beneficiary of the sum in question nor did it render any service to TIL. Further, it held that there was no evidence brought on record to show that the technical skill, knowledge etc., were made available to TIL by the taxpayer. At best the sum was taxable only in the hands of the persons who provided the services to TIL and not in the hands of the taxpayer. It further observed that the TPO scrutinised the details of reimbursements while examining the international transaction of reimbursement by TIL to the taxpayer under Section 92 and found that the taxpayer made no profit on such reimbursements and that the reimbursements were at arm’s length.

ADIT v. The Timken Company (ITA Nos. 387 & 398/Kol/2010) – Taxsutra.com


Corporate taxDecisions

Section 56(2)(viib) of the Income-tax Act is applicable to all class of shares and AO can challenge the valuation report submitted for computation of income submitted thereunder

The taxpayer is engaged in the business of investment and financing. The taxpayer had allotted 0.1 per cent Redeemable Non-Cumulative Preference Shares (RNCPS) with face value of INR10 at a premium of INR1990 redeemable on expiry of 10 years from the date of allotment. The taxpayer had filed a valuation report from a Chartered Accountant (CA) under Rule 11UA(c)(c) of the Rules, for valuation of these shares. The AO observed the market value of preference shares at INR1285.41 per share against the market value of INR2000 determined by the taxpayer. The AO applied Section 56(2)(viib) of the Act and held that consideration received by the taxpayer for issuance of shares was in excess of the face value of such shares. The taxpayer could not substantiate that the Fair Market Value (FMV) adopted by the taxpayer was correct market value. Accordingly, the AO added the difference to the income of the taxpayer under Section 56(2)(viib) of the Act. The AO accepted the discounted cash flow method used by the valuer is accepted. However, the AO held that valuer is not correct in adopting discount rate of 10 per cent. The CIT(A) upheld AO’s order. Aggrieved, the taxpayer filed an appeal before the Kolkata Tribunal.

The Tribunal observed that Section 56(2)(viib) of the Act covered all types of shares. The Tribunal also rejected the taxpayer’s contention that the AO was not an expert to interfere with the report by relying on the Supreme Court’s decision in Duncans Industries Ltd. v. State of U.P. and Ors. Ltd. (C.A. No. 5929 of 1997). The Tribunal held that it cannot be accepted that the AO cannot interfere with valuation done by the valuer.

However, the Tribunal accepted discount factor of 10 per cent as per valuer’s report for bench marking.

Microfirm Capital Pvt. Ltd v. DCIT (I.T.A. No. 513/Kol/2017) – Taxsutra.com

Failure to establish the identity of a persons is liable for addition under Section 68 of the Income-tax Act by disbelieving the cash credit entries recorded in the books of the private limited company

The taxpayer was engaged in the manufacture and sale of iron and steel products. During the AY 2007-08, the AO doubted the genuineness of the cash credit entries that had been recorded against share capital subscribed by corporates and individuals. The taxpayer had provided names, addresses, PAN details and other details of investors who had made investment. The AO randomly picked up few persons and adopted process under Section 133(6) and concluded that no person was found existing at any of the address disclosed by the taxpayer. The inquiries with regard to PAN details also resulted in negative confirmation inasmuch as the taxpayer’s database did not support/confirm the identity of the persons who the taxpayer claimed had made the investment. Thus, the AO did not agree with the explanation furnished by the taxpayer in support of cash credit entries and consequently made an addition of that amount to the income of the taxpayer. On appeal, CIT(A) allowed taxpayer’s appeal. However, the Tribunal upheld AO’s order on the ground that, the burden to establish the identity of the investors and the genuineness of the transaction was never discharged by taxpayer. Aggrieved, the taxpayer filed an appeal before the Allahabad High Court.

The High Court observed that investors either did not exist or effectively denied the fact of making investment. Further, PAN details of investors also could not establish their identity. The High Court observed that the claim of investments could not be accepted even though made through banking channel as they were found to be of persons other than the alleged investors on inquiry. The taxpayer being a private limited company had accepted that the alleged investors were close friends and business associates. Thus, taxpayer’s case was on a different footing than that of public company that may receive some amount through banking channel from persons completely unknown to its directors. The taxpayer itself ought to have known the person/s it invited to subscribe to its share capital. The taxpayer cannot hide behind the shell of a corporate entity to feign ignorance of the real person who may have subscribed to its share capital. The High Court observed that the taxpayer itself may have been aware of the real identity of such persons and on failure to establish identity of such persons, an adverse inference and the consequential addition had to be made at the hands of the company itself under Section 68 of the Act by disbelieving the cash credit entries found recorded in the books of the taxpayer a private limited company.

Prem Castings (P) Ltd. v. CIT (ITA No. 34/2016) –Taxsutra.com


Date of accepting offer under share swap arrangement is relevant for computing long-term capital gain

The taxpayer is a Director of Angel Group of Companies, was holding 13,01,000 shares of Angel Broking Limited (ABL) and 3,00,000 shares of Angel Capital & Debt Market Limited (ACDL). During AY 2008-09, Angel Infin Pvt. Limited (AIPL) made an offer to the shareholders of five Angel Group Companies (including these 2 companies) to swap shares of these individual companies for the shares of AIPL. The valuation of shares which was arrived on the basis of valuation report by CA. Consequent to restructuring/ swap of shares of Angel Group of Companies, the taxpayer had been allotted 14,10,554 shares of AIPL in lieu of the shares of ABL and 1,83,035 in lieu of shares of ACDL. The taxpayer offered LTCG arising out of transfer of shares of ABL and ACDL in lieu of allotment of shares of AIPL. For the purpose of computing LTCG, the taxpayer took the date of purchase of AIPL shares as on 24 April 2007 and price of INR32.42 per share. The AO held that the taxpayer cannot adopt the acquisition date of shares as 23 April 2007 as the record date was 16 October 2007 and on that date the share of AIPL was priced at INR65 per share. The AO observed that pursuant to reorganisation of Angel Group of Companies, AIPL was converted into a holding company of these five companies and it lead to enhancement in value of shares of AIPL by virtue of it coming to hold controlling stake in equity and commodity broking business. Therefore, the AO held that during the period from 17 October 2007 to 20 October 2007, the value of shares was INR 65 per share. Accordingly, the AO adopted INR 65 per share as the value of the shares of AIPL for the purposes of computing LTCG. The CIT(A) confirmed the action of the AO. Aggrieved, the taxpayer appealed before the Tribunal.

The Tribunal accepted the taxpayer’s contention that the shares swap/exchange offered was made by AIPL on 16 April 2007 and was accepted by the taxpayer on 24 April 2007 and not on 20 October 2007. The taxpayer has rightly returned the swap value of INR32.42 while calculating LTCG. Though the taxpayer sold his part of holding in AIPL of 4,92,917 shares at INR65 per share on 20 October 2007 and returned short-term capital gain thereon, but the AO wrongly assumed this price as the price of swap/exchange ratio of AIPL shares. The Tribunal observed that the reason for getting the higher value of shares of AIPL by the taxpayer on 20 October 2007 was at that point of time the value of AIPL included the value of investment in all the five companies and the consolidated strength of the company had increased. Accordingly, the Tribunal held that the AO instead of appreciating the facts, ignored all the facts and held the full value of consideration received by the taxpayer on exchange of shares of ABL and ACDL at INR 65 per share and not at INR32.42 per share. The Tribunal held that the price per share of AIPL on 20 October 2007 cannot be compared with the value received by the taxpayer on swap/exchange of shares of ABL and ACDL because the shares of ABL and ACDL were exchanged for shares of AIPL on standalone basis and not on the basis of the sixth companies put together.

The Tribunal relied on Delhi Tribunal’s decision in the case of Modipon Ltd. wherein it is held that the consideration for sale of land was to be worked out on the basis of circle rate prevailing on the date of registration of agreement to sell and not by applying circle rates on the date of execution of sale deed. It held that similarly the exchange/swap of shares of AIPL with that of ABL and ACDL, were exchanged on 23 April 2007 when offer was accepted by the taxpayer and the price on that date was to be accepted as true price, which was based on independent valuers’report. It also accepted the taxpayer’s reliance on Delhi Tribunal’s decision in the case of Venus Financial Services Ltd. and held that the AO should have adopted the swap/exchange value at INR32.42 per share of AIPL in exchange of shares of ABL and ACDL considering the date as 24 April 2007. Accordingly, it directed the AO to compute the long term capital gain accordingly.

Mukesh Ramanlal Gandhi v. ACIT (ITA No.2712/Mum /2015) – Taxsutra.com

Charitable Trust is eligible for depreciation claim. Amendment made in the Finance Act 2014 amendment not retrospective

The taxpayers are charitable institutions registered under Section 12A of the Act. During the previous year, the taxpayer claimed the depreciation on the asset. The entire expenditure incurred in respect of acquisition of capital assets was treated as application of income for charitable purposes under Section 11(1)(a) of the Act. The AO disallowed the depreciation claim holding that once the capital expenditure is treated as application of income for charitable purposes, the taxpayers had virtually enjoyed a 100 per cent write off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the taxpayer. The CIT(A) confirmed the order of the AO. The Tribunal reversed the same and the High Courts have accepted the decision of the Tribunal.The Supreme Court referred various decisions of the High Courts wherein the High Courts have primarily followed the decision of the Bombay High Court in CIT v. Institute of Banking Personnel Selection (IBPS) [2003] 131 Taxman 386 (Bom). In the said decision, the contention of the department predicated on double benefit was turned down in the following manner:

• Section 11 of the Act makes provision in respect of computation of income of the trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, Section 28 of the Act deals with chargeability of income from profits and gains of business and Section 29 of the Act provides that income from profits and gains of business will be computed in accordance with Section 30 to Section 43C of the Act.

• It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the taxpayer on general principles or under Section 11(1)(a) of the Act.


• It was held that income of a charitable Trust derived from building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets.

• In all such cases, Section 32 of the Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under Section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust.

The Supreme Court held that aforesaid view taken by the Bombay High Court correctly states the principles of law and there is no need to interfere with the same. Most of the High Courts have taken the aforesaid view with only exception thereto by the Kerala High Court which has taken a contrary view in 'Lissie Medical Institutions v. Commissioner of Income Tax'. The Supreme Court observed that the legislature, realising that there was no specific provision in this behalf in the Act, has made amendment in Section 11(6) of the Act, vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-2016. The Supreme Court observed that the Delhi High Court has taken the view that the said amendment is prospective in nature. It also follows that once taxpayer is allowed depreciation, he shall be entitled to carry forward the depreciation as well. For the aforesaid reasons, the Supreme Court affirmed the view taken by the High Courts in these cases and dismiss these matters.

CIT v. Rajasthan and Gujarati Charitable Foundation Poona (Civil Appeal No. 7186 of 2014) – Taxsutra.com

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Notifications/Circulars/Press releases

CBDT extends date for linking of Aadhaar with PAN

Under the provisions of recently introduced Section 139AA of the Act, with effect from 1 July 2017, all taxpayers having Aadhaar or enrolment number are required to link the same with PAN. In view of the difficulties faced by some of the taxpayers in the process, the date for linking of Aadhaar with PAN was initially extended till 31 August 2017 which was further extended upto 31 December 2017.

The CBDT has issued a press release stating that some of the taxpayers have not yet completed the linking of PAN with Aadhaar. Therefore, to facilitate the process of linking, CBDT has decided to further extend the time for linking of Aadhaar with PAN till 31 March 2018.

CBDT press release, dated 8 December 2017

CBDT press release - Constitution of Task Force for drafting a New Direct Tax Legislation

The CBDT has issued a press release stating that in order to review the Act and to draft a new direct tax law in consonance with economic needs of the country, the government has constituted a Task Force comprising of various members. The Task Force is to draft an appropriate direct tax legislation keeping in view:

• The direct tax system prevalent in various countries

• The international best practices

• The economic needs of the country

• Any other matter connected thereto

The Task Force shall submit its report to the government within six months. The CBDT press release is attached here for your ready reference. You may communicate appropriately to your relevant client group.

CBDT press release, dated 22 November 2017


Transfer pricingDecisions

Taxpayer’s aggregation of IT services and ITeS provided to Associated Enterprises under a single composite contract upheld

The taxpayer is engaged in providing routine Software Development (SD) and back office processing services (BPO), pursuant to a single composite contract, to Data Core Systems Inc. U.S.A. for enabling it to service the same to end customers. In addition, the taxpayer also provides similar services to third parties in its independent capacity.

The taxpayer for establishing the arm’s length nature of the services (SD - IT & BPO - ITeS) rendered to its Associated Enterprise (AE) benchmarked the transaction level analysis with reference to the composite contract and considering a ‘bundled pricing arrangement’. The segmented margin of the service rendered to AE was benchmarked against third party comparable price for IT and ITeS companies.

Tribunal’s ruling

• The Tribunal observed that the terms of the composite agreement entered into with its AE for totality of services on the basis of ‘bundled pricing approach’ had been consistently followed by the taxpayer and the pricing had been made in such a manner so as to ensure that the same was always at arm’s length. Further, the Tribunal noted that the assets employed and risks assumed were the same for both SD and BPO services.

• Thus, the Tribunal opined that “there is nothing wrong in working out the composite remuneration for both SD and BPO services based on a composite agreement” and held that there was no good reason to disbelieve this pattern of undertaking transactions by the taxpayer with its AE. The Tribunal also recognised that the taxpayer had tried to justify its transactions with its AE by presenting the segmental profitability statement duly certified by a chartered accountant during the course of TP assessment proceedings by taking into account ‘Rendering of both SD and BPO services’ to both AE and non-AE separately.

• The Tribunal noted that the co-ordinate bench of Pune Tribunal in the case of Cummins India Ltd1 had upheld aggregation of closely linked transactions to determine the Arm’s Length Price (ALP), Mumbai Tribunal in the case of Boskalis International Dredging International

____________1 Cummins India Ltd v. ACIT [2015] 53 taxmann.com 53 (Pune) 2 Boskalis International Dredging International CV v. DDIT (ITA No. 4862/Mum/2008)3 Birla Soft Limited v. ACIT (ITA No. 4001/Del/2009)

CV2 had upheld the portfolio approach and in case of Birla Soft3 Limited also aggregation approach was upheld.

• Further, referring to the OECD TP guidelines for MNEs and tax administration (updated via BEPS Actions 8-10) which provides that due recognition should be given to contractual terms of the agreement for undertaking TP analysis, the Tribunal observed that these guidelines also provide for aggregation of transactions encapsulated under a single portfolio. The Tribunal noted that OECD had also highlighted that under a portfolio approach, the taxpayer’s objective was to earn an appropriate return across the product/service offering in the portfolio rather on any single product/service offering of the portfolio.

• Tribunal stated that the U.K. TP Guidelines conformed to the OECD approach on composite pricing. Thereafter, the Tribunal stated that the UN TP Manual also had acknowledged existence of composite contracts and warranted analysing the individual element of such contracts on an aggregate basis. Thus, the Tribunal opined that the taxpayer’s conduct had been proved pursuant to the conditions stipulated in the agreement and understanding with the AE and it was evident from the margins derived and declared by the taxpayer for various years.

• The Tribunal highlighted Dispute Resolution Panel’s direction of including both IT and ITeS comparables for determining the arm’s length margin to establish that the Revenue had accepted the bundled nature of the service under the composite contract. The margins thus calculated also established that the taxpayer’s margin was at arm’s length. This acceptance of the bundled arrangement further overrules the forced segmentation performed by the Transfer Pricing Officer (TPO) of the accounts into SD and BPO services and ignoring the segmentation provided by the taxpayer of the bundled arrangement between AE and non-AE segment. Thus the Tribunal observed that the forced bifurcation performed by the TPO and the workings and the margins arrived for BPO segment and in respect of the comparables was not needed at all, as the segmented profitability statement in respect of both IT and ITeSrendered to AE and non-AE was already on record before the TPO. The Tribunal explained that if the same was considered, the taxpayer’s margin was very much at ALP.

• Thus the Tribunal accepted the taxpayer’s contentions and held that the other arguments advanced by the taxpayer on the principles of ‘intentional set off’ from one segment to another segment under the

____________4 Sony Ericsson Mobile Communications India Pvt Ltd v. CIT [2015] 374 ITR 118 (Del)


Transactional Net Margin Method (TNMM) which was relied upon by the Delhi High Court in the case of Sony Ericsson Mobile Communications India (P) Ltd4

need not be gone into.

Kolkata Tribunal in the case of Data Core (India) Pvt. Ltd. vs ITO (I.T.A No. 387/Kol/2015)

Notifications/Circular/Press Release

India to accept MAP and bilateral APA even in cases where Article 9(2) relating to ‘Corresponding Adjustment’ is absent in the tax treaty with the respective country

India does not have Article 9(2) in its tax treaties with major trading partners such as Belgium, Germany and France. Till very recently, India had historically followed an approach of not accepting applications pertaining to TP MAP cases and bilateral APAs wherein the AE of the Indian entity is resident of a country with which India has a tax treaty but such tax treaty does not contain Article 9(2) (or its relevant equivalent Article) relating to ‘corresponding adjustment’. However, in light of the CBDT receiving several references from time to time regarding the acceptance of such applications, the CBDT evaluated the matter and as per CBDT Press Release dated 27 November 2017, it has decided to accept TP MAP and bilateral APA applications regardless of the presence or otherwise of Article 9(2) (or its relevant equivalent Article) in the tax treaties.

CBDT press release dated 27 November 2017


Indirect taxGoods and Service Tax

Decisions

Admission of writ petition by Delhi High Court with direction to Government of India to review the anomalies observed in availing input tax credit of SGST charged by other states since not registered in those other states

The taxpayer submits that it is in the business of booking tours and hotel packages for customers and charge IGST from customers for bookings in hotels located outside Delhi - However, they are unable to avail input tax credit on the SGST charged by the hotels located outside Delhi since they are not registered in the State in question -Petitioner submits that as per the stand of the respondents, the petitioner and other taxpayers would have to be registered in all States and Union Territories to avail input credit of SGST which, according to them, is contrary to the purpose and objective of Goods and Services Tax.

It was held that the Union of India will examine the assertions and so called anomalies and inform on the treatment accorded on sale of manufactured goods and other services which are provided by the taxpayer across the country. Also advised to consider whether the matter should be placed before the GST Council.

D Pauls Travel and Tours Ltd v. UOI and Anr. [2017-TIOL-37-HC-DEL-GST]

Admission of writ petition by Delhi High Court in respect of stipulation in Section 140(3)(iv) of CGST Act restricting transitional input tax credit only up to 1 year

Writ petition was filed against stipulation in Section 140(3)(iv) of CGST Act restricting transitional credit up to 1 year the CGST in respect of Input Tax Credit (ITC) on pre-GST stock.

The taxpayers contended that such restriction upon persons possessing invoice is arbitrary inasmuch as proviso thereto allows deemed credit at prescribed percentage without any restriction to persons not possessing invoice.

The Delhi High Court admitted the Writ since in their opinion the matter requires to be heard in greater detail.

GMMCO Ltd and Hafele India Pvt Ltd v. UOI & Anr[2017-TIOL-42-HC-DEL-GST]

Notifications/Circulars/Press Releases

• Clarified that milling of paddy into rice cannot be considered as an intermediate production process in relation to cultivation of plants for food, fibre or other similar products or agricultural produce hence not eligible for exemption under Sr. No. 55 of Notification 12/2017 (Rate) dated 28 June 2017.

Circular No. 19/19/2017-GST– TRU, 20 November 2017

• Clarified that Inter-state movement of rigs, tools and spares, and all goods on wheels [such as cranes], except in cases where movement of such goods is for further supply of the same goods, shall be treated ‘neither as a supply of goods or supply of service,’ and consequently no IGST would be applicable on such movements.

Circular No. 21/21/2017-GST– TRU, 22 November 2017

• The GST Council in their 24th meeting decided that the nationwide e-way bill system will be ready to be rolled out on a trial basis latest by 16th January, 2018 and the rules for implementation of nationwide e-way bill system for inter-state movement of goods on a compulsory basis will be notified with effect from 1 February, 2018. States may choose their own timings for implementation of e-way bill for intra-state movement of goods on any date before 1 June, 2018

Press Release, 16 December 2017

Customs

Notifications/Circulars/Press Releases

Applicability of IGST/GST on goods transferred/sold while being deposited in a warehouse

The value of imported goods is determined as per Section 14 of the Customs Act, 1962 at the time of import i.e. at the time of filing of the into-bond bill of entry. Any costs incurred after the import of goods, such as, port charges/port demurrage charges or costs for customs clearing or transporting the goods from the port to the customs bonded warehouse or costs of storage at the customs bonded warehouse, cannot be added to the value of the goods, for the purpose of levy of duties of customs at the stage of ex-bonding. Further, clause (b) of sub-section (1) of Section 15 of the Customs Act provides that the rate of duty or tariff valuation for an ex-bond bill of entry shall be the date on which it is filed. Therefore, duties of customs (BCD + IGST) shall be paid on the imported goods at the stage of ex-bonding on the value determined under section 14 of the Customs Act.


However, the transaction of sale/transfer etc. of the warehoused goods between the importer and any other person may be at a price higher than the assessable value of such goods. Such a transaction squarely falls within the definition of "supply" as per Section 7 of CGST Act and shall be taxable in terms of Section 9 of the CGST Act read with Section 20 of the IGST Act. It may be noted that as per sub-Section (2) of Section 7 of the IGST Act, any supply of imported goods which takes place before they cross the customs frontiers of India, shall be treated as an inter-state supply. Thus, such a transaction of sale/transfer will be subject to IGST under the IGST Act. The value of such supply shall be determined in terms of section 15 of the CGST Act read with Section 20 of the IGST Act and the rules made thereunder, without prejudice to the fact that customs duty will be levied and collected at the ex-bond stage.

When goods remain deposited in a customs bonded warehouse and are transferred by the importer to another person, the transaction will be subject to payment of IGST at the value determined as per Section 20 of the IGST Act read with Section 15 of the CGST Act, 2017 and the rules made thereunder and the tax liability shall be reckoned as per Section 9 of the CGST Act, 2017.

46/2017-Customs, dated 24 November 2017

Refund/claim of countervailing duty as duty drawback

With respect to countervailing duties which are leviable under Section 9 of the Customs Tariff Act, the Board clarifies that these are rebatable as drawback in terms of Section 75 of the Customs Act. Since countervailing duties are not taken into consideration while fixing All Industry Rates (AIR) of duty drawback, the drawback of such countervailing duties can be claimed under an application for brand rate under Rule 6 or Rule 7 of the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995 and /or the Customs and Central Excise Duties Drawback Rules, 2017, as the case may be. This would necessarily mean that drawback shall be admissible only where the inputs that suffered countervailing duties were actually used in the goods exported as confirmed by the verification conducted for fixation of brand rate.

Where imported goods subject to countervailing duties are exported out of the country as such, then the drawback payable under Section 74 of the Customs Act, 1962 would also include the incidence of countervailing duties as part of total duties paid, subject to fulfilment of other conditions.

49/2017-Cus; dated 12 December 2017

DGFT

Public notice

Under SEIS scheme, the eligible period for the services and rates of rewards as per Appendix 3D provided in annexure to the Public Notice No.3 / 2015-2020 i.e., April 1, 2015 to March 31, 2017 has been extended till March 31, 2018 i.e. from April 1, 2015 to March 31, 2018. The list of services / rates is subject to review with effect from April 1, 2018.

Public Notice: 45 dated 5 December 2017

Central Excise

Decisions

In absence of any time limit to avail input credit, it was held that same cannot be denied if not taken immediately after the input and input service is received

In the absence of any time bar to take input credit during the relevant period i.e. 2005 to March 2010, it was held that the tax payer cannot be denied credit if the same is not taken immediately after the input and input service is received. The time limit was prescribed by insertion of third proviso in rule 4(1) of CCR, 2004 with effect from 1 September 2014.

Accordingly, it was held that the tax payer was eligible for Cenvat credit for the above period.

Fine Chem Ltd v. CCE [2017-TIOL-4345-CESTAT-MUM SD]

Writ petition cannot be filed when the option of appeal was available

The facts of the case were that the tax payer had challenged the Order-in-Original (OIO) passed by the Assistant Commissioner of Customs, by filing the writ petition even though the option of appeal before the appellate authority was available.

The taxpayer submitted that the question of exemption when an EOU has purchased the goods from another EOU has been concluded by the judgement of Supreme Court in case of Favourite Industries, 2012 (278) ELT 145, therefore the adjudicating authority should have followed such judgement. The tax payer accordingly claimed that certain precedents on this issue were not considered by the original authority.

In this background, the High Court held that, the tax payer cannot exercise option of writ petition, when it had the option of filing appeal before the Appellate authority. This point of law stands settled in various precedents. Accordingly, the said writ was held not maintainable.

Sindhu Apparels Pvt Ltd v. UOI [2017-TIOL-2571-HC-AHM-CX]


Without issue of SCN CENVAT credit cannot be denied for the refund filed under Rule 5 of Cenvat Credit Rules (CCR), 2004

The facts of the case are that the taxpayer is a 100 per cent EOU and involved in export of goods. They had filed refund claim under Rule 5 of CCR and part of credit was rejected on the grounds that:

• They had availed credit on the strength of photocopy of the invoice and the original and duplicate were not produced.

• They had taken credit of certain amount on 30th June, whereas the invoice was raised on 1st of July.

The taxpayer argued that both the issue relates to denial of cenvat credit and no show-cause notice under Rule 14 of the CCR has been issued. He argued that, the proceedings relating to refund under Rule 5 of the CCR, availment of cenvat credit cannot be questioned. He further argued that cenvat credit cannot be denied on the strength of procedure prescribed by the trade notice so long as their claim is covered under CCR.

It was held by the CESTAT that, to deny cenvat credit, CCR prescribes a procedure where show-cause notice is required to be issued. Without issue of notice it is not open to revenue to deny cenvat credit in proceedings relating to refund under Rule 5 of CCR.

Since no notice has been issued seeking reversal of the cenvat credit which is allegedly wrongly claimed, the revenue has no option but to process the refund under Rule 5 treating the same as a valid cenvat credit.

Keva Fragrances Pvt. Ltd v. CCE [2017-TIOL-4079-CESTAT-MUM]

VAT

Decisions

No additional levy on purchases made at a concessional rate for inputs used in manufacture of export goods

In the present case, taxpayer, Baron Power Ltd. (BPL) is dealing in automatic power factor systems, capacitors, relays, etc. As per Section 3(3) of the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act), when a registered dealer purchases raw materials for manufacturing specific goods, he can do so at a concessional rate of tax by issue of a declaration in form XVII, subject to certain conditions. Further, Section 3(4) of TNGST Act (impugned section) states that additional levy of 1 per cent shall be applicable, if a dealer has procured raw materials at a concessional rate as per Section 3(3) of TNGST Act and has dispatched the manufactured goods to another state by way of branch transfer or transfer through an agent. In light of Section 3(3) of the TNGST Act, BPL purchased raw materials at a concessional rate of tax in AY 2006-2007. However, basis Section 3(4) the assessing

authority passed an assessment order with the view that an additional 1 per cent shall be levied on the export turnover of INR19,50,272 under Section 3(4) of TNGST Act (‘impugned Section’) as the same did not appear to be a local sale. Aggrieved by the same, BPL filed an appeal before the Appellate Deputy Commissioner, Chennai who set aside the assessment made on the export turnover at 1 per cent under the impugned section. Aggrieved, the state preferred a second appeal before the Tamil Nadu Appellate Tribunal, who upheld the order of the First Appellate Authority and dismissed the state’s Appeal stating that export is also a sale as contemplated in the first part of the impugned section. Being aggrieved by the same, the state filed an appeal with HC, wherein the learned state representative submitted that as per the impugned section raw materials purchased would qualify for a concessional rate only if the same were used to manufacture goods which would be sold locally .i.e. intrastate. However, this contention was rejected by the High Court when it upheld the decision of the first appellate authority, and dismissed the appeal filed by the state. Aggrieved by the decision of the High Court the State filed a Tax Case (Revision) Petition with the High Court.

Along with the Tax Case (Revision) Petition filed, the Learned Special Government Pleader placed reliance on State of Karnataka v. B.M. Ashraf and Co. and submitted that a sale in the course of export cannot be regarded as an ‘intrastate sale’ under Section 5(3) of the Central Sales Tax Act, 1956 and hence the same would be considered as non-compliance with the impugned section. The state also submitted that the words ‘in any other manner’ appearing in the impugned section would also include sales made in the course of export, and accordingly and additional levy of 1 per cent would be levied on such export sales. The assesse contended that if the law makers wanted to restrict the sale only to a sale inside the state then such a restriction would have been specified in the section accordingly. The High Court held that the expression ‘but does not sell the goods so manufactured’ cannot be put against the export sale for levying of tax on the value of goods purchased at a concessional rate under Section 3(3) of the Act. The High Court also held that the State of Karnataka v/s B.M. Ashraf case could not be relied on by the State as the facts appear to be different from the present case. The High Court further concluded that an export sale cannot be brought under purview of the expression ‘in any other manner’ as mentioned in section 3(4) of the TNGST Act. HC also stated that as in case of export sale the ‘situs of sale’ was within the state, section 3(4) of the TNGST Act would not apply.

Accordingly, the High Court affirmed the view of the assesse and the Tamil Nadu Appellate Tribunal and stated that raw materials purchased at a concessional rate under section 3(3) of the TNGST Act would not attract additional levy under the impugned section. The High Court relied on various judgments to come to the aforementioned conlusion.


Therefore, the High Court dismissed the Tax Case (Revision) Petition filed by the State of Tamil Nadu as no question of law, much less substantial question of law, arises for the consideration of the present revision.

The State of Tamilnadu v. Tvl Baron Power Limited [Madras High Court (Revision) No 44 of 2017]

Notifications/Circulars/Press Release/Order

Maharashtra

The definition of ‘goods’ as mentioned under the Section 2(d) of Central Sales Tax Act, 1956 (CST Act) has been amended with effect from 1 July 2017 which states that goods means petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption. In connection to the above, the Ministry of Finance, Department of Revenue, State Tax Division, New Delhi has issued Office Memorandum on 7 November 2017 referring to the amended definition of ‘Goods’, stating that goods means any goods i.e. goods which fall within GST as well as goods which do not come under ambit of GST. Further, such office memorandum has clarified that declarations in Form-C to be issued for the period from 1 July 2017 onwards in case if inter-state purchases pertains to the aforesaid 6 items (as per the amended definition of goods) and used for the purpose of resale of such items, manufacture of such items and used in telecommunication network or mining or generation or distribution of electricity or any other form of power.

Basis above office memorandum, Maharashtra Sales Tax Department vide below mentioned circular, has upheld the Office Memorandum issued by the Department of Revenue, New Delhi.

Circular No. 47T of 2017 dated 17 November 2017


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