Tax Digest

September 2014

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Dear readers,We are pleased to present the September 2014 edition of EY’s quarterly newsletter, The Tax Digest, summarizing significant tax and regulatory developments.

This newsletter is designed as a ready reckoner and covers landmark tax judgments, an update on tax treaties and alerts on topical developments in the tax arena. It provides access to “In the press” covering published articles on various issues in the tax realm over the last quarter. It also covers key thought leadership reports and other topics of interest to a tax professional.

We hope you find this edition, both timely and insightful.

Best regards, EY Tax Update team

Contents

Direct taxVerdicts

• Reported decisions supported by our Litigation team

• Gift by corporates in form of transfer of shares, held valid in law and eligible for capital gain exemption

• Time limit for initiating withholding tax proceedings

• Waiver of loan taken to discharge “payable” liability on purchase of capital assets not chargeable to tax

• Significant Supreme Court (SC) decisions

• SC considers “agreement to sale” as the date of “transfer” for capital gains computation

• Taxability of sale of shares and debentures

• Sale of CCDs of Joint Venture (JV) company to JV partner taxable as capital gains

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• Sale of shares of JV company to JV partner at price lower than the right issue price acceptable

• Rulings on tax withholding

• Amendment of extended time limit for tax withholding to be applied retrospectively

• Disallowance for not withholding taxes not applicable to an exempt trust

• No disallowance for not withholding on account of retrospective amendment in law

• Rulings on income linked incentive deductions

• Income linked deduction allowable even in case of change of ownership of undertaking

• Power plant exclusively set up for captive consumption eligible for income link deduction

• Income linked deduction available even though taxpayer ceases to be Small Scale Industries (SSI) during tax holiday period

• No denial of benefit where state law does not provide for issue of completion certificate

• Taxability of shipping companies

• One member shipping company registered, headquartered in Cyprus eligible for DTAA benefit

• Entire profits on freight income, including income from “slot charter arrangement” with third party feeder vessel covered as profits from operation of ship

• Deductibility of expenditure incurred for business purpose

• Guarantee commission paid to directors is a deductible expenditure

• Expenditure not disallowable on the ground of procedural breach of law

• Nature of income and its taxability

• Tax treatment of interest on income tax refunds

• Interest on NPA, can be offered to tax only on realization basis

• Is there a Permanent Establishment (PE)?

• LinkedIn profiles contents of employees can be regarded as evidence for determining PE of employer?

• PE exposure on executing a turnkey contract involving equipment supply, provision of installation and commissioning services using related parties

• No PE for carrying supervisory activities for Indian projects, absent construction or building site

• NR firm rendering professional services in India constitutes Services PE

• Other significant rulings

• Employer cannot to be regarded as representative where employee becomes NR post cessation of employment

• No concealment penalty if an addition or issue is acknowledged as involving “substantial question of law”

• “Human Intervention” a primary condition for technical services

• Capital gain exemption on conversion of company to LLP denied for violation of exemption condition

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• DTAA benefit available to recipient of income where beneficial owner is also a resident of the same country

• Incubation of start-ups by a private trust is not a business activity

• Meaning of “substantially” for indirect transfers, at least 50% assets threshold considered

• Some key issues on which Special Leave Petitions were dismissed by the SC

• Recent decisions on taxation of Royalty/FTS payments

Treaty connections

• DTAA between India and Fiji effective from 1 April 2015

• DTAA between India and Malta effective from 1 April 2015

• Protocol amending the 1989 DTAA between India and Poland enters into force

• Tax Information Exchange Agreements (TIEA) updates

• India - Liechtenstein TIEA enters into force

• OECD updates

• OECD releases the 2014 update to the OECD Model Tax Convention and Commentary

• OECD releases report on impact of BEPS in low income countries

• OECD seeks input on collecting and analyzing data on BEPS

• OECD issues Standard for Automatic Exchange of Information in Tax Matters

Tax happenings across the border

• China issues draft administrative guidance on general anti-avoidance rules (GAAR) for public comments

• EU formally adopts proposed linking rule for hybrid loans under Parent-Subsidiary Directive

• Australian Tax Office issues final guidance on deductibility of support payments to foreign subsidiaries

• Korea’s National Tax Tribunal holds indirect US shareholder is a beneficial owner

• Spanish Supreme Court issues resolution upholding existence of PE in Spain

• South Africa releases proposed international tax changes for comment

• Brazilian tax authorities issue interpretation on cross-border tax treatment of technical services

From the Tax Gatherer’s desk

• Finance (No. 2) Act, 2014 enacted

• First report of the Tax Administration Reform Commission (TARC) made public

• CBDT clarifies allowability of profit-linked deduction to new SEZ Unit upon transfer of technical manpower up to 20%

• CBDT notifies Cost Inflation Index (CII) for financial year 2014-15

• Extension of due date for Tax Audit report to 30 November 2014

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Indirect taxCase Laws

Service tax

• Delhi High Court quashes Rule 5A(2) of the Service Tax Rules and the Instruction issued by CBEC which prescribes manner of an audit and the records that can be called for by the authorities

• Service tax levy upheld on composite contracts for pre-2007 period

• Revenue sharing could be only mode of computation of consideration for service rendered

• Third member follows British Airways ruling; Foreign CRS services not taxable

• Domain registration fees paid were not liable to Service tax as “franchisee service”

• “Ocean freight” not liable to Service tax absent specific entry levying tax

• Bar of limitation under Section 11B of Central Excise Act, 1944 would not be applicable for refund of Service tax

CENVAT credit/ Central Excise

• CENVAT credit alleged as wrongly taken by manufacturer basis ISD procedure and demand rightly raised on manufacturer and not on ISD - Godfrey Phillips case distinguished

• Input service definition amendment not retrospective; CENVAT credit on courier/telephone /insurance services allowed

• Shipping services availed at the port of export of goods - Held as Input services

• Goods sold in retail pack with MRP thereon would be subject to valuation under Section 4A irrespective of the fact that the said packages are also sold in bulk to institutional buyers

• Taking of credit under a common pool permissible without any restriction for an assessee who is both a manufacturer as well as a service provider

Customs Duty

• Order prohibiting assessee from operating as CHA, based on allegations in notice issued to importer / client, not tenable

• Levy of Extra Duty Deposit (EDD) on related-party imports, despite appeal pendency, held to be illegal

• Refund made available by Tribunal when assessee paid duty, without availing exemption

• Doctrine of unjust enrichment not applicable on refund claim of provisional deposits made prior to adjudication

VAT/Central Sales Tax (CST)

• Stay granted for VAT recovery to the assessee (OTIS) in light of the Supreme Court Ruling in Kone Elevators

• Exemption under Section 5(3) of CST Act for penultimate sale of goods for export upheld

• Questions correctness of SC ruling in M/s Rainbow Colour Lab (2000) in light of the SC-Larger Bench judgment in Bharat Sanchar Nigam Ltd (2006)

• Theory of ‘same goods’ dismissed again while recognising the link between local sale and exports

• Only CST is applicable in respect of goods procured from Karnataka, for works contract executed in the State of Kerala

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Foreign Trade Policy

• High Court dismisses Revenue’s appeals, Education cess levy on DTA clearances appealable before SC

• Once duty is paid on the inputs CENVAT credit is admissible

Key Statutory updates

• Service tax – post Budget 2014-15

• Service tax Notification amending Mega Exemption Notification to provide exemption to services by a specified organization relating to religious pilgrimage.

• Service tax amendments post Budget 2014-15 (effective from 6 August 2014)

• Service tax amendments post Budget 2014-15 (effective from 1 October 2014)

• Changes in the Point of Taxation Rules, 2011 (POT Rules) amending POT for reverse charge

• Changes in Abatement

• Service tax amendments on a date to be notified post enactment on 6 August 2014 of the Finance (No.2) Act, 2014 [No.25 of 2014] – The effective date is 1 October 2014 as notified vide Notification No. 18/2014-ST dated 25 August 2014.

• Insertion of Rules 11 and 12 to the Service Tax Rules, 1994 wef 1 October, 2014 as notified vide Notification No. 19/2014-ST dated 25 August 2014

• Central Excise Duty/CENVAT credit

• Government notified a fixed interest of 6% per annum on delayed refund of pre-deposit for Section 35FF of Central Excise Act, 1944. (Also applicable to Service tax)

• Key Central Excise amendments post Budget 2014-15 (effective from 6 August 2014)

• Key Central Excise amendments post Budget 2014-15 (effective from 1 September 2014)

• Key Central Excise amendments post Budget 2014-15 (effective from 1 October 2014)

• CENVAT Credit Rules, 2004 amendments

• Customs

• Government notified a fixed interest of 6% per annum on delayed refund of pre-deposit for Section 129EE of the Customs Act, 1962

• Guidelines for considering request for exemption from payment of Customs Duty under Section 25(2) of Customs Act, 1962

• Key Customs amendments post Budget 2014–15 (effective from 6 August 2014)

• Key amendments post Budget 2014–15 — Common to Service tax, Central Excise and Customs (effective from 6 August 2014)

• Special Economic Zones (SEZ)

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• SEZ department has proposed time-lines for disposal of various processes related to a SEZ developer and unit on their website on 14 August 2014

• Key SEZ / EOU amendments post Budget 2014–15

• VAT/CST – Maharashtra

• Trade Circular no 13T of 2014 dated 02-08-2014: Gist of the Circular issued by the Maharashtra VAT Department

• Trade Circular No. 15T of 2014 dated 6 August 2014issued by the Maharashtra VAT Department amending the Maharashtra VAT Act, 2002

• VAT – Rajasthan

• Rajasthan Finance Act (14 of 2014) bringing about amendments in Sections of the Rajasthan Value Added Tax Act, 2003

Regulatory

• Foreign Direct Investment

• Issue of Press Note 3 of 2014

• Issue of Press Note 4 of 2014

• Press Note 5 of 2014

• Press Note 7 of 2014

• Press Note 8 of 2014

• Reserve Bank of India

• Liberalised Remittance Scheme (LRS) for resident individuals – Increase in limit and permission to acquire immovable property abroad

• Foreign investment in India by registered FPIs, SEBI registered long term investors and NRIs in non-convertible/redeemable preference shares or debentures of Indian companies

• Foreign investment in India by SEBI registered Long term investors in Government dated Securities

• Pledge of shares for business purposes in favor NBFCs

• Delegation of Powers to AD Banks for transfer of assets of Liaison Office (LO) / Branch Office (BO) / Project Office (PO) of a foreign entity either to its Wholly Owned Subsidiary (WOS) / Joint Venture (JV) / Others in India

• Export and Import of Currency: Enhanced facilities for residents and non-residents

• Master Circulars issued by RBI

• Financial Commitment (FC) by Indian Party under Overseas Direct Investments (ODI) – Restoration of Limit

• Issue of Partly Paid Shares and Warrants by Indian Company to Foreign Investors

• Issue/Transfer of Shares or Convertible Debentures - Revised pricing guidelines

• Refinancing of ECB at lower all-in-cost – Simplification of procedure

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For the latest tax insights for business leaders, read our quarterly magazine: T Magazine

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Doing Business in India 2012-13

Budget Connect 2014 : for Union Budget Analysis with sector Budget alerts

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In the press

Compilation of alerts

• Direct Tax

• Indirect Tax

• Regulatory

9 Tax Digest

Verdicts

Direct tax

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Reported decisions supported by our Litigation team

Gift by corporate entities in form of transfer of shares, held valid in law and eligible for capital gain exemption

In case of Redington (India) Ltd. [TS-419-ITAT-2014(CHNY)] argued by our Litigation Team, the Chennai Tribunal held that transfer of shares of a subsidiary to its step-down subsidiary by way of gift is valid in law. In the absence of definition of “gift” under the Income Tax Laws (ITL), the Tribunal referred to Transfer of Property Act, 1882 and Gift Act, 1958 and held that essential ingredients of a valid gift are existence of a property, which is transferred voluntarily, without consideration. Presence of “love and affection” is not a pre-requisite for a transfer. The Tribunal further held that the company is eligible to claim exemption of capital gain tax on gift transaction as provided under the ITL, since there is no specific provision, which states that the exemption will be available only to gift made by individuals.

(For more details, please refer EY Alert dated 18 July 2014)

Time limit for initiating withholding tax proceedings

In the case of DIT v. Mahindra and Mahindra Ltd. [TS-404-HC-2014(Bom)], the Bombay High Court (HC) was concerned with the Tax Authority’s appeal against the ruling of the Special Bench (SB) of Mumbai Tribunal, which had held that the withholding tax proceedings should be initiated within a reasonable time, i.e., within the time limit provided under the ITL for assessment/reassessment of the payee. The Tax Authority’s contention was that there is no such specific time limit. The HC upheld the SB’s ruling on the limited issue that in absence of specific time limit, withholding tax proceedings should be initiated within a reasonable time limit based on facts of the case and the nature of order sought to be passed. However, it kept the issue of length of period which may be regarded as “reasonable” open for adjudication.

(For more details, please refer EY Alert dated 17 July 2014)

Waiver of loan taken to discharge “payable” liability on purchase of capital assets not chargeable to tax

The manufacturer-taxpayer had availed a term loan from a German bank to finance purchase of capital assets in the case of Rieter India Pvt. Ltd. v. ACIT [ITA No. 2331/PN/2012]. Unable to repay the same, the Taxpayer entered into a settlement scheme whereby the German bank agreed to waive off the principal and interest due on the loan. The Taxpayer offered waiver of interest to tax but claimed that waiver of principal sum is not chargeable to tax which was disputed by the Tax Authority on the ground that the loan was taken for trading purpose. The Tribunal, ruling in favor of the Taxpayer, held that the loan was utilized for discharge of liabilities, which was incurred on purchase of capital assets (which was not disputed by the Tax Authority). The utilization of loan for discharge of such liability needs to be regarded as utilization of loan for acquisition of capital assets. Therefore, the Tribunal ruled that waiver of loan was on capital account and hence, was a capital receipt not chargeable to tax.

Significant Supreme Court (SC) decisions

SC considers “agreement to sale” as the date of “transfer” for capital gains computation

In the case of Sanjeev Lal v. CIT [TS-397-SC-2014], the SC adopted a liberal view in allowing capital gains exemption by considering the date when “agreement to sale” was executed (as compared to the date of execution of the sale deed) as the date of transfer for computing the stipulated time-limit for investing in a new house. The SC held so in view of the fact that the Taxpayer was restrained from executing the sale deed by virtue of a Court stay order. The SC also emphasized the fact that the intention of the legislature behind such exemption is to give some relief to the Taxpayer from capital gains tax and, hence, the same is to be interpreted purposively and harmoniously to grant benefits to the taxpayer.

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Taxability of sale of shares and debentures

Sale of CCDs of joint venture (JV) company to JV partner taxable as capital gains

In the case of Zaheer Mauritius v. DIT (IT) [TS-464-HC-2014(Del)], the Delhi HC held that gains arising on sale of Compulsory Convertible Debentures (CCDs) in a JV company to a JV partner is in the nature of capital gains and exempt by virtue of the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The Authority for Advance Rulings (AAR) had earlier taken a view that this is a loan transaction disguised as investment and, accordingly, gain arising therein is in the nature of interest.

The Delhi HC also held that the transaction involving CCDs and understanding between the Taxpayer and the JV partner was a genuine commercial venture and there was no reason to ignore the legal nature of CCDs or to lift the corporate veil to treat the JV company and the JV partner to be a single entity.

(For more details, please refer EY Alert dated 6 August 2014 on the HC ruling and EY alert dated 9 April, 2012 on the AAR ruling)

Sale of shares of JV company to JV partner at price lower than the right issue price acceptable

In case of CIT v. Siel Ltd. [TS-470-HC-2014(Del)], the Delhi HC ruled that sale of shares of JV company to JV partner at a price below the right issue price, issued around the same time, does not itself mean that sale price of shares is understated, leading to disallowance of capital loss in the hands of the seller. The Taxpayer and the JV Partner were neither controlled or under the same management, nor had common shareholders or directors. In such circumstances, it cannot be assumed that an undeclared sale consideration was paid in the given transaction to bring under scrutiny the capital loss assessed in the hands of the seller.

Rulings on tax withholding

Amendment of extended time limit for tax withholding to be applied retrospectively

The Karnataka HC, in case of CIT v. Santosh Kumar Shetty [TS-460-HC-2014(Kar)], held that the amendment made by the Finance Act (FA) 2010, extending time limit of depositing taxes withheld up to the return filing due date is retrospective in nature. The HC relied on the Gujarat HC ruling in case of CIT v. Om Prakash R Chaudhary (ITA No. 412/2013) and held that the amendment, being curative in nature, is to be given with retrospective effect. The HC also noted that a similar view has been expressed by the Delhi HC in the cases of CIT v. Oracle Software India Ltd. [293 ITR 253(Del)], H.S.Mohindra Traders v. I.T.O. [44 SOT 43(Del)] and Calcutta HC in the case of CIT v. Virgin Creations [TS-810-HC-2011(Cal)].

Disallowance for not withholding taxes not applicable to an exempt trust

In case of Bombay Stock Exchange Ltd. v. DDIT [TS-356-HC-2014(Bom)], the Bombay HC ruled that disallowance of expenditure due to default in withholding taxes cannot be made in case of charitable institution. The HC observed that Taxpayer’s income was exempt from tax under a specific chapter of the ITL, whereas provisions of disallowance on non-withholding of taxes form part of another Chapter relating to computation of income under the head, “profits and gains of business or profession”. Since the Taxpayer was not carrying on any business and its income was exempt, these provisions of disallowance were not applicable to the Taxpayer.

No disallowance for not withholding on account of retrospective amendment in law

In the case of Kerala Vision Ltd. [TS-342-ITAT-2014(Coch)], the Taxpayer was engaged in the business of distributing cable signals. It made payments to several channel companies for receiving channel signals, which was disallowed by the Tax Authority for failure to withhold taxes on such payment. The Cochin Tribunal held that

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royalty payment cannot be disallowed on the ground that Taxpayer had not withheld taxes, since such payment was not taxable as “royalty” at the time when it was incurred and the payment became taxable under the definition of “royalty” only subsequently, due to a retrospective amendment in the ITL vide Finance Act 2012 (FA 2012).

This decision adds to the collection of other favorable tribunal rulings and reiterates the principle that retrospective amendments made with respect to taxation of an income, cannot change the tax withholding liability of the payer of such income, where it is discharged before the amendment with retrospective effect .

(For more details, please refer EY Alert dated 12 June 2014)

Rulings on income-linked incentive deductions

Income-linked deduction allowable even in case of change of ownership of undertaking

In the case of CIT v. Prisma Electronics [TS-493-HC-2014(All)], the Allahabad HC allowed profit- linked incentive deduction, even when the ownership of the undertaking was converted from a proprietorship firm to a partnership firm. According to the conditions stipulated in the provisions of the ITL, if the undertaking is formed by splitting up or by reconstruction, then the undertaking will not be qualified for claiming deduction. The HC laid down that the formation of the undertaking should not be confused with the ownership of the business. In this case, the undertaking was already in existence and was not formed by splitting up or by reconstruction of the business. The HC also ruled that it is not the case of transfer of plant and machinery from an old firm to a new firm, but transfer of the undertaking as a whole.

Power plant exclusively set up for captive consumption eligible for income-linked deduction

In the case of CIT v. Orient Abrassive Ltd. [TS-487-HC-2014(Del)], the Delhi HC held the Taxpayer’s power generation unit to be eligible for income-linked deductions as a separate undertaking even though the power generated was supplied solely for captive consumption. The HC relied on its earlier ruling in the case of Orissa

Cement Ltd. [254 ITR 412 (Del)] and DCM Sriram Consolidated Ltd. [322 ITR 486(Del)], following the SC ruling in case of Tata Iron and Steel Co. Ltd. [48 ITR 123 (SC)] wherein it was held that nothing in law prohibits the taxpayer to do business with oneself and ascertain the profit and loss attributable to each line of activity.

Income-linked deduction available even though taxpayer ceases to be small scale industries (SSI) during tax holiday period

In the case of Ace Multi Axes Systems Ltd. v. DCIT [TS-484-HC-2014(Kar)], the Taxpayer, a SSI manufacturer, was eligible for income-linked deduction for ten consecutive years. One of the conditions for eligibility of deduction was to commence manufacturing within a stipulated time period, which was complied with by the Taxpayer. In the ninth year of the tax holiday period, the Tax Authority denied the deduction on the ground that the Taxpayer ceased to be a SSI in that year. The Karnataka HC noted that the conditions stipulated in the provisions of the ITL are initial conditions to be fulfilled for being eligible for deduction. Once these conditions are fulfilled, the undertaking is entitled to the benefit for ten consecutive years. The HC also pointed out that the legislative intention behind the deduction is industrial growth and wealth creation. The benefits of deduction cannot be denied, merely because an industry stabilizes early, makes profits, makes future investment, and grows out of the definition of SSI.

No denial of benefit where state law does not provide for issue of completion certificate

In the case of CIT v. Ittina Properties Pvt. Ltd. [TS-461-HC-2014(Kar)], the Tax Authority denied the income-linked deduction to the Taxpayer in absence of project completion certificate, which is a pre-condition for availing the deduction according to ITL provisions. The reason for not providing the completion certificate is that there is no provision for issue of the certificate in the Bangalore Development Authority Act, 1976 or the Karnataka Municipal Corporations Act, 1976. The Karnataka HC ruled that, in such circumstances, if the building was completed within the stipulated period, the Taxpayer is entitled to the benefit. The HC also directed the Tax authority to make suitable amendments to the law or issue appropriate

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circulars keeping in mind the provisions of the relevant state law.

Taxability of shipping companies

One-member shipping company registered and headquartered in Cyprus eligible for DTAA benefit

Article 8 of the India-Cyprus DTAA provides that profits derived by an enterprise, registered and with headquarters (i.e., effective management) in Cyprus, from the operation of ships in international traffic will be taxable only in Cyprus. In case of Shaan Marine Services Pvt. Ltd. [TS-327-ITAT-2014(PUN)], the Taxpayer was acting as agent of a shipping company (Ship Co) registered and headquartered in Cyprus. Ship Co was a one-member company with no employees or a big office establishment as most its work was outsourced. Considering the facts and the language of the India-Cyprus DTAA, the Tribunal held that Ship Co is entitled to benefits of the DTAA and, consequently, its income from transportation of cargo is not taxable in India.

(For more details, please refer EY Alert dated 6 June 2014)

Entire profits on freight income, including income from “slot charter arrangement” with third- party feeder vessel covered as profits from operation of ship

The Mumbai Tribunal, in case of MISC Berhad [TS-418-ITAT-2014(Mum)], ruled that the entire profits on freight income, which also comprised slot charter arrangement with third party feeder vessels is covered under Article 8 (Operation of Ships) of India-Malaysia DTAA as profits from operation of ships. Based on facts, the Tribunal held that there is complete linkage of the voyage between the Indian port to the hub port through a feeder vessel and from the hub port to the final destination port through the mother vessel owned/leased by the Taxpayer and, therefore, the entire profits derived from the transportation of goods carried on by the Taxpayer are to be treated as profits from operation of ships eligible for the benefit of Article 8.

(For more details, please refer EY Alert dated 22 July 2014)

Deductibility of expenditure incurred for business purpose

Guarantee commission paid to directors is a deductible expenditure

The taxpayer’s directors, in the case of Controls & Switchgear Contactors Ltd. [TS-334-HC-2014(Del)], had given personal guarantees to the lending bank for extending various credit facilities to the taxpayer. On these facts, the Delhi HC held that guarantee commission paid to directors cannot be regarded as payment of bonus or commission to an employee in lieu of profits or dividend, which is not a deductible expenditure for the company. The HC observed that the taxpayer was a listed company and the concerned directors were not the only shareholders. The amount, even if not paid as commission, would not have been payable to directors as dividend or profits. The transaction cannot be considered as unreal or not genuine considering that the provision of personal guarantees and undertaking attendant risks were clearly beyond the scope of directors’ services as employee of the Taxpayer company.

(For more details, please refer EY Alert dated 6 June 2014)

Expenditure not disallowable on the ground of procedural breach of law

According to ITL provisions, any expenditure incurred for any purpose, which is an offence or otherwise prohibited by law is not allowed as a deduction from business income. In the case of Jai Surgicals Ltd. [TS-378-ITAT-2014(Del)], the taxpayer made certain payments to a related party without obtaining approval of the Central Government, as statutorily required and, hence, the Tax Authority sought to disallow such expenditure. The Delhi Tribunal clarified that the scope of disallowance of provision under the ITL is to be restricted to an expenditure, which is incurred for a “purpose”, which is an offense or prohibited by law. Mere non-compliance of procedures will not render an otherwise lawful expenditure, unlawful.

(For more details, please refer EY Alert dated 3 July 2014)

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Nature of income and its taxability

Tax treatment of interest on income tax refunds

In the case of DIT v. DHL Operations BV [TS-439-HC-2014(Bom)], the non-resident (NR) Taxpayer with Indian Permanent Establishment (PE) had received interest on income tax refund. Such interest was offered to tax at a lower rate of 10% under Interest Article of the India–Netherlands DTAA. The Tax Authority sought to tax the interest at an increased rate of 40% contending that the same was effectively connected to Indian PE and taxable as business income. The Bombay HC confirmed the Tribunal’s reliance on a SB’s ruling in the case of Clough Engineering Ltd. [TS-184-ITAT-2011(DEL)], which had held that the interest on income tax refund is not effectively connected with PE, either on the basis of asset-test or activity-test and is, therefore, to be considered under the Interest Article of the DTAA.

In case of Vankatesh Dutt v. CIT [TS-454-HC-2014(Kar)], the Karnataka HC has held that interest on refund of tax is taxable in the year of receipt. This is true even if the interest relates to many years or the matter is pending resolution before the appellate authorities.

Interest on NPA, can be offered to tax only on realization basis

The Bombay HC, in case of CIT v. KEC Holdings Ltd. [TS-380-HC-2014(Bom)], ruled that the interest accrued on Non-Performing Assets (NPAs) by an NBFC taxpayer cannot be taxed on accrual basis due to uncertainty of its realization. The HC also emphasised that the policy of recognising interest income in the year of recovery is in line with RBI guidelines and it also does not conflict with ITL provisions.

Is there a PE ?

LinkedIn profiles contents of employees can be regarded as evidence for determining PE of employer?

The Delhi Tribunal, in case of GE Energy Parts Inc. [TS-400-ITAT-2014(DEL)], in its interim order, admitted that contents of LinkedIn (a social networking platform for professionals) profiles as additional evidence to determine whether the Taxpayer, through its offices or through its Indian affiliate, constituted PE in India and have considerable bearing on the facts of the case.

The Taxpayer thereafter filed a writ petition before the Delhi HC [W.P.(C) 4337/2014] against the interim order of the Tribunal. The HC stayed the interim order and directed the Tax Authority to file its reply on the Taxpayer’s plea contending that LinkedIn profiles are hearsay and cannot be admitted as evidence in the court proceedings.

(For more details on the Delhi Tribunal decision, please refer EY Alert dated 8 July 2014)

PE exposure on executing a turnkey contract involving equipment supply, provision of installation and commissioning services using related parties

In case of Nortel Networks India International Inc. [TS-355-ITAT-2014(Del)], the Taxpayer’s Indian affiliate (Nortel India) had initially entered a contract with an Indian customer for supply, installation and commissioning of telecommunication equipment, which was thereafter, assigned to the Taxpayer wherein the Taxpayer purchased equipment from group entities and Nortel India carried out the installation and commissioning work. The Tribunal treated the entire contract as an indivisible one, under which all activities done by group entities were treated as done on behalf of the taxpayer. The Tribunal ruled that the Taxpayer had a fixed place PE, as well as a dependent agent PE in India.

(For more details, please refer EY Alert dated 18 June 2014)

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No PE for carrying supervisory activities for Indian projects, absent construction or building site

In case of GFA Anlagenbau Gmbh [TS-383-ITAT-2014(Hyd)], the Hyderabad Tribunal held that as there was no fixed place of business of the taxpayer in the form of building or construction site, mere supervisory activities in India by employees of the Taxpayer will not constitute PE, either under the ITL or the India–Germany DTAA. The Tribunal further held that supervisory activities carried out by technicians in India are taxable as fees for technical services (FTS) under the ITL and also clearly falls under the FTS definition of the India-Germany DTAA.

(For more details, please refer EY Alert dated 30 June 2014)

NR firm rendering professional services in India constitutes Services PE

In the case of Linklaters & Paines (Now Linklaters) v. DCIT [TS-329-ITAT-2014(Mum)], the taxpayer, a UK-based partnership firm, engaged in the practice of law was rendering services to its clients for their projects in India. The partners and staff members of the taxpayer firm visited India to render professional services. The Taxpayer did not have any branch office or any other form of presence in India. The Taxpayer claimed that its income was not taxable in India as it was “rendering” services in India, whereas according to Article 5(2)(k) of India–UK DTAA, it was necessary to “furnish” services in India. Rejecting the Taxpayer’s hyper-technical interpretation, the Tribunal held that connotation of “rendering” also extends to “to give or make available; provide” and “to furnish; to state; to deliver”.

Observing the taxpayer’s nature of work, which included structuring of various projects, attending meetings with project sponsors, negotiating the floating rate issues and advising on any information, required on projects in India, the Tribunal held that the taxpayer had entered the arena of business activities in true commercial sense and, hence, liable to tax in India in respect of its business income.

Other significant rulings

Employer cannot be regarded as representative where employee becomes NR post cessation of employment.

Under the ITL, any person in India can be treated as a “representative assessee” of a NR if such NR receives income, whether directly or indirectly, from such person. In the case of Comverse Networks Systems India Pvt. Ltd. v. CIT [TS-462-HC-2014(Del)], the Tax Authority sought to treat the taxpayer as a “representative assessee” in respect of an employee who had become a NR after cessation of employment with the taxpayer. The Delhi HC held that the expression “representative assessee” has to be seen in respect of the income of a NR for the concerned tax year. As the past employee was a resident in the years of employment and had become NR subsequently post cessation of employment, the Taxpayer could not be regarded as his representative under the provisions of the ITL.

No concealment penalty if an addition or issue is acknowledged as involving “substantial question of law”

In case of CIT v. Nayan Builders and Developers Pvt. Ltd. [TS-452-HC-2014(Bom)], the Bombay HC deleted the concealment penalty levied by the Tax Authority on a disallowance, which was accepted by the HC as involving a substantial question of law. The HC upheld the Tribunal ruling stating that once HC admits substantial question of law on an addition, it implies that the issue is debatable. Hence, mere fact of confirmation of disallowance would not per se lead to the imposition of penalty.

“Human Intervention” — a primary condition for technical services

In case of Dakshin Haryana Bijli Vitran Nigam Ltd., [TS-354-HC-2014(P&H)], the Taxpayer, engaged in distribution of power, made payments towards transmission/wheeling charges without withholding tax at source. The Tax Authority contended that such payments constituted technical services, liable for tax withholding, and hence, sought to disallow the same. The Punjab & Haryana HC, followed the SC ruling in the case of Bharti Cellular Ltd.

15 Tax Digest Home

[330 ITR 239], which has laid down that in determining whether such payment is covered by the definition of “technical service”, it has to be examined whether any human intervention is involved in the activity or not. If the entire service was fully automated without any human intervention, it could not constitute technical services. Accordingly, the HC remitted the case back to the Tax Authority for fact finding.

Capital gain exemption on conversion of company to LLP denied for violation of exemption condition

According to the ITL, conversion of a private limited company into LLP requires that no amount should be paid, directly or indirectly, to any partner out of accumulated profit standing in the company’s accounts for a period of three years from the date of conversion. In case of Aravali Polymers LLP [TS-385-ITAT-2014(Kol)], the Taxpayer granted interest-free loan to its partners in the profit-sharing ratio partially out of the accumulated profits standing in the accounts of the company on the date of conversion. This led to the violation of one of the exemption condition. The Tribunal held that since the violation of condition occurred in the same tax year as that of conversion, the Taxpayer never qualified to secure the exemption. Consequently, the general provision relating to taxation of capital gains was applicable and not the special provision, which provides for forfeiture of exemption and taxation of capital gains in the hands of successor LLP in the year of violation.

(For more details, please refer EY Alert dated 2 July 2014)

DTAA benefit available to recipient of income where beneficial owner is also a resident of the same country

In the case of JC Bamford Investments, England [ITA No. 80/Del/2013], the Delhi Tribunal held that India-UK DTAA benefit of lower tax rate is available to the recipient of royalty income, though it is not a beneficial owner. However, in the facts of the case, the recipient as well as the beneficial owner of royalty, were both residents of the UK. The Tribunal ruled that the underlying purpose of a DTAA is to grant benefit to a “resident” of any of the DTAA contracting states though not to a “resident of a third State”. As in the Taxpayer’s case, both, the recipient of royalty income as well as beneficial owner of such income were residents of the UK, the Tribunal held that the benefit

of reduced rate of tax should apply to royalty income earned by the recipient.

(For more details, please refer EY Alert dated 9 July 2014)

Incubation of start-ups by a private trust is not a business activity

In the case of IMFR Trust v. ACIT [TS-425-ITAT-2014(CHNY)], the Taxpayer, a private trust, was settled with the main object to set up, incubate and provide financial services to individuals and enterprises for overall sustained development of rural areas. The Taxpayer derived interest, dividend and other income such as guarantee fees, processing charges etc. It incurred incubation, professional consultancy, legal and administrative expenses in connection with carrying out feasibility studies, research activities in setting up new units and assisting rural entrepreneurs in setting up new businesses. The Tribunal negated the Taxpayer’s claim that it was engaged in the business of “setting up of businesses” and/or “business of investments” and held that the Taxpayer was merely a facilitator and organizer engaged in asset creation of new units. Accordingly, the Tribunal characterized income earned by the Taxpayer as “Other Sources” and did not permit deduction of various expenses except for deduction of nominal administrative expenses at 2% of gross income.

Meaning of “substantially” for indirect transfers, at least 50% assets threshold considered

Under the ITL, the shares of a foreign company will be deemed to be situated in India if such shares derive their value “substantially” from assets located in India. In one recent HC decision, the Mauritius-taxpayer had sold shares of a foreign company to another NR group whereby the transaction resulted in transfer of the Indian company’s control to the NR group without offering any part of capital gains to tax in India. The Tax Authority contended that the shares sold derived their value “substantially” from assets located in India and, hence, are liable to withholding tax in India. The HC upheld the AAR ruling in the same case, which held that the expression ”substantially” has to be read as “principally”, ”mainly” or at least “majority”. Accordingly, it was held that gains arising from sale of a share of a company incorporated overseas, which derives less than 50% of its value from assets situated in India will not be taxable under the ITL.

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Some key issues on which special leave petitions (SLPs) were dismissed by the SC

Citation Particulars Ruling of HC

CIT, Udaipur v. Chittorgarh Kendriya Sah. Bank Ltd. [TS-409-SC-2014]

Tax Authority preferred an SLP against Rajasthan HC’s ruling that penalty for concealment cannot be levied in case of bona fide mistake due to change of law applicable in relevant year.

• Deduction from total income was being statutorily allowed to taxpayer in earlier years. In the relevant year, the taxpayer had become ineligible to claim the deductions due to amendment in the provision of ITL.

• The HC, therefore, held that the claim of deduction is a bona fide mistake and cannot be taken as concealment or furnishing of inaccurate particulars of income for levy of penalty.

CIT v. Durr India Pvt. Ltd. [TS-402-SC-2014]

Tax Authority preferred an SLP against Madras HC’s ruling deleting concealment penalty on claim made by Taxpayer under bona fide belief.

• HC ruled that concealment penalty cannot be levied, since taxpayer’s claim for deduction of liquidated damages was a precautionary one, based on contractual terms.

• The taxpayer had neither concealed the income with dishonest intention nor furnished inaccurate particulars.

CIT & Anr. v. Talisma Corp. Pvt. Ltd. [TS-406-SC-2014]

Tax Authority preferred an SLP against Karnataka HC’s ruling that software development expenditure is scientific research.

• Taxpayer, being a software development company, incurred certain amount for software development and claimed it as deduction. The Tax authority disallowed the said expenses contending the same to be capital in nature.

• The Karnataka HC had held that the development expenditure incurred by the taxpayer, though capital in nature, qualified as “scientific research” and was eligible for 100% deduction under ITL.

CIT v. Vector Shipping Services (P) Ltd. [TS-401-SC-2014]

Tax Authority preferred an SLP against Allahabad HC’s ruling that disallowances of expenditure for default in withholding taxes is to be limited to the extent of amount payable at the year end.

• Salary was being paid by a third person (MCL) on behalf of the taxpayer and tax was also being withheld by MCL. The taxpayer reimbursed to MCL the amount so paid on its behalf without withholding the taxes.

• The HC held that since the taxes were duly withheld by payee, MCL, the taxpayer was under no obligation to withhold the tax on reimbursement made by it to MCL.

• The HC further held that even if ruled otherwise, disallowance of expenditure due to non-withholding of tax under ITL should be NIL as there remained no amount “payable at the end of the year.”

Haryana State Small Industries & Export Corpn Ltd v. CIT, Panchkula. [TS-324-SC-2014]

Taxpayer preferred an SLP against Punjab & Haryana HC’s ruling that no expenditure can be claimed against interest income taxable under the head “Income from other sources (IFOS)” in absence of direct nexus between interest earned and expenditure incurred.

• HC ruled that if the business of taxpayer is into liquidation, the bank interest earned is to be taxed as IFOS and not as business income. Accordingly, the taxpayer cannot claim expenses under the provisions of “Income from business and profession” against the said interest.

• Furthermore, the HC also rejected the contention of the taxpayer to claim expenses against interest income under the head of IFOS as there is no direct nexus between interest earned and expenditure spent to qualify for deduction against the interest income.

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Citation Particulars Ruling of HC

Sanghamitra Bharali v. CIT [TS-312-SC-2014]

Taxpayer preferred an SLP against Guwahati HC’s ruling holding share sale as bogus, applying the test of human probabilities.

• The taxpayer purchased shares of an Indian company (ICo) at a nominal price and sold them after one year at a very high price and claimed the gain as long-term capital gain.

• HC ruled that applying the test of human probabilities, factors/circumstances such as absence of sufficient evidences regarding purchase of shares; share being purchased in cash, non-existence of the ICo at its registered address; directors of ICo not being traceable, increase of more than 25 times in the share prices of Ico within 1 year in spite of very nominal profits in the books of ICo, etc., support the findings of the Tax Authority that the whole transaction was not a genuine one and was a method adopted to convert the undisclosed income into “capital gain”.

Skyline Advertisement Pvt. Ltd. v. CIT [TS-478-SC-2014]

Taxpayer preferred an SLP against Karnataka HC’s ruling denying profit-linked deduction to taxpayer being an advertisement company.

• The taxpayer, an advertisement company, claimed deduction for developing road medians, erecting bus shelter and light poles etc. according to agreement with local Self-government. In return, the taxpayer earned advertisement income by planting advertisement on these bus shelters, lamp posts, road medians and foot bridges.

• The HC reversed Tribunal’s ruling and denied deduction holding that scope of activities carried out by the taxpayer does not qualify for “infrastructure facility” as contemplated under incentive deduction provisions of ITL.

• The HC held that, to be eligible for such deduction, taxpayer has to earn income out of the infrastructure developed. In this case, the taxpayer has earned income only out of advertisements and not out of infrastructure developed.

Arvind Footwear Pvt. Ltd. v. CIT [TS-491-SC-2014]

Taxpayer preferred an SLP against Allahabad HC’s ruling that denied profit-linked incentive deduction on duty drawback.

• Tax Authority disallowed the profit-linked incentive deduction to the extent of duty drawback received contending that duty drawback does not form part of profit derived from industrial undertaking.

• However, the tribunal allowed the deduction to Taxpayer on merits, ignoring contrary view taken by the SC in case of Liberty India (317 ITR 218).

• Following the case of Liberty India, HC denied the 80IB exemption on the duty drawback receipt. The HC further held that Tribunal judgment is a “infraction of judicial discipline” on the ground that Tribunal is under obligation to follow the binding precedent of the SC.

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Citation Particulars Ruling of HC

Manoj Kumar Samdaria v. CIT [TS-502-SC-2014]

The taxpayer preferred an SLP against Delhi HC’s ruling his share trading as business activity considering “volume” and “duration of holding”.

• The taxpayer offered to tax, gain on share trading, as short-term capital gain.

• Tax Authority contented that the share trading carried out by the taxpayer is in the nature of business activity and the taxpayer cannot take benefit of concessional rate of tax by claiming it to be investment activity.

• The Delhi HC upheld the decision of the Tribunal ruling the share trading activity of the taxpayer as business considering his habitual dealing in particular items, applying various tests such as “volume”, “duration of holding”, “proportion of dividend earned to investment made”, etc.

CIT v. NHK Japan Corporation. M/s. Eli Lilly & Co (I) Ltd. [TS-505-SC-2014]

Tax Authority preferred an SLP against Delhi HC’s ruling that the taxpayer cannot be regarded as “assessee-in- default” for non-withholding tax on expatriates’ salary, being a debatable issue.

• The taxpayer had not withheld tax on foreign salary payment as a component of the total salary paid to an expatriate working in India.

• Relying on the earlier ruling of the SC in the taxpayer’s own case, Delhi HC had held that since the issue of liability to withhold tax on expatriates’ salary was a debatable issue at that time, the taxpayer cannot be held as “assessee-in-default’ under the provision of withholding of taxes under ITL.

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Recent decisions on taxation of Royalty/FTS paymentsSummarized below are some decisions on Royalty and FTS, also considering relevant DTAA provisions:

Case law Payment description Ruling

CIT v. Faizan Shoes Pvt. Ltd [TS-472-HC-2014 (Mad)]

Madras HC

Section 9(1)(vii) of ITL

Commission payment to NR agent for fulfilment of export commitments.

• Commission paid to NR agent to secure orders from various customers for export business of taxpayer is not FTS.

• NR agent’s services were merely incidental to export and did not involve provision of any technical service.

• The HC further held that deeming provision of income accrued in India, even if services are not rendered in India applies only if the payments made to NR are in the nature of interest, Royalty or FTS.

DIT (IT) v. Haldor Topsoe [TS-450-HC-2014(Bom)] Mumbai Tribunal Section 9(1)(vi) of ITL

Payment to NR for providing technical installation guide along with supply of equipment

• Designs, flow charts and information provided with equipment were in relation to installation. There was no transfer of rights as contemplated under the provisions of ITL to cover it under the definition of Royalty.

DIT (IT) v. Sun Microsystems India Pvt. Ltd.

[TS-420-HC-2014(Kar)]

Karnataka HC

India Singapore DTAA

Payment to Singapore company for providing distribution, management and logistic services

• The HC supported the findings of Tribunal that the Singapore company has rendered technical services to the taxpayer but had not made available its technical knowledge, experience or skill in rendering services.

• The HC relied on its ruling in case of De Beers India Minerals (P) Ltd. and ruled that “make available” condition is not satisfied in this case and, hence, does not constitute FTS as defined in the India-Singapore DTAA.

Reuters Transaction services Ltd. v. DDIT (IT)

[TS-435-ITAT-2014(Mum)]

Mumbai Tribunal

India UK DTAA

Amount paid for providing Foreign Exchange Deal Matching System (FEDMS) to Indian subscribers.

• The taxpayer, a UK company provided FEDMS to bring about deals in spot foreign exchange against monthly charges.

• Tribunal held that the taxpayer was not only providing media but also facilitating use and right to use of equipment along with software and information for foreign exchange dealings.

• Use of software and computer system with the taxpayer’s portal for finding information amounts to technical, industrial, commercial work and hence, constitutes royalty.

ITO (IT) v. Adani Port Infrastructure Pvt. Ltd. & Dholera Port Ltd.

[TS-384-ITAT-2014(Ahd)]

India UK DTAA

Payment made to UK company (UKCo) for Morphological studies, Sedimentation Assessment, Navigation and Mooring Assessment

• Tribunal ruled that such payments made to UK Co were not FTS according to the DTAA since “make available” element was not satisfied.

• Tribunal analysed the definition of “make available” and held that technology can be said to be made available when service recipient is able to perform similar activity, for which the services were sought, without the help or recourse to the service provider.

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Case law Payment description Ruling

DDIT(IT) v. IATA BSP India

[TS-367-ITAT-2014(Mum)]

Mumbai Tribunal

India France DTAA

Payment made towards development of a system automatizing manual office operations

• Payment made was merely towards development of BSP Link, a system that automatises manual operations such as issuing debit/credit notes, issuing refund, billing statements and information relating to tickets carried out electronically, developed according to specific needs of airlines and agents.

• It did not make available any technical knowledge or skills to enable them to apply said technology, and hence, was not taxable

Kerala Vision Ltd. v. ACIT

[TS-342-ITAT-2014(Coch]

Cochin Tribunal

Section 9(1)(vi) of ITL

Payment made for receiving satellite signals from channel companies.

• In view of retrospective amendment in the definition of royalty under the provision of ITL by Finance Act 2012, payment made by the taxpayer for receiving satellite signals constituted royalty

GECF Asia Ltd. v. DDIT (Int. Tax)

[TS-482-ITAT-2014(Mum)]

Mumbai Tribunal

India-Thailand DTAA

Payment for providing support services such as accounting and finance support service, HR service, Risk Management services etc. to an Indian group company

• ITAT held that if there is no “alienation” or the “use of” or the “right to use of” any know how, i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, it cannot be termed as “Royalty”.

• Tribunal, therefore, restored the matter back to the file of the Tax Authority to examine the nature of the service in line of the principle laid down.

Oxford University Press

[TS-301-AAR-2014]

AAR

India-Sri Lanka DTAA

Amount paid to Sri Lankan sales executive for sales promotion performed in Sri Lanka

• AAR ruled that in absence of definition of “Technical Service” in DTAA, one has to resort to the provisions of ITL.

• Sales promotion services rendered by NR executive are neither managerial, technical nor consultancy in nature and, therefore, cannot be covered under the definition of FTS under the provisions of ITL but constituted Independent Personal Service under the DTAA.

CIT v. CGI Information Systems and Management Consultants Pvt. Ltd. [TS-519-HC-2014(KAR)]

Karnataka HC

Section 9(1)(vi) r/w. Expl. 4 of ITL

Payment by Indian company to Canadian group company for use of intranet facility/communication tools under cost-sharing arrangement

• The HC held that the Canadian company was the absolute owner of intranet facility and owned Intellectual Property Rights. The taxpayer was permitted to use the facility and the taxpayer had no right to sell or sub-licence or lease the facility.

• Payment was held to be a “licence fee” for “right to use a computer software,” and hence, constitutes Royalty payment under ITL.

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Treaty connections

DTAA between India and Fiji effective from 1 April 2015

India and Fiji signed a DTAA on 30 January 2014, which came into force on 15 May 2014. It is effective in India from 1 April 2015. The DTAA contains a Limitation of Benefits (LOB) clause denying benefits of the DTAA to the taxpayer if its affairs were arranged in such a manner that the main purpose or one of the main purposes is to obtain the benefits of the DTAA. The DTAA also contains provisions for exchange of information and assistance in collection of taxes.

(Source: Notification No. 35/2014 [F.NO.503/11/2005-FTD-II], dated 12 August 2014)

DTAA between India and Malta effective from 1 April 2015

India and Malta had signed a DTAA on 8 April 2013, which came into force on 7 February 2014. It is effective in India from 1 April 2015. The DTAA contains an LOB clause denying the benefits of the DTAA if the main purpose or one of the main purposes of the creation or existence of resident or the transaction undertaken by the resident is to obtain the benefits of the DTAA. The DTAA also contains provisions for Exchange of Information.

(Source: Notification No. 34/2014 [F. NO. 504/06/2003-FTD-I]/ dated 5 August 2014)

Protocol amending the 1989 DTAA between India and Poland enters into force

A protocol between India and Poland was signed on 29 January 2013 to amend the India-Poland DTAA signed in 1989. The 2013 Protocol reduces the tax rates for source country taxation on dividends, interest and royalties and fees for technical services. It also introduces a Service PE provision and an article on LOB in the 1989 DTAA. The provisions relating to exchange of information and assistance in the collection of taxes have also been enhanced. This Protocol has entered into force on 1 June 2014 and accordingly applies in Poland from 1 January

2015 and in India from 1 April 2015. Please note that the India notification to this effect is yet be issued.

(Source: EY Global Withholding Tax Reporter / IBFD)

Tax Information Exchange Agreements (TIEA) updates

India-Liechtenstein TIEA enters into force

The Government of India (GoI) had signed a TIEA with the Principality of Liechtenstein for exchange of information relating to tax matters on 28 March 2013. The TIEA entered into force in India on 20 January 2014 and will affect all requests made in respect of taxable periods beginning on or after 1 April 2013.

(Source: Notification No. 30/2014 [F.No.503/04/2009-FTD-I]/SO 1458(E), dated 6 June 2014)

OECD updates

OECD releases the 2014 update to the OECD Model Tax Convention and Commentary

As part of the ongoing process of revising and updating the OECD Model Convention (MC) and Commentary, the OECD released the contents of the 2014 Update in July 2014. The changes reflected in the 2014 Update will be incorporated in a revised version of the OECD Model that will be published in the next several months.

Areas addressed in the 2014 Update include the definition of the term “beneficial owner,” the treatment of termination payments, changes to the exchange of information provisions, and issues related to emissions permits and credits. The 2014 Update includes updates to the reservations and observations of OECD member countries to provisions of the OECD Model, as well as updates to the statement of positions of non-OECD member countries. One may note that India has additionally expressed a number of reservations and observations on some aspects of the above changes in the section containing positions of non-OECD member countries.

22 Tax Digest Home

The 2014 Update does not include any changes related to the OECD Base Erosion and Profit Shifting (BEPS) project.

(Source: OECD)

(Refer, EY Global Alert dated 22 July 2014)

OECD releases report on impact of BEPS in low income countries

On 1 August 2014, the OECD released the first part of a report on BEPS in developing countries, Part 1 of a Report to G20 Development Working Group on the Impact of BEPS in Low Income Countries. This was discussed during the G20 Development Working Group (DWG) meeting in May 2014. The Report focuses on developing countries and their key challenges in addressing BEPS, their priority items in the “OECD Action Plan on BEPS,” and their other BEPS-related tax issues.

The second part of the Report is expected to be made available to the G20 DWG in September 2014 and will describe how the DWG can assist developing countries to address challenges posed by BEPS.

(Refer, EY Global Alert dated 11 August 2014)

OECD seeks input on collecting and analysing data on BEPS

On 4 August 2014, the OECD published a paper seeking input on Action 11 of the OECD’s Action Plan on BEPS issued on 19 July 2013. The paper, BEPS Action 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it, describes input on OECD requests, including suggestions for possible indicators of the scale and economic impact of BEPS, potential methodologies for estimating the scale and impact of BEPS, available data and methodologies to develop economic analysis of the impact and effectiveness of actions to address BEPS, and new types of data to be collected to monitor the effectiveness of actions to address BEPS on an ongoing basis. Comments are requested to be submitted by 19 September 2014.

(Source: OECD)

(Refer, EY Global Alert dated 11 August 2014)

OECD issues Standard for Automatic Exchange of Information in Tax Matters

On 21 July 2014, the OECD published the Standard for Automatic Exchange of Information in Tax Matters (the Standard). The Standard consists of the Model Competent Authority Agreement, intended as a template for intergovernmental agreements, and the Common Reporting Standard (CRS) that contains the reporting and due diligence standard that underpins the automatic exchange of information. There are also extensive commentaries and guidance on technical solutions for information exchange as well as a number of appendices. The Standard has no direct legal force but it is expected that jurisdictions will follow it closely in adopting local rules and regulations, with many countries already agreeing to early adoption in 2016.

The CRS represents an additional global compliance burden for financial institutions (FIs) and increases risks and costs of servicing globally mobile customers and, in general, non-individual customers. One positive note for FIs is that the OECD has modelled the CRS on the intergovernmental approach to the Foreign Tax Account Compliance Act (FATCA), which means that in part it should be possible to leverage existing and planned FATCA processes and systems. It should be noted, however, that the data required under the CRS is different, and the volumes of customers and clients affected are likely to be significantly greater.

(Refer, EY Global Alert dated 13 August 2014)

23 Tax Digest Home

Tax happenings across the border

China issues draft administrative guidance on general anti-avoidance rules (GAAR) for public comments

On 3 July 2014, China’s State Administration of Taxation issued a draft administrative guidance on GAAR (Draft Guidance) for public comments. The Draft Guidance is intended to provide procedural internal guidelines in conjunction with special tax adjustments made by the Tax Authority for tax avoidance arrangements. The Draft Guidance will apply to tax avoidance arrangements carried out on or after 1 January 2008, unless cases have been settled before the Draft Guidance is finalized. The Draft Guidance specifies “obtaining tax benefits” to be the sole purpose, main purpose or one of the main purposes.

(Refer, EY Global Alert dated 18 July 2014)

EU formally adopts proposed linking rule for hybrid loans under Parent-Subsidiary Directive

On 8 July 2014, the European Union’s (EU) Economic and Financial Affairs Council (ECOFIN) formally adopted a proposed amendment to the Parent-Subsidiary Directive (PSD) to prevent double non-taxation of distributed profits within corporate groups resulting from hybrid loan arrangements. The amendment to the PSD will prevent cross-border companies from planning their intra-group payments, which is likely to result in double non-taxation where hybrid loan arrangements are involved. Prior to the amendment, such hybrid loan arrangements were not prevented as the original PSD provisions required member states to grant relief for double taxation for profits that parent companies received from their subsidiaries in other member states. With hybrid loan arrangements, it was possible for cross-border groups to avoid paying taxes by taking advantage of mismatches between national tax rules.

(Refer, EY Global Alert dated 9 July 2014)

Australian Tax Office issues final guidance on deductibility of support payments to foreign subsidiaries

On 4 June 2014, the Australian Tax Office (ATO) released a tax determination (TD 2014/14) addressing the income tax deductibility of payments made by Australian companies to foreign subsidiaries. TD 2014/14 focuses on situations where certain payments by parent companies to foreign subsidiaries will not be deductible. Where support payments do not relate to adjustments to the pricing of goods and services provided to the subsidiary, they are termed as “capital support payments,” which are generally non-deductible under TD 2014/14. If the payments relate to adjustments to the price of goods and services provided (referred to as “price adjustments” rather than “market support payments”) then they may be deductible.

(Refer, EY Global Alert dated 6 June 2014)

Korea’s National Tax Tribunal holds indirect US shareholder is a beneficial owner

On 29 May 2014, Korea’s National Tax Tribunal (NTT) issued a ruling in favor of an indirect US shareholder of a Korean company (KoreaCo). The NTT held that the term “ownership” of a Korean company in Article 12 of the US-Korea Income Tax Treaty (Treaty) is not limited to direct ownership, if an indirect shareholder has the right to dividends, provided that the indirect shareholder satisfies the 10% ownership requirement and is a US resident for treaty purposes.

(Refer, EY Global Alert dated 14 July 2014)

Spanish Supreme Court issues resolution upholding existence of PE in Spain

On 18 June 2014, the Spanish Supreme Court issued a resolution upholding that a Spanish entity belonging to an international group constitutes a PE of another British entity of the group under both the “fixed place of business” and the “dependent agent” clauses, by combining the general clause (fixed place of business) and the dependent agent clause of Article 5 of the OECD Model tax treaty. The resolution is of special interest in the interpretation of

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the “fixed place of business” clause as it upholds Spanish tax authorities’ functional approach with regard to post-restructuring of schemes and commissioner dealings involving complex business structures in Spain.

(Refer, EY Global Alert dated 31 July 2014)

South Africa releases proposed international tax changes for comment

On 17 July 2014, South Africa released the Draft Taxation Laws Amendment Bill 2014 (the Draft TLAB) for comment. The Draft TLAB contains several amendments applicable to cross-border transactions, involving transfer pricing (including thin capitalization) and secondary adjustments, interest deduction limitation rules and high tax exemption for Controlled Foreign Corporation (CFC) income.

(Refer, EY Global Alert dated 18 July 2014)

Brazilian tax authorities issue interpretation on cross-border tax treatment of technical services

Aligned with the latest Federal Revenue Attorney General’s Office (PGFN) opinion, Brazilian Federal Tax Authorities (RFB) published interpretative Act 5 (ADI 5/14) on 16 June 2014, providing further guidance on the withholding tax treatment applicable to cross-border payments for services to residents of jurisdictions that have entered a DTAA (treaty) with Brazil. Under the ADI, if the respective treaty’s protocol treats payments for technical services and technical assistance under Article 12 (Royalty Provision), the payments will be subject to withholding taxation in Brazil, irrespective of whether the technical services or technical assistance contain the transfer of know-how. Separate treatment entails if payments are covered under Article 14 (IPS) or Article 7 (Business Profits)

(Refer, EY Global Alert dated 25 June 2014)

25 Tax Digest

From the Tax Gatherer’s desk

Home

Finance (No. 2) Act, 2014 enacted

The Finance (No. 2) Bill, 2014 was presented by the Finance Minister on 10 July 2014 and enacted into the Finance (No. 2) Act, 2014 with the President’s assent on 6 August 2014.

(Source Link: http://indiabudget.nic.in)

(Access Budget Booklet)

(For more details, please refer EY Alerts)

dated 10 July 2014 – Global Tax Alert - News from Transfer pricing,

dated 22 July 2014 – Global Tax Alert - Update on India’s 2014-15 Budget provisions related to foreign investment,

dated 10 July 2014 – Budget Connect+ - EY Tax Alert - Key amendments from Transaction Tax perspective,

dated July 2014 – HR & Tax Alert - India Budget 2014

dated 10 July 2014 – Budget Connect+ - Automative Sector Impact,

dated 10 July 2014 – Budget Connect+ - Education Sector Impact,

dated 10 July 2014 – Budget Connect+ - Budget 2014 - Infrastructure Impact,

dated 10 July 2014 – Budget Connect+ - EY Tax Alert - Media & Entertainment,

dated 10 July 2014 – Budget Connect+ - EY Tax Alert - Oil & Gas Sector,

dated 10 July 2014 – Budget Connect+ - Budget 2014 - Real Estate Sector Impact,

dated 11 July 2014 – Budget Connect+ - EY Tax Alert - Chemical Sector,

dated 11 July 2014 – Budget Connect+ - EY Tax Alert - Financial Services,

dated 11 July 2014 – Budget Connect+ - EY Tax Alert - Life Science Sector Impact,

dated 11 July 2014 – Budget Connect+ - EY Tax Alert - Retail and Consumer products sector impact,

dated 11 July 2014 – Budget Connect+ - EY Technology Tax Alert 2014)

First report of the Tax Administration Reform Commission (TARC) made public

With an objective of bringing in more credibility among tax payers and streamlining income tax procedures, the GoI set up Tax Administration Reform Commission (TARC) comprising senior government officials and private sector tax professionals under the Chairmanship of Dr. Parthasarathi Shome.

The first report of the TARC was made available to the public in June 2014. This Report has identified and addressed four terms of reference that were shortlisted by TARC based on their relative importance. The Report is comprehensive and expresses an overwhelming need for fundamental reform in tax administration and contains various recommendations to achieve the desired tax reforms. These recommendations are the result of extensive discussions with focused groups and stakeholders. The report contains refreshingly significant recommendations for a “comprehensive” transformation of tax administration founded on accountability and recognition of taxpayer as a “customer”. Importantly, the Report states that the recommendations have to be considered as a package and not on a pick-and-choose basis.

(Source Link: http://www.finmin.nic.in/the_ministry/dept_revenue/tarc_report.asp)

(For more details, please refer EY Alert dated 18 June 2014)

CBDT clarifies allowability of profit-linked deduction to new SEZ unit upon transfer of technical manpower up to 20%

The Central Board of Direct Taxes (CBDT) issued a Circular on allowability of deduction to a taxpayer in case where there is transfer of technical manpower from an existing Special Economic Zone (SEZ) unit of the taxpayer to its new unit under Sections 10A/10AA of the ITL.

The CBDT has clarified that mere transfer or redeployment of technical manpower from an existing unit of a taxpayer to its new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, provided the

26 Tax Digest Home

number of technical manpower so transferred does not exceed 20% of the total manpower actually engaged in developing software at any point of time in the given year in the new unit.

(Source: CBDT Circular No. 12 / 2014 dated 18 July 2014)

(For more details, please refer EY Alert dated 29 July 2014)

CBDT notifies Cost Inflation Index (CII) for financial year 2014-15

Under the ITL, the cost of acquisition of certain capital assets is allowed to be indexed according to the inflation index notified by the CBDT for the respective financial year while computing capital gains tax. Accordingly, the CBDT has notified that CII for financial year 2014–15 is to be taken as 1024.

(Source: Notification No. 31/2014 [F. NO. 142/3/2014-TPL]/SO 1498(E), dated 11 June 2014)

Extension of due date for Tax Audit report to 30 November 2014

The CBDT has extended the due date for obtaining and furnishing of tax audit report for tax year 2013–14 in case of taxpayers who are not required to furnish Transfer Pricing audit from 30 September 2014 to 30 November 2014. Earlier, Form No. 3CA, 3CB and 3CD had been changed vide notification dated 25 July 2014. The order dated 20 August 2014 further clarifies that tax audit report filed during the period 1 April 2014 to 24 July 2014 in pre-revised Forms shall be treated as valid tax audit report. However, it may not be inferred that the return filing date is also automatically extended to 30 November 2014.

(Source: Order [F.NO.133/24/2014-TPL], dated 20 August 2014 and Notification No. 33/2014 [F.No. 133//1/2014-TPL]/SO 1902(E), dated 25 July 2014)

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Case Laws

Indirect Tax

Home

Service tax

High Court, Delhi

Delhi High Court quashes Rule 5A(2) of the Service Tax Rules and the instruction issued by CBEC, which prescribes manner of an audit and the records that can be called for by the authorities

Finance Act, 1994 and Service Tax Rules, 1994; in favor of assessee

The assessee filed a petition under Article 226 of the Constitution challenging the validity of Rule 5A(2) of the Service Tax Rules, 1994 (STR) authorizing audit and Central Board of Excise and Customs (CBEC’s) Instruction F. No. 137/26/2007-CX dated 1.1.2008 (clarificatory instruction) regarding maintenance and furnishing of records. Rule 5A(2) directs a taxpayer, on demand, to furnish prescribed records. The assessee contended that Rule 5A(2) is not within the rule-making powers conferred on the executive under Section 94 of the Finance Act, 1994 and that only Section 72A of the Finance Act, 1994 contains substantive powers and prescribes specified circumstances when authorities can order “special audit”. Revenue justified the calling of records for “general audit” in terms of Rule 5A(2) of the STR, impugned instruction issued by CBEC and the Service tax Manual. Striking down Rule 5A(2) and the clarificatory instruction as ultra-vires, it was held that the ruling in this case, establishes the well-settled principle that the Rules are merely to give effect to the Statute’s provisions and intent and the same cannot travel beyond the Statute. In the past, the issue of maintainability of Rule 5A(2) has been dealt with by the High Courts of Calcutta and Allahabad. The Honourable Allahabad High Court, in the case of A.C.L. Education Centre (P) Ltd v. UOI; 2014 (33) STR 609 (All.), held that the audit under Service tax is to be conducted by chartered accountants /cost accountants only and not by officers of the Revenue. Furthermore, the Honourable Calcutta High Court, in the case of SKP Securities Ltd. v. Deputy Director (Ra-Idt); 2013 (29) STR 337 (Cal.), held that no audit of private assessee can be undertaken by the Comptroller and Auditor General of India.

Travelite (India) v. UOI & Others; TS-310-HC-2014(DEL)-ST

High Court, Delhi

Service tax levy upheld on composite contracts for pre-2007 period

Finance Act, 1994 and Service Tax Rules, 1994; in favor of Revenue

The assessee is engaged in the business of commercial construction, construction of multi-storeyed residential complexes and also construction of structures, finishing works as well as in the business of manufacture and supply of ready-mix concrete. The issue arose when the assessee, along with other assesses, had challenged the constitutional validity of Section 65(105)(zzd) involving Erection, Commissioning or Installation Services, Section (105)(zzq) involving Commercial or Industrial Construction services and Section 65(105)(zzzh) involving Construction of Residential Complexes services of the Finance Act, 1994 for the period prior to 1 June 2007 and requested for the refund of illegally collected tax from the assessees during the period September 2004 to May 2007. The decision attempted to clarify the power of the Parliament over the State Legislature with respect to Service tax on composite contracts, which necessarily include the “sale of goods” component. Relying on Delhi High Court - Division Bench’s decision in G.D. Builders v. UOI; 2013 (32) S.T.R. 673 (Del.), it was held that Service tax is leviable only on the service component of any contract involving sale of goods. The computation of service component is a procedural matter and it would not invalidate the fact of imposition of Service tax. Furthermore, it was held that in the instant case no encroachment by the Parliament was established on the powers of State Legislature for imposing tax on sale of goods.

YFC Projects P. Ltd & Others v. UOI & Others; TS-8-HC-2014(DEL)-ST

High Court, Delhi

Revenue sharing could only be a mode of computation of consideration for service rendered

Finance Act, 1994; in favor of assessee

The assessee challenged the constitutional validity of Section 65(90a) read with Section 65(105)(zzzz) of the

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Finance Act, 1994 whereby Service tax has been imposed inter alia on renting of immovable property by the Delhi International Airport Pvt. Ltd. (DIAL) to the assessee. The assessee was required to pay a fixed monthly licence fee to DIAL and also a share of the gross revenue generated by various product categories, which were to be sold at the said duty-free shops. Pursuant to the licence granted by DIAL, the assessee established a duty free outlet at the Delhi Airport; however, the assessee closed its operations at the Delhi Airport with effect from 30 June 2010. In view of a retrospective amendment to the provisions of the Act by the Finance Act, 2010, DIAL addressed a letter dated 3 June 2010 to the assessee informing them about the retrospective amendment regarding levy of Service tax on the license fee/concession fee including fixed rent, royalty and revenue share etc. and called upon the assessee to remit the entire amount of Service tax w.e.f. 1 June 2007. The assessee was afraid that the Revenue may seek to tax such licence fees paid to DIAL as “taxable service” as defined under Section 65(105)(zzm) (i.e., Airport services). Being aggrieved, the writ petition was filed by the assessee. The assessee submitted that the question of imposition of Service tax on renting of immovable property being ultra vires the Constitution of India was no longer res integra in view of the decision by a Full Bench of the Delhi High Court in Home Solutions Retails Ltd. v. Union of India & Others; 2011 (24) STR 129. Therefore, the only issue remaining before the High Court was to decide regarding taxing the alleged service under Airport services and not under renting services (due to the retrospective amendment). For renting of the Airport immovable property the licence fee was split into two components, one being fixed and the other based on revenue sharing. It was held by the High Court that merely because the licence fee was split into two components — one being fixed and the other based on revenue sharing, it cannot by itself lead to a conclusion that the licence fee is not a consideration for use of premises. The High Court opined that even if transaction between DIAL and assessee is considered as a simple letting out of immovable property, the transaction will not fall within taxable service of Airport services under clause (zzm) of Section 65(105) prior to 1 July 2010. Since it stated that the assessee had closed its operations w.e.f. 30 June 2010, the transaction between DIAL and the assessee will not be eligible to tax as Airport services.

Airport Retail Pvt. Ltd. v. UOI; 2014-VIL-DEL-ST

CESTAT – Third Member’s Decision, Delhi

Third member follows British Airways ruling; Foreign CRS services not taxable

Finance Act, 1994 and Service Tax Rules, 1994; in favor of assessee

The issue before the Third Member of the Delhi Tribunal was to decide on whether Online Database Access or Retrieval Service was received by the assessee from their foreign-based Computer Reservation System (CRS)/Global Distribution System (GDS) service provider and whether such a service was liable to Service tax in terms of Section 66A of the Finance Act, 1994 (w.e.f.18 April 2006 on a reverse charge mechanism basis). The Third member held that the issue was identical to British Airways case; 2014-VIL-108-CESTAT-DEL-ST and that majority decision of British Airways can be followed. Accordingly, it was held by the Third member as follows:

• It is clear that CRS companies were not providing any Indian branch-specific service. It is the Head Office at Bangkok which, in order to facilitate the booking of air tickets through IATA agents all over the world, had negotiated with CRS companies and had signed contracts with them.

• When it is the Head Office, which has received the service and it is Head Office, which is liable to pay for the service and has actually made payment for the same, it is the Head Office, which has to be treated as the recipient of the service provided by CRS companies.

• In view of the above discussion, the Appellant, the branch office in India of Thai Airways, Bangkok, cannot be treated as recipient of the service provided by CRS companies, in pursuance of their agreements with the Appellant’s Head Office at Bangkok and, therefore, no service tax can be charged from the Appellant.

Given this, it was concluded that, no Service tax can be charged from the assessee.

Thai Airways International Public Company Ltd v. Commissioner (Adjudication) CE, Delhi; 2014-VIL-160-CESTAT-DEL-ST-LB

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CESTAT, Mumbai

Domain registration fees paid were not liable to Service tax as “franchisee service”

Finance Act, 1994; in favor of assessee

The assessee was engaged in the activity of registration of website domain names, i.e., as a registrar. The assessee was also accredited by International Corporation for Assigned Names and Numbers (ICANN) for certain top level domains. The assessee registered domain names permitted by ICANN and ICANN accredited registries. In this regard, the assessee paid a fee (which was either fixed or variable) to ICANN according to agreements and various registries (that were also accredited by ICANN). The agreement that permitted the use of ICANN symbols clearly indicated that assessees were ICANN Accredited Registrar and nothing beyond that. The Tribunal was therefore, in agreement with the assessee’s submission that accreditation and representing the ICANN were two different things and the assessees were only accredited by ICANN and that they were not representing ICANN. Demand notices had been issued under the Franchise Service. The terms “Franchisee” and “Franchiser” have been defined under Section 65(47) and 65(48) of the Finance Act, 1994. It would thus be seen from the definitions that franchisee means an agreement by which the franchisee is granted representational rights to sell or manufacture goods or to provide service or undertake any process identified with franchiser. The Tribunal accepted the assessee’s contention that “accreditation” and “representation” were two different things and absent representational rights from ICANN, held that no Service tax is payable under reverse charge.

Directi Internet Solutions v. Commissioner of Service tax; TS-332-Tribunal-2014(Mum)-ST

CESTAT, Chennai

“Ocean freight” not liable to Service tax absent specific entry levying tax

Finance Act, 1994; in favor of assessee

The assessee renders various taxable services but is mainly engaged in providing logistics support services to exporters/importers located in India. The issue arose because of inclusion of value of ocean freight, advance

manifest charges, as well as bunkering and currency adjustment charges in the taxable value for the period June 2006 to December 2008. Revenue contended that assessee was providing a composite service and the pre-dominating factor of their services was logistics support service, taxable under Business Support Service (BSS). The assessee contended that 95% of the demand was raised on ocean freight, which was a non-taxable service and further placed reliance on the ruling in Agility Logistics Pvt. Ltd. v. CST, Chennai; 2013-TIOL-162-CESTAT-MAD, wherein it was held that in the absence of a specific entry in provisions levying tax on transportation by sea, ocean freight will not be liable to Service tax under a general entry such as BSS. Similarly, assessee also relied upon Gudwin Logistics v. CCE, Vadodara; 2010 (18) STR 348 (Tri. Ahmd). The Tribunal, setting aside the Adjudicating Authority’s order, held that no Service tax is leviable under BSS on ocean freight incurred by the logistics company. Furthermore, relying on Gudwin Logistics (supra) ruling, remanded the matter to Adjudicating Authority for fresh consideration.

APL Logistics (India) Pvt Ltd v. CCE, Chennai; TS-325-Tribunal-2014(CHNY)-ST

CESTAT, Mumbai

Bar of limitation under Section 11B of Central Excise Act, 1944 will not be applicable for refund of Service tax

Finance Act, 1994 and Central Excise Act, 1944; in favor of assessee

The assessee has been wrongly paying Service tax. When they realized their mistake, they filed for a refund claim, which was rejected by the Revenue on the grounds of limitation. Being aggrieved, the assessee filed an appeal against the impugned order. The assessee contended that Section 11B of the Central Excise Act, 1944 is not applicable as no tax was payable and they had wrongly discharged the tax. The Tribunal, relying upon the decision of the Madras High Court in the case of Natraj & Venkat Associates; 2010-TIOL-67-HC-MAD-ST, held that where no tax was required to be paid and such tax had been wrongly paid, the bar of limitation under Section 11B will not be applicable and that the refund claim could not be held as time barred.

Prabhu Marketing Services v. Commissioner of Service tax, Mumbai; 2014-TIOL-914-CESTAT-MUM

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CENVAT credit/Central Excise

CESTAT, Mumbai

CENVAT credit alleged as wrongly taken by manufacturer basis ISD procedure and demand rightly raised on manufacturer and not on ISD — Godfrey Phillips case distinguished

Central Excise Act, 1944 and CENVAT Credit Rules, 2004; stay/pre-deposit ordered, in favor of Revenue

The assessees are manufacturers of excisable final product and had also undertaken certain trading activity; they had availed CENVAT credit of the Service tax paid on common input services used in the manufacturing and trading activity for the period prior to 1 April 2011 on the strength of the invoices raised by the HO, which was registered as an Input Service Distributor (ISD). A show cause notice was issued to the assessee for denial of the CENVAT credit for the impugned period on the premise that the credit taken was attributable to trading activities and was required to be reversed. The assessee argued that if credit has been wrongly distributed, the ISD was responsible for reversing the same and not them. The assessee, relying on the decisions of the Tribunal in the cases of CST Ahmedabad v. Godfrey Philips India Pvt. Ltd. 2009 (14) STR 375 (Tri - Ahmd) and United Phosphorous Ltd. v. CCE, Surat-II - 2013 (30) STR 509 (Tri-Ahmd) (Tribunal decisions), contended that the trading activity should be construed as “exempted service” even prior to 1 April 2011, based on CBEC’s Clarification 943/4/2011-CX dated 29 April 2011. The Revenue placed reliance upon CBEC’s Circular vide letter No.137/68/2013-ST dated 10 March 2014 (internally circulated and was not in public domain) wherein it was clarified that in terms of Rule 14 of the CENVAT Credit Rules, 2004, the credit wrongly taken by the assessee/manufacturer will be recoverable from him. Hence, the Revenue justified that the show cause notice had been correctly issued on the assessee and the decisions relied upon were distinguishable. Furthermore, the ruling in Mercedes Benz India Pvt. Ltd. v. CCE, Pune; 2014-TIOL-476-CESTAT-MUM held that the explanation inserted in Rule 2 (e) of CENVAT Credit Rules, 2004 clarifying that “exempted services” includes trading is only prospective

in effect and trading is not a service prior to 1 April 2011. Held that in view of the clarification given by the Circular dated 10 March 2014, read with provisions of Rule 14 of the CENVAT Credit Rules, 2004, the proceedings must be initiated by the jurisdictional excise authority over the unit availing the credit and hence, the demand has been correctly raised on the assessee. As regards to the reliance placed on the Tribunal decisions (supra) they were rendered before the issuance of the present clarification and it was a fact that these decisions did not examine the provision of Rule 14 for recovery of wrongly taken credit. Given this, it was held that reliance could not be placed on these decisions and that they now stood distinguished. Subsequently, the Tribunal continued to place reliance in the Mercedes Benz (supra) decision, which had held for the period prior to 1 April 2011, the credit of Service tax paid on common input services should be apportioned in the same ratio as the turnover of the manufactured and traded items. In light of the above, the Tribunal directed that the entire demand for CENVAT credit has been wrongly raised on the assessee (i.e., manufacturer) and not on the ISD.

Clariant Chemicals (I) Ltd v. CCE, Raigad; 2014-VIL-140-CESTAT-MUM-ST

CESTAT, Delhi

Input service definition amendment not retrospective; CENVAT credit on courier/telephone/insurance services allowed

Finance Act, 1994, Central Excise Act, 1944 and CENVAT Credit Rules, 2004; in favor of assessee

The assessees are manufacturers of cement and clinkers. For the period November 2004 to March 2008, they availed CENVAT credit of Central Excise duty paid on input and capital goods and Service tax paid on input services, which according to them had been used in or in relation to manufacture of their final products. The input services availed were — courier services, landline telephones/mobile phone services and insurance services for the plant and machinery. The Revenue, alleging that these services have no nexus whatsoever with the manufacture of final product

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and that the amendment made to Rule 2 (l) of CENVAT Credit Rules, 2004 by Notification No. 3/2011-CE (NT) dated 1 March 2011, the expression “activities relating to business” in the inclusive portion of the definition of input services was deleted, is of clarificatory nature, and hence, would apply even for the period prior to 1 April 2011. The Tribunal held that the Revenue’s reasoning regarding credit being inadmissible on account of the amended definition (w.e.f. 1 April 2011) was “retrospective”, is totally wrong. The Tribunal categorically states that the amendment, which restricts “input service” definition and availability of CENVAT credit cannot be given retrospective effect, since it gives “absent” or “no express” intention in the amending provisions on retrospective issue. As regards the insurance service credit, the Tribunal stated that insurance is an integral part of manufacturing business and no prudent manufacturer would start operations without insuring his assets. Therefore, relying on the plethora of judicial precedents, CENVAT credit of courier services, landline telephone/mobile phone services and insurance services of plant and machinery prima facie were held to be made available and, accordingly, assessee’s stay applications were allowed.

J.K. Cement Works v. CCE, Jaipur; TS-329-Tribunal-2014-EXC

CESTAT, Mumbai

Shipping services availed at the port of export of goods — held as input services

Finance Act, 1994, Central Excise Act, 1944 and CENVAT Credit Rules, 2004; in favor of assessee

The assessee is engaged in the manufacture of several categories of pipes and had availed Service tax credit on services availed at the port for export of the pipes/goods manufactured by them (shipping services). The Revenue rejected the above Service tax credit on the grounds that the services are not admissible as input services and that the assessee had claimed refund of the Service tax paid on such services. The Tribunal held that in case of exports, the place of removal gets extended till the port where the goods are loaded into the ship for dispatch and,

accordingly, the shipping services availed at the port would qualify as input services for which CENVAT credit can be availed as per Rule 2 of the CENVAT Credit Rules, 2004. It was further held that the assessee had the option of either availing credit of such input services or they can claim refund of the same.

Jotinder Steel and Tobes Ltd. v. CCE; 2014-TIOL-1047-CESTAT-MUM

CESTAT, Mumbai

Goods sold in retail pack with MRP thereon would be subject to valuation under Section 4A irrespective of the fact that the said packages are also sold in bulk to institutional buyers

Central Excise Act, 1944; in favor of assessee

The assessee manufactures ceramic tiles. It packs tiles in standard retail packs and affixes MRP on each of the pack, which is meant for sale in retail and discharges Excise duty under Section 4A of Central Excise Act, 1944. For institutional customers, the assessee was supplying the tiles in bulk, but in the same standard retail packages. In respect of the bulk sales, the Revenue rejected the valuation under Section 4A and instead demanded duty as per Section 4. The Tribunal held that the tiles packed in retail packs with MRP affixed thereon were meant for retail sales. The very same packs were being sold in bulk to industrial/institutional buyers. Furthermore, the packs sold in bulk did not contain any declaration to the effect that the tiles are meant for industrial/institutional consumers. Therefore, the packs of tiles supplied to institutional/industrial buyers were not exempted/excluded from MRP declaration. Consequently, the packs, though supplied to institutional/industrial buyers continued to be valued under Section 4A of Central Excise Act, 1944. The Tribunal relied upon clarifications issued by the Legal Metrology Department of Karnataka, Gujarat and Maharashtra, which provided that packages meant for industrial/institutional buyer should bear a declaration meant for industrial/institutional consumers and/or “not meant for retail sale”.

H & R Johnson (India) Ltd. v. CCE, Raigad; 2014-TIOL-845-CESTAT-MUM

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CESTAT, Chennai

Taking of credit under a common pool permissible without any restriction for an assessee who is both a manufacturer as well as a service provider

CENVAT Credit Rules, 2004; in favor of assessee

The assessee was a manufacturer of excisable goods and also a provider of output services under the Service tax category of Business Auxiliary Services (BAS). They utilized the available CENVAT credit in their books for payment of Service tax liability on their output services rendered from the same premises. The Tribunal opined that the CENVAT credit can be utilized for payment of any duty of excise on any final product or for payment of Service tax on any output service. Allowing credit availed on inputs received for the manufacture of excisable goods, for payment of Service tax on the services rendered towards BAS; the credit taken by the assessee as a manufacturer and service provider had been held to be used both for paying Excise duty and for paying Service tax basis judicial precedents. The Tribunal held that the CENVAT credit rules permitted taking of credit under a common pool and permitted use of the credit from the common pool for different purposes and therefore, there was held to be no restriction placed to the effect that separate credit accounts should be maintained for use for manufacture of excisable goods and for use for providing services. Given this, the Revenue’s appeal was dismissed.

Commissioner of Central Excise, Salem v. V. Thangavel & Sons (Pvt) Ltd; 2014-VIL-146-CESTAT-CHE-ST

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Customs

High Court, Bombay

Order prohibiting assessee from operating as Customs House Agent (CHA), based on allegations in notice issued to importer/client, not tenable

Customs Act, 1962 and Customs Brokers Licensing Regulations, 2013; in favor of the assessee

The assessee is in the business of forwarding and clearing of cargoes for various importers and exporters at the Mumbai Port. The Bombay High Court allowed a writ petition against an order prohibiting the assessee from operating as Customs House Broker based on allegations in Show Cause Notice (SCN) issued to importer/client. Regulation 23 of the Customs Brokers Licensing Regulations, 2013 confers discretionary power enabling Commissioner of Customs of a particular station to prohibit Custom Broker from operating. Given that the proceedings against importers were pending and matter three years old, it is not justified to proceed against the assesssee in terms of Regulation 23. The High Court held that it was a clear case of haste and arbitrariness by Customs Commissioner at Mumbai despite the matter being taken up by the parent Commissionerate (Cochin). However, leeway was provided to the Commissioner to take steps against importer/client and the assessee on pending adjudication proceedings in accordance with law along with the remedy available to the assessee to defend themselves in such proceedings.

GAC Shipping (India) Pvt. Ltd. v. UOI; TS-295-HC-2014(BOM)-CUST

High Court, Bombay

Levy of Extra Duty Deposit (EDD) on related-party imports, despite appeal pendency, held to be illegal

Customs Act, 1962 and Customs Valuation (Determination of Value of Imported Goods) Rules, 2007; in favor of the assessee

The assessee is an Indian entity of the global operations of the DuPont group and had filed a Petition as 1% EDD was loaded on their imports from their various related

parties (as falling within the meaning of Rule 2(2) of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007). In view of the relationship between the assessee and its affiliates, a reference was made to the Special Valuation Branch (SVB), Chennai for a detailed investigation on the valuation of their imports from their foreign affiliates. The loading 1% EDD on their imports by SVB authorities, despite pendency of appeal in this regard before the Tribunal was held to be illegal and arbitrary. The High Court rejected the Revenue’s contention that loading of imports was justified since the Commissioner (Appeals) order was held to be not acceptable to the Department and same was therefore, challenged before the Tribunal. It was opined that even the new SVB order will be held to be as not implemented (since the matter was subjudice) before the Tribunal. Given this, the Revenue was held to not have been justified in charging EDD on every import by virtue of Circular No. 11/2001-Cus dated 23 February 2001. The High Court opined that the Clause 9 of Circular categorically directed that if the decision of SVB cell over finalization of assessment was pending beyond four months, the EDD will have to be discounted. Therefore, the EDD levy was rejected on related-party imports. However, the High Court directed the assessee to furnish a bond in order to secure the difference between duty demanded and quantum of EDD while requesting the Tribunal to expedite the pending appeal.

E.I. DuPont India Pvt. Ltd. v. UOI; TS-313-HC-2014(BOM)-CUS

CESTAT, Chennai

Refund made available by Tribunal when assessee paid duty, without availing exemption

Customs Act, 1962; in favor of the assessee

The assessee had filed refund claims in connection with the duty paid at the time of import (i.e., Special Additional Customs Duty (SAD), in lieu of VAT/Sales Tax ). Adjudicating authority had denied such a refund claim. Being aggrieved, the assessee approached the Commissioner (Appeals) who granted relief to them by allowing the refund. The Commissioner (Appeals) decision was challenged by the Revenue in the Chennai Tribunal.

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The Revenue’s contention was that the assessee, rather than paying duty and claiming the refund under the Notification No 102/2007-Customs dated 14 September 2007, should instead avail the unconditional exemption from SAD to the goods in question under Notification No 29/2010-Customs dated 27 February 2010. The Tribunal rejecting the Revenue’s contention held as follows — in the absence of any specific prohibition under Section 25 of the Customs Act, 1962, the importer is not prohibited from paying import duty when goods are exempted and cannot be forced to avail exemptions, in view of the various decisions of the courts.

Therefore, the Tribunal found no reason to take any objection in the case of goods, which were exempted from SAD, but for which the assessee paid duty without availing exemption and thus, the benefit of refund is made available to the assessees.

Commissioner of Customs, Chennai v. Redington (India) Ltd; 2014-TIOL-1178-CESTAT-MAD

CESTAT, Ahmedabad

Doctrine of unjust enrichment not applicable on refund claim of provisional deposits made prior to adjudication

Customs Act, 1962; in favor of the assessee

The assessee had imported certain goods and the consignment was detained by the Customs officer on the ground that the prices shown in the bill of entry

and invoices were very low. The detained goods were released provisionally on execution of the requisite bonds and on payment of differential duty. The Adjudicating authority, while finalizing the assessment, confirmed the duty demand and appropriated the provisional deposit against the demand. On an Appeal, the Tribunal set aside the demand. Pursuant to the decision, the assessee had filed a refund claim. However, though the refund was allowed to the assessee, the amount was credited to the Consumer Welfare Fund on grounds of unjust enrichment. The Tribunal held that the refund is not hit by unjust enrichment due to the following two reasons — (a) The bar of unjust enrichment was introduced on 14 July 2006 in Section 18 of the Customs Act, 1962, which provides for provisional assessment and finalization thereof, and the period in the present case is prior to this date. Hence, the unjust enrichment principle will not be applicable in the instant case being issue arising on finalization of provisional assessment; and (b) with regard to the deposit amount appropriated as duty on adjudication (which was subsequently set aside by the Tribunal), the whole adjudication order was held to become non-existent that inter alia included the action of appropriation of the deposit amount as duty. Therefore, the amount of deposit was held to be continued to remain as deposit and accordingly, the doctrine of unjust enrichment was held to be not applicable in such a case of refund of deposit.

N K Overseas v. Commissioner of Customs, Ahmedabad; 2014-TIOL-765-CESTAT-AHM

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VAT/CST

High Court, Allahabad

Stay granted for VAT recovery to the assessee (OTIS) in light of the SC ruling in Kone Elevators

Uttar Pradesh Value Act Tax, 2008; stay granted

The assessee is engaged in the business of manufacturing of parts and components of lifts and elevators in offices, residential buildings, Government buildings etc. The assessee is registered under UP VAT Act, 2008 Act and executed work contracts for supply of parts and components of lifts/elevators and to provide services for erection, commissioning and installation of the same. The Assessing Authority held the works contract to be a sale contract. They imposed a total demand of INR56 million. Being aggrieved, the assessee filed an appeal before the Commissioner (Appeals), who stayed the demand to an extent of 50% but directed the assessee to deposit the remaining 50% amount within 30 days. Further aggrieved, the assessee filed an appeal before the Tribunal and the Tribunal modified the order of Commissioner (Appeals) and granted stay to the extent of 80% of the total demand on furnishing of security and remaining 20% was required to be deposited within 30 days. It was held by the Allahabad High Court that, since the Assessing Authority made the assessment relying exclusively on earlier judgment of SC in the case of State of Andhra Pradesh v. Kone Elevator, 2005 Indlaw SC 113, which was overruled by the Constitution Bench of SC in the case of Kone Elevator India Pvt. Ltd. v. State of Tamil Nadu & Ors. [2014-VIL-12-SC-CB], the assessee was entitled to complete stay of the demand amount. The impugned order, passed by the Tribunal, was modified and a direction was issued to the Appellate Authority to decide the appeal of the assessee expeditiously in accordance with law and within a period of two months. Furthermore, until then it was directed that no recovery will be made from the assessee of the remaining amount of 20% of tax.

Otis Elevators Company (India) Limited, Lucknow v. Commissioner of Commercial Taxes Uttar Pradesh Lucknow; 2014 Indlaw ALL 2535

High Court, Bombay

Exemption under Section 5(3) of CST Act for penultimate sale of goods for export upheld

Bombay Sales Tax Act, 1959 and Central Sales Tax Act, 1956; in favor of assessee

The assessee filed a writ petition before the Bombay High Court under Article 226 of the Constitution of India, challenging the revision order passed by the sales tax authority, the consequent demand under the Bombay Sales Tax Act, 1959 and the order of the Maharashtra Sales Tax Tribunals confirming the aforesaid demand for Sales tax. Requisite form was furnished by the buyer to the assessee, certifying the fact of sale of Submarine Navy Batteries (SMBs) by the assessee to the buyer for a consideration and further sale by the buyer to the Algerian Navy in the course of export had taken place. The issue dealt with relates to exemption from payment of Local Sales tax in case of penultimate sale for exports effected in terms of Section 5(3) of the Central Sales Tax Act, 1956 (CST Act). The assessee contended that the sales made by them are in the course of export and fall within purview of Section 5(3) of the CST Act and should be adjudged as exempt from payment of Sales tax. The assessee relied upon the SC judgment in the case of Consolidated Coffee v. Coffee Board; [(1980) 3 SCC 258], wherein the SC held that the term “sale” appearing in Section 5(3) cannot be construed to mean an “Agreement to sell” and that the said term refers to a completed sale, meaning thereby a “sale” as defined in Section 2(g) of the CST Act. The Revenue contented that purchase order/agreement entered into by the assessee with the buyer for sale of goods be treated as “last sale” as contemplated in Section 5(3) of CST Act. This contention was quashed by the High Court by concluding that “Agreement to sell” cannot be said to be included in the definition of “sale” according to Section 2(g) of CST Act. The SC’s ruling in Consolidated Coffee (supra) was affirmed by the High Court and it is held that the purchase order/agreement between the assessee and the buyer could not fall in the definition of “sale” as there was no transfer of title in goods or a transfer of right to use any goods. Furthermore, the High Court also dealt

36 Tax Digest

with the issue of maintainability of writ petition in cases where an alternate remedy is available with the assessee and concluded that such writs can be maintained when issues involved are “pristinely” legal.

Exide Industries Ltd. v. State of Maharashtra and Others; TS-315-HC-2014(BOM)-VAT

High Court, Allahabad

Questions correctness of SC ruling in Rainbow Colour Lab (2000) in light of the SC-Larger Bench judgment in Bharat Sanchar Nigam Ltd (2006)

Matter remanded back

The assessee’s view of no Sales tax liability on photo developing, printing and processing was questioned by the Revenue. The Revenue disagreeing with the assessee’s view, imposed a tax liability upon them. Being aggrieved, the assessee had preferred a first and a second appeal before the Joint Commissioner (Appeals) and Tribunal, respectively. The Tribunal allowed the assessee’s appeal placing reliance upon the SC ruling in the case of Rainbow Colour Lab & Others v. State of M.P. & Others; 2000-VIL-01-SC. In this regard, the Revenue filed for a revision application questioning the correctness of the Tribunal’s reliance on Rainbow Colour Lab (supra) in light of decision in the case of Bharat Sanchar Nigam Ltd & Another v. UOI; 2006-VIL-07-SC-LB. It was held by the High Court that the matter needs to be re-examined on account of the Rainbow Colour Lab’s (supra) decision, being not “good in law” and in light of decision of BSNL case (supra). The High Court therefore, allowed the Revenue’s revision appeal and quashed the Tribunal order remanding the matter to the Tribunal.

The Commissioner Trade Tax, UP v. Kohli Color Lab; 2014-VIL-191-ALH

High Court, Allahabad

Theory of “same goods” dismissed again while recognizing the link between local sale and exports

CST Act, 1956; Matter remanded back

The assessee sold toughened glass to Titan Energy System Ltd., who exported solar modules, accessories and CIGS module. Assessee’s contention was that the toughened glass has been used in the export of solar modules and so could qualify for an exemption as being a “penultimate sale” as envisaged in Section 5(3) of the CST Act. The assessee contended that it had also complied with all the conditions as regards declarations in Form H, shipping bill etc. However, the Revenue disallowed the claim under Section 5(3) and levied CST on the ground that the same goods (i.e., the toughened glass) were not exported. The First Appellate Authority and the Meerut Tribunal rejected the assessee’s appeals on the ground that the toughened glass had not been exported in the same form (in which it was purchased from the assessee). Aggrieved by the Tribunal order, the assessee filed an application before the Allahabad High Court wherein the issue raised was whether Tribunal was justified in denying exemption benefit only on the basis that the goods sold by the assessee to the purchaser/exporter had not been exported in the same form. The contention of the assessee was that the Tribunal has not examined the matter in the light of the law laid down by Constitution bench of the Hon’ble SC in the case of State of Karnataka v. Azad Coach Builders Pvt. Ltd.; 2010-36-VST-1. Azad Coach (supra), in that case, claimed an exemption u/s 5(3) of the CST Act on sale of such bus-body to TATA against Form H. Furthermore, the SC held that the assessee had succeeded in satisfying the tests and was eligible to the exemption under Section 5(3) of the CST Act and that the transaction between the exporter and the foreign buyer were inextricably connected with each other, the “same goods” theory had no application. Relying on the SC ruling, the Allahabad

37 Tax Digest

High Court held that if there was an inseverable link between the local sale or purchase and export and as it was clear that the local sale or purchase between the parties was inextricably linked with the export of goods; thus the exemption claim under Section 5(3) of CST was allowable. It remanded the matter with directions to the Tribunal, to decide the matter afresh after considering the law laid down in the case of Azad Coach Builders Pvt Ltd (supra).

Allied Glasses Pvt Ltd v. The Commissioner, Commercial Taxes; TS-280-HC-2014-(ALL)-VAT

High Court, Kerala

Only CST is applicable in respect of goods procured from Karnataka, for works contract executed in Kerala

CST Act, 1956; in favor of assessee

The assessee is based out of Karnataka and undertook works contract for construction of a History Business Museum at the Indian Institute of Management (IIM) in Kerala. The assessee procured material from Karnataka for undertaking the aforementioned works contract. The assessee discharged CST in respect of the material procured from outside the state. The Revenue contended that the assessee was required to be registered in the state of Kerala and discharge works contract tax in respect of the supplies made for the said construction. Simultaneously, the Revenue also required the IIM to deduct works contract tax at source, before making any payments to the assessee. The Kerala HC held that the assessee has shown that the goods were purchased from Karnataka and brought to Kozhikode (Kerala) for the purpose of the works contract and accordingly CST had been correctly discharged. Given this, the CST Act will become applicable. Furthermore, once the dealer had suffered the liability to pay tax under the CST Act, they were not required to discharge VAT under the Kerala VAT laws.

FI-Design & Development Pvt. Ltd. v. State of Kerala; 2014-TIOL-882-HC-KERALA-VAT

38 Tax Digest

Foreign Trade Policy

High Court, Gujarat

High Court dismisses Revenue’s appeals, Education cess levy on Donmestic Tariff Area (DTA) clearances appealable before SC

In favor of assessee

The Gujarat HC dismissed the Revenue’s appeals against a Tribunal order wherein the question of payment of Education cess (EC) and Secondary & Higher Education Cess (SHEC) levy on a Domestic Tariff Area (DTA) sale by an Export Oriented Unit (EOU) was discussed. The Gujarat HC held that this issue is maintainable before the SC on the basis of the Division Bench ruling in Sarla Performance Fibers Ltd. v. CCE, Vapi; 2010 (253) ELT 203 (Tri.-AHM), which had held that EC levy has a direct bearing on “rate of excise duty” payable by an EOU on DTA clearances and hence, can be appealed before the apex court. The Gujarat HC has directed the Revenue to prefer appeals before an appropriate court and/or the SC in light of the Central Excise provisions.

CCE v. Godrej Industries Ltd.; TS-327-HC-2014(GUJ)-EXC

CESTAT, Ahmedabad

Once duty is paid on the inputs CENVAT credit is admissible

Para 4.25 of the EXIM Policy, Central Excise Rules, 2002 and CENVAT Credit Rules, 2004; in favor of assessee

The assessee procured certain inputs from DTA on payment of duty and took CENVAT Credit, which according to the Revenue was not admissible since benefit of Notification No.44/2001-CE (NT), dated 26 June 2001, issued under Rule 19(2) of Central Excise Rules, 2002 was applicable and available to them. Permitting duty free imports, the Tribunal held that the route under Notification No.44/2001-CE (NT), dated 26 June 2001 is an optional procedure for getting duty free inputs and is subject to fulfilment of certain conditions. If the assessee could not fulfil the prescribed conditions, then the raw material had to be received on payment of duty. The Tribunal, stating that the matter was no more res integra as decided in the judicial precedents and relied in the cases of Shakun Polymers Ltd v. CCE & Cus, Daman; 2009 (241) ELT 250 (Tri. - Ahm), Olefine Organics (I) Pvt Ltd v. CCE; 2014(299) ELT 91 (Tri. –Mum) and CCE Ahmedabad – III v. Nahar Granites Ltd; 2014-TIOL-582-HC-AHM-CX. Hence, it was held that once duty was paid on the input, CENVAT credit was admissible if otherwise admissible under the CENVAT Credit Rules, 2004. It further stated that it is a settled law that duty assessed at the suppliers end cannot be questioned at the recipients end.

Jupiter Remedies Pvt. Ltd. v., CCE, Ahmedabad dated 13 August 2014

39 Tax Digest

Key statutory updates

Home

Service tax — post Budget 2014–151

• Service tax Notification amending Mega Exemption Notification to provide exemption to services by a specified organization relating to religious pilgrimage

Notification No. 17/2014-ST; F.No. B1/1/ 2014-TRU; dated 20 August 2014

• Service tax amendments post Budget 2014–15 (effective from 6 August 2014)

• Recommended time limits for completion of adjudication is within six months or one year from the date of issuance of show cause notice to the extent possible.

• 50% penalty can be imposed in cases where Service tax has not been levied, not paid or short levied or short paid on account of suppression of facts or wilful misstatement, even if the assessee proves that there was reasonable cause for such failure by way of details of such transactions being available in specified records.

• The Joint Commissioner or Additional Commissioner or any other officer notified by CBEC will be given the power to authorize any Central Excise Officer to undertake search and seizure.

• Powers to recover dues of a predecessor from the assets of a successor, which are purchased from the predecessor, will be introduced.

• The GoI will prescribe rules to determine rate of exchange for calculation of taxable value in respect of certain services to delink the current practice of using conversion rates notified for Customs purpose.

• The GoI will be given powers to make rules for specified activities such as book keeping, restriction of CENVAT credit, issuance of supplemental instructions.

• Service tax amendments post Budget 2014-15 (effective from 1 October 2014)

• Increase in rate of interest payable for late payment of Service tax — graded increase in

interest rates for delay beyond six months (ranges from 24% to 30%). The specific change in rate of interests are as follows:

Extent of delay Simple interest rate per annum

Up to 6 months 18%

More than 6 months and upto 1 year

18% for the first 6 months, and 24% for the period of delay beyond 6 months

More than 1 year 18% for the 1st 6 months, 24% for the next 6 months, and 30% for the period of delay beyond 1 year

• ► E-payment of Service tax has been made mandatory except with permissions from Deputy Commissioner/Assistant Commissioner. [Rule 6(2) of the Service Tax Rules, 1994]

• ► Value of service portion for works contracts other than “original works” has been rationalized to 70%. [Rule 2A of the Service tax (Determination of Valuation) Rules, 2006]

• ► Intermediary definition amended — in case of intermediary of goods, place of provision of service will be the location of service provider. [Rule 2(f) &9 of the Place of Provision of Services Rules, 2012]

• ► Place of provision in case of services of hiring of vessels or aircraft, irrespective of whether short term or long term, will be the place of the service recipient.

• ► Changes in the Point of Taxation Rules, 2011 (POT Rules) amending POT for reverse charge

• ► Point of taxation for reverse charge payments rationalized (for invoices issued after 1 October 2014) whichever is earlier:

(a) Date of payment; or

(b) First day after three months from the date of invoice (i.e., where the payment has not been made).

1 The Finance (No. 2) Bill, 2014 was enacted into the Finance (No.2) Act, 2014 [No.25 of 2014] w.e.f. 6 August 2014

[S.75 of the Finance Act, 1994]

40 Tax Digest Home

• ► The said amendment will apply only to invoices issued after 1 October 2014. A transition rule for the same has also been prescribed under new Rule 10 of the POT Rules.

Notification No. 13/2014-ST Dated 11 July 2014

• Changes in abatement

• ► Taxable portion, in respect of transport of goods by vessel, has been reduced from 50% to 40% with effect from 1 October 2014.

• Service related to transportation of passenger by air-conditioned contract carriages has now become taxable. Therefore, a new entry is inserted at Sr. No. 9A providing taxable portion of such services to be 40% with the condition that CENVAT credit of input or capital goods or input services has not been availed.

• There is a decline in effective Service tax rate on transport of goods by vessel from 6.18% to 4.94% due to increased abatement.

• The condition in entry No. 9 is amended with effect from 1 October 2014 allowing credit of input service of renting of a motor cab if such services are received from a person engaged in the similar business, i.e., a sub-contractor providing services of renting of motor cab to the main contractor. The whole of the CENVAT credit has been allowed with respect to input service of renting of any motor cab, received from a person who is paying Service tax on 40% of the value of services. The CENVAT credit eligibility will be restricted to 40% of the credit of the input service of renting of any motor cab if Service tax is paid or is payable on full value of the services, i.e., no abatement is availed.

• With effect from 1 October 2014, the service of tour operator is also being allowed to avail CENVAT credit on the input service of another tour operator, which are used for providing the taxable service.

Notification No. 8/2014-ST Dated 11 July 2014

• ► Service tax amendments on a date to be notified post enactment on 6 August 2014 of the Finance (No.2) Act, 2014 [No.25 of 2014] – The effective date is 1 October 2014 as notified vide Notification No. 18/2014-ST dated 25 August 2014.

• ► Following services will be removed from the negative list of services on a date to be notified after enactment:

(a) Services such as advertisements in internet websites, out-of-home media, on film screen in theatres, bill boards, conveyances, buildings, cell phones, automated teller machines, tickets, commercial publication, and aerial advertising

(b) Radio taxis or radio cabs, whether or not air-conditioned

• Regarding determination of rate of exchange, rules to be prescribed [S.67A of the Finance Act, 1994] — The effective date is 1 October 2014 as notified vide Notification No. 18/2014-ST dated 25 August 2014

• ► Insertion of Rules 11 and 12 to the Service Tax Rules, 1994 w.e.f, 1 October 2014 as notified vide Notification No. 19/2014-ST dated 25 August 2014.

41 Tax Digest Home

Central Excise duty/CENVAT credit

• ► The GoI notified a fixed interest of 6% p.a. on delayed refund of pre-deposit for Section 35FF of Central Excise Act, 1944. (Also applicable to Service tax)

Notification No. 24/2014-CE (NT) dated 12 August 2014

• ► Key Central Excise amendments post Budget 2014–15 (effective from 6 August 2014)

• ► Packing, repacking, labelling or relabeling on specified goods such as wireless data modem cards with PCMCIA or USB or PCI express ports, packaged or canned software, cellular phones and radio trunking terminals will be considered as deemed manufacture.

• ► Determination of disputes relating to taxability or excisability of goods is covered under the term “determination of any question having a relation to rate of duty” and hence, appeal against Tribunal orders in such matters would lie before the SC. [S. 35L of the Central Excise Act, 1944]

• ► Key Central Excise amendments post Budget 2014–15 (effective from 1 September 2014)

• ► Significant limitation introduced on time for claiming credits on input and input services — to be availed within six months from date of invoice/challan. [Rule 9(1) of the CENVAT Credit Rules, 2004]

• ► Key Central Excise amendments post Budget 2014–15 (effective from 1 October 2014)

• ► Penalty of 1% p.m. to be levied in case duty declared according to return is not paid within one month from the due date

• ► E-payment of Central excise made mandatory except with permissions from Deputy Commissioner/Assistant Commissioner. [Rule 8(1B) of the Central Excise Rules, 2002]

• ► CENVAT Credit Rules, 2004 amended to include:

• ► Rule 12AAA, after the words “first stage and second stage dealer”, the words “provider of taxable service” inserted

Notification No. 25/2014-CE (NT) dated 25 August 2014

• ► Insertion of Rule 9 (fa), after clause f (which talks of invoice, bill or challan issued by a ISD) CENVAT credit can be taken by the manufacturer/provider of output service/ISD basis the documents prescribed in Rule 9 of CCR “Documents and accounts” and now includes the following :

• A Service tax Certificate for Transportation of goods by Rail (STTG Certificate) issued by the Indian Railways, along with the photocopies of the railway receipts mentioned in the STTG certificate.

Notification No. 26/2014-CE(NT) dated 27 August 2014

42 Tax Digest Home

Customs

• The GoI notified a fixed interest of 6% p.a. on delayed refund of pre-deposit for Section 129EE of the Customs Act, 1962.

Notification No. 70/2014-CUS (NT) dated 12 August 2014

• Guidelines for considering request for exemption from payment of Customs Duty under Section 25(2) of Customs Act, 1962.

• The GoI provides for exemption from Customs duty under Section 25(2) of the Customs Act, 1962 in cases involving circumstances of an exceptional nature such as on import of specified goods for charitable purposes and for specified organizations engaged in relief and rehabilitation. For this purpose, revised guidelines have been set out in this Circular for the manner and seeking of exemption pending and future requests and for granting the exemption under Section 25(2) of the Customs Act, 1962 for the aforementioned circumstances.

Circular 09/2014-Cus; dated 19 August 2014

• Key Customs amendments post Budget 2014–15 (effective from 6 August 2014)

• Customs duties on mineral oils including petroleum and natural gas extracted or produced in the continental shelf of India or the exclusive economic zone of India and imported prior to 7 February 2002 is exempt. There will be no refund of customs duties paid earlier. [S.25 (7) and (8) inserted to the Customs Act, 1962]

• Importers bringing goods in a vehicle by land can file a bill of entry prior to import of goods in the same manner as imports by air or sea. [S. 46(3), Second Proviso substituted of the Customs Act, 1962]

• The CBEC has been vested with powers to condone delay in review of orders by Committee of Chief Commissioners and Commissioner of

Customs by a further period of 30 days. [Proviso added to S. 129D of the Customs Act, 1962]

Key amendments post Budget 2014–15 — Common to Service tax, Central Excise and Customs (effective from 6 August 2014)

• Applicants can approach Settlement Commission even if they have not filed returns. [S. 32E of the Central Excise Act, 1944, Section 83 of the Finance Act, 1994]

• Discretionary powers of CESTAT and Commissioner (Appeals) for grant of stay of pre-deposit replaced with a mandatory deposit.

• According to proposed provisions in the Bill, the mandatory pre-deposit at prescribed rates (7.5%/10%) for first/second stage appellate proceedings before the Commissioner (Appeals)/Tribunal, was to be payable on duty or penalty, or both. On 25 July 2014, the Finance (No.2) Bill, 2014 was amended to provide that where duty and penalty are disputed, pre-deposit will now be on the duty amount only. Where only penalty has been charged without duty, pre-deposit will be applicable on the penalty amount at the prescribed rate. The pre-deposit is subject to an upper ceiling limit of INR100 million. The amendment is prospective and not applicable to appeals and stay applications pending for decision prior to 6 August 2014. [S. 35F of the Central Excise Act, 1944, Section 83 of the Finance Act, 1994 and S. 129E of the Customs Act, 1962; respectively]

• Discretionary power of CESTAT to refuse admission of appeal has been increased from the existing limit of INR50,000 to INR2,00,000 [S. 35B(1) of the Central Excise Act, 1944 and S. 129A(1) of the Customs Act, 1962]

• Enables the Commissioner (Appeal) to take into consideration the fact that a particular order being cited as a precedent decision on the issue has not been appealed against for reasons of low amount [S. 35R of the Central Excise Act, 1944, Section 83 of

43 Tax Digest Home

the Finance Act, 1994 and S. 131BA of the Customs Act, 1962]

• On 25 July 2014, the Finance (No.2) Bill, 2014 was amended to include provisions relating to “Interest on refund of pre-deposit” [S. 35FF of the Central Excise Act, 1944 and S. 129EE of the Customs Act, 1962]

• Earlier the Bill did not prescribe any interest on refund of pre-deposit. According to the amendment, interest on refund of pre-deposit amounts will be granted to the assessee from the date of such deposit till the date of refund consequent to the order of the Appellate Authority. The cap for such interest has been fixed at 5% on the lower side and 36% on the upper side. Rate of interest will be prescribed through a Notification.

• Benefit of advance ruling extended to resident private limited company. Definition of “private limited company” linked to Companies Act, 2013 and “resident” linked to Income-tax Act, 1961.

Special Economic Zones (SEZ)

• The SEZ department has proposed time-lines for disposal of various processes related to a SEZ developer and unit on their website on 14 August 2014.

• Key SEZ/EOU amendments post Budget 2014–15

Safeguard duty made applicable on inputs imported by an EOU or SEZ unit, which are cleared into DTA as such or are used in the manufacture of final products, which are cleared into DTA.

44 Tax Digest Home

VAT/CST

Maharashtra

• Trade Circular no 13T of 2014 dated 02 August2014: Gist of the Circular issued by the Maharashtra VAT Department is as follows:

• Dealers who have not filed any of the returns that was due on 1 April 2014 may file their returns before 30 September 2014 by paying a late fee of INR1,000 per return as against the late fee of INR5,000 earlier.

• Returns up to February 2014 will be covered under this period.

• Only those dealers who file their returns along with tax and applicable interest according to the provisions of the Act will be eligible for the late fee concession.

• Any dealer who either defaults on returns, does not pay the complete amount of tax or interest within 30 September 2014 will not be eligible for this partial exemption.

• All defaulting dealers are requested to file pending returns and pay the applicable tax and interest and take benefit of the exemption.

• Trade Circular No. 15T of 2014 dated 6 August 2014 issued by the Maharashtra VAT Department amending the Maharashtra VAT Act, 2002, key features are given below:

• Amendment to Section 3: Incidence of Tax — The turnover limit for dealers other than an importer, has been increased from INR0.5 million to INR1 million effective from 26 June 2014.

The turnover limit for registration of an importer remains unaltered at INR0.1 million.

• Amendment to Sec 16: Registration — The amendments provide for contingencies in which a dealer can apply for cancellation of his registration. According to the amendment

the turnover of the dealer not exceeding INR1 million during 2013–14 can be a ground for cancellation of registration. A dealer can opt for cancellation of registration on or before 30 September 2014.

If the turnover of the dealer is less than INR1 million in 2013–14, but has exceeded INR1 million in the period from 1 April 2014 to 30 September 2014, then the registration officer will not cancel the registration in 2014–15.

• Amendment to sub-section 6 of Section 20: Returns and self-assessment — W.e.f 1 July 2014 a late fee of INR2,000 will be applicable for late filing of returns within 30 days after the due date for filing returns. Late fee of INR5,000 will continue if the dealer files its returns after the expiration of 30 days from the due date.

• Amendments to Section 61: Accounts to be audited in certain cases — the turnover limit for a dealer to file VAT audit report has been increased to INR10 million as compared to INR6 million from 2013–14. Hence, the dealers, whose turnover of sales or purchases has not exceeded INR10 million , in 2013–14, will not be liable to file Form 704.

• For the purpose of VAT returns, branch transfers/consignment transfers are to be considered as forming part of the turnover. However, stock transfer inward from other states will not be taken into consideration while computing the turnover of purchases.

• Amendment to Schedule A

Insertion of entry 2A — Aircraft spare parts to be notified by the State Government is included in tax free goods

Insertion of entry 26A — Copyrights for distribution and exhibition of cinematographic films in theatres and cinema halls sold during the period from 1 April 2005 to 30 April 2011 will be exempted

45 Tax Digest Home

Rajasthan

• Rajasthan Finance Act (14 of 2014) bringing about amendments in sections of the Rajasthan Value Added Tax Act, 2003 — key features are as follows:

• Amendment in Section 3 — Incidence of tax: The threshold limit of a manufacturer to be registered under the Act is increased from INR0.2 million, currently to INR0.5 million

• Amendment in Section 16 (4) — Amendment and cancellation of registration certificate : According to the amendment a dealer is required to amend or cancel its registration as the case may be, if the dealer has discontinued business at the principal place of business

• Amendment in Section 18 — Input Tax Credit: According to the amendment to Section 18(2), the input tax credit will be allowed only after verification of the deposit of tax by the selling dealer

• Amendment to Section 20 — Payment of Tax:The amount of tax that has to be deducted from works contract payments to a contractor by the awarder is increased from 6% to 20%. The existing sub-section (2A) will be deleted.

• Amendment of Section 22 — Assessment on failure to pay tax, submit returns or audit report: The amendment provides that no order under this Section (4) will be passed after the last date of submission of annual return for that year

• Amendment of section 23 — Self assessment: A registered dealer will be deemed to have assessed on the basis of returns and audit report filed by it, if there is anything to the contrary findings by the Assessing Authority and if the dealer has been prompt in filing its returns in time.

• Insertion of Section 51B — Rebate of tax: Notwithstanding anything contained in the Act, the State Government has the right to allow prospectively or retrospectively, a rebate up to full amount of tax to such dealers or class of

dealers as may be specified in the notification.

• Amendment of Section 53 — Refund: Dealers who will get a refund of tax will be eligible apart from the refund, a simple interest at the prescribed rate with effect from 1 April of the year immediately following the year to which it relates. Provided that if the dealer has paid any amount of tax after the closing of the year and such amount is required to be refunded, no interest will be payable.

• Amendment in Section 61— Penalty for avoidance or evasion of tax: It provides that if a dealer has made a deliberate act, which results in loss of revenue to the Government, then the Assessing Authority, not below the rank of an Assistant Commercial Tax Officer, can impose upon the dealer a penalty in addition to the tax payable by him, a sum equal to two times the amount of tax avoided or evaded.

• Amendment of Section 67 — Prosecution for offences: Where the demand notice exceeds INR10 million, the dealer will be punishable with simple imprisonment for a term, which may extend up to three years and also be liable for fine, but in any case the imprisonment will be for a minimum period of six months and fine of INR5,000.

• Rajasthan VAT Departmental amendment in Schedule II – Exemption to persons or class of persons

Sl. No.

Description of goods

68 Registered builders/developers who usually engage in the construction of flats, dwellings or building or premises and transfer them along with goods, land or interest underlying the land in pursuance of an agreement

Implication: By this amendment, the VAT liability on works contractors involved in the construction industry is withdrawn and exempted.

46 Tax Digest

Foreign direct investment

Regulatory

Home

Issue of Press Note 3 of 2014

Department of Industrial Policy and Promotion (DIPP) has issued Press Note 3 of 2014, which provides for a list of defence items, which require compulsory industrial licence under the Industries (Development & Regulation) Act, 1951. It has been clarified that items not included in the list will not require industrial licence for defence purposes and hence, any Foreign Direct Investment (FDI) in those companies will be under the automatic route. Moreover, in case of dual use items, with military as well as civilian applications, other than those specially mentioned in the list, will also not require industrial licence from the perspective of defence sector investment.

The press note has brought an end to long-pending ambiguity prevailing around list of items/services in the defence sector requiring industrial licence. Dual use items not mentioned in the list have also been exempted from the industrial licence category if they do not form part of the list, which is a positive move.

DIPP Press Note 3 of 2014 dated 26 June 2014

Issue of Press Note 4 of 2014

DIPP has issued Press Note 4 of 2014 whereby it has decided to switch over from existing National Industrial Classification (NIC) 1987 to NIC 2008 version which was applicable for the purpose of classification of activities in respect of FDI/industrial licence/Industrial Enterpreneurs Memorandum(IEM) proposals. NIC 2008 is an improved version providing a more contemporary industrial classification system in the light of changes in the structure and composition of the economy, changing user requirements and compatibility with international standards.

DIPP Press Note 4 of 2014 dated 27 June 2014

Press Note 5 of 2014

DIPP has issued Press Note 5 of 2014 whereby the period of validity of industrial licensing has been increased from two years to three years and guidelines have been provided for extension of validity of industrial license.

DIPP Press Note 5 of 2014 dated 2 July 2014

Press Note 7 of 2014

In line with the budget announcement, DIPP has issued Press Note 7 increasing the FDI limit in defence sector from existing 26% to 49%. The 49% sectoral cap will be a composite cap including the foreign institutional investors (FII) investment (which was earlier prohibited). Portfolio investment will be under the automatic route and will have an upper limit of 24%. FDI beyond 49%, where India would get the access of state of art technology, will be considered by Cabinet Committee on Security (CCS).

DIPP Press Note 7 of 2014 dated 26 August 2014

Press Note 8 of 2014

DIPP has issued the Press Note 8 of 2014 allowing FDI in railway infrastructure up to 100% under the automatic route. Railway infrastructure will cover construction, operation and maintenance of the following:

(i) Suburban corridor projects through public private partnership (PPP)

(ii) High-speed train projects

(iii) Dedicated freight lines

(iv) Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities

(v) Railway electrification

(vi) Signaling systems

(vii) Freight terminals

(viii) Passenger terminals

(ix) Infrastructure in industrial park pertaining to railway lines/sidings including electrified railway lines and connectivities to main railway line

(x) Mass Rapid Transport Systems

• FDI in above mentioned activities open to private sector participation including FDI is subject to sectoral guidelines of the Ministry of Railways

• Proposals involving FDI beyond 49% in sensitive areas from a security point of view will be brought by the Ministry of Railways before the CCS for consideration on a case-to-case basis.

DIPP Press Note 8 of 2014 dated 27 August 2014

47 Tax Digest Home

Reserve Bank of India

Liberalised Remittance Scheme (LRS) for resident individuals — increase in limit and permission to acquire immovable property abroad

The RBI has increased the LRS investment limit from US$75,000 to US$125,000.

Furthermore, the RBI had increased the LRS limit to US$125,000. In addition, they have permitted acquisition of immovable property abroad under the LRS.

In wake of this permission, the RBI has clarified that post facto reporting to the Authorised Dealer (AD) Bank with respect to the acquisition of property overseas by a resident individual (under the LRS route) has been done away with.

RBI/2013-2014/624 A. P. (DIR Series) Circular No.138 dated 3 June 2014

RBI/2014-2015/132 A. P. (DIR Series) Circular No.5 dated 17 July 2014

RBI/2014-2015/171 A. P. (DIR Series) Circular No.19 dated 19 August 2014

Foreign investment in India by registered Foreign Portfolio Investors (FPIs), SEBI registered long-term investors and NRIs in non-convertible/redeemable preference shares or debentures of Indian companies

The RBI has permitted registered FPIs and Securities and Exchange Board of India (SEBI)-registered long-term investors to invest on a repatriation basis, in non-convertible/redeemable preference shares or debentures issued by an Indian company, which are listed on a recognized stock exchange. The investment will be within the overall limit of US$51 billion earmarked for corporate debt. Furthermore, NRIs may also invest, both on repatriation and non-repatriation basis, in non-convertible/redeemable preference shares or debentures.

RBI/2013-2014/632 A. P. (DIR Series) Circular No.140 dated 6 June 2014

Foreign investment in India by SEBI-registered long-term investors in government dated Securities

Currently, the limit for investments by FIIs, Qualified Foreign Investors(QFIs) and longterm investors in government securities stands at US$30 billion, out of which a sub-limit of US$10 billion is available for investment by long-term investors in government dated securities.

The RBI has decided to increase the investment limit in government securities available to FIIs/QFIs/FPIs by US$5 billion by correspondingly reducing the amount available to long-term investors from US$10 billion to US$5 billion within the overall limit of US$30 billion. The incremental investment limit of US$5 billion will be required to be invested in government bonds with a minimum residual maturity of three years. Furthermore, all future investment against the limit vacated when the current investment by an FII/QFI/FPI runs off either through sale or redemption will also be required to be made in government bonds with a minimum residual maturity of three years. It is, however, clarified that there will be no lock-in period and FIIs/QFIs/FPIs will be free to sell the securities (including that are currently held with less than three years of residual maturity) to domestic investors.

RBI/2014-2015/134 A. P. (DIR Series) Circular No.13 dated 23 July 2014

Pledge of shares for business purposes in favor of NBFCs

AD banks have been delegated the powers to allow pledge of shares held by NR investor/s, in favor of non-banking finance companies (NBFCs), to secure credit facilities extended to the resident investee company for bona-fide business purposes/operations, subject to compliance with certain conditions. Earlier shares of an Indian company held by the NR investor could have been pledged in favor of a bank in India.

RBI/2013-2014/633 A. P. (DIR Series) Circular No.141 dated 06 June 2014

48 Tax Digest Home

Delegation of powers to AD Banks for transfer of assets of liaison office (LO) / branch office (BO) /project office (PO) of a foreign entity either to its wholly owned subsidiary (WOS) /joint venture (JV) /others in India

The RBI has delegated the powers to AD Category-I banks to approve transfer of assets of LO/BO/PO at the time of winding up subject to compliance of specified condition. The aforesaid general permission is available only if the LO/BO/PO is closing its operations in India and in case of transfer of assets during the operations of the LO/BO/PO, approval from the RBI would continue to be applicable.

RBI/2013-2014/640 A. P. (DIR Series) Circular No.142 dated 12 June 2014

Export and import of currency: enhanced facilities for residents and non-residents

Residents travelling aboard/NR visiting (except citizens of Pakistan and Bangladesh and also other travellers coming from and going to Pakistan and Bangladesh) India have been permitted to take out/ bring along Indian currency notes up to INR25,000 while leaving/arriving in to the country.

RBI/2013-2014/648 A. P. (DIR Series) Circular No.148 dated 19 June 2014

Master circulars issued by RBI

The RBI issued Master circulars for 2014–15 on 1 July 2014. The circulars are available on the website of the RBI.

RBI Master Circulars at www.rbi.org.in Dated 1 July 2014

Financial Commitment (FC) by Indian party under overseas direct investments (ODI) — restoration of limit

As a measure to arrest the depreciation of rupee by controlling the outflow of foreign exchange, the RBI in August 2013 had reduced the limit of overseas investment under the automatic route from 400% of net-worth to 100% of net-worth. Keeping in mind the current improved market conditions, the RBI has now decided to restore the limit of ODI/ Financial Commitment (FC) to be undertaken by an Indian party under the automatic route to 400% of its net worth.

It has, however, been decided that any financial commitment exceeding US$1 billion (or its equivalent) in a financial year will require prior approval of the RBI even when the total FC of the Indian party is within the 400% of net-worth.

RBI/2014-2015/117 A. P. (DIR Series) Circular No.1 dated 03 July 2014

Issue of partly paid shares and warrants by Indian company to foreign investors

To attract further foreign investments by reducing the administrative process of taking approval, the RBI has permitted issuance of warrants and partly paid equity shares under the automatic route subject to entry restriction/sector cap. The conditions for issue of share warrants and partly paid equity shares are as follows::

• Share warrants have been included in the definition of “security” according to FEMA and hence, allowed to be issued under the automatic route.

• Partly paid equity shares allowed to be issued under the automatic route. Requisite filing, i.e., form FC-GPR shall be undertaken within 30 days of each tranche of payment in case of partly paid equity shares.

• The price for share warrants and partly paid equity shares will be decided up front and 25% consideration (including share premium in case of partly paid equity shares) will be received up-front.

• The balance amount towards fully paid up equity shares will be received within a period of 12 months and in case of share warrants within a period of 18 months.

• The period of 12 months (in case of partly paid equity shares) can be exceeded in case of listed as well unlisted companies where the issue size exceeds INR5 billion and the issuer company complies with the provisions of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations regarding appointment of monitoring agency (use of proceeds of the issue to be monitored by a public financial institution or by one of the scheduled commercial banks).

49 Tax Digest Home

• If the entity issuing share warrants or partly paid equity shares come under the approval route sector, prior Foreign Investment Promotion Board (FIPB) approval will be required for issuance of the above instruments.

• NRI investment on non-repatriation route in partly paid equity shares/warrants will be governed by non-repatriation guidelines.

RBI/2014-2015/123 A. P. (DIR Series) Circular No.3 dated 14 July 2014

Issue/transfer of shares or convertible debentures — revised pricing guidelines

The RBI, in its First Bi-monthly Monetary Policy Statement for financial year 2014–15, had announced to withdraw all the existing guidelines relating to valuation in case of any acquisition/sale of shares of an Indian company. It was proposed in the monetary policy statement that the valuation will be based on internationally acceptable market practices.

In continuation of the announcement the RBI has notified revised valuation guidelines by changing the valuation norms from Discounted Cash Flow (DCF)/Return on Equity (ROE) to any internationally accepted pricing methodology. The guidelines will be applicable on issue/transfer of equity instruments and also investment with optionality clause. A synopsis of the guidelines is as follows:

• Equity Shares, Convertible Preference Shares or Convertible Debentures (Equity Instruments) of unlisted company will be issued at a price not lower than value arrived at according to any internationally accepted pricing methodology for valuation of shares on arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

• The NR investor will be eligible to exit from the investment in equity instruments of an Indian company with or without the optionality clauses at a price not more than that arrived at according to any internationally accepted pricing methodology on arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. The guiding principle for put option will be that the NR investor is not guaranteed any assured exit price at the time

of making such investment/agreements and will exit at a fair price computed as above at the time of exit, subject to applicable lock-in period requirement.

• The NR investor will be eligible to acquire equity instruments from resident shareholders at a price not less than the value arrived at according to any internationally accepted pricing methodology on arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

RBI/2014-2015/129 A. P. (DIR Series) Circular No.4 dated 15 July 2014

Refinancing of ECB at lower all-in-cost: simplification of procedure

The RBI has issued the circular whereby it has delegated the powers to the AD Category-I banks to approve even those cases where the Average Maturity Period (AMP) of the fresh External commercial borrowing (ECB) is exceeding the residual maturity of the existing ECB under the automatic route subject to certain conditions.

Furthermore, this facility will be available even in those cases where existing ECBs were raised under the approval route subject to the amount of new ECBs being eligible to be raised under the automatic route.

Currently, cases where the AMP of the fresh ECB is more than the residual maturity of existing ECBs, they are examined by the RBI under the approval route.

RBI/2014-2015/196 A. P. (DIR Series) Circular No.21 dated 21 August 2014

50 Tax Digest

Click on the links provided below to access some of our recently published articles.

In the press

Home

Strong focus on asset-creationRajiv Memani, Mint

A vision for future fiscal managementSudhir Kapadia, The Financial Express

The steps to the GSTSatya Poddar, Business Standard

Baby steps and the start of a long haulR.Anand, The Hindu Business Line

Budget FY15: Small Reformist Steps, Large Shadow of the Interim BudgetD.K.Srivastava, DNA

Budget 2014: Finance Minister Arun Jaitley tempered high aspirations for biz-friendly tax outcomeSudhir Kapadia, The Economic Times

Budget 2014: What Corporate India Wants The FM To DoPranav Sayta, CNBC – The Firm website

TARC report: Taxman needs to change old mindsetSudhir Kapadia, The Financial Express

Investor Sentiment Hampered By Excessive Litigation In TaxRajan Vora, CNBC – The Firm website

A blueprint to encourage tax complianceSatya Poddar, Business Standard

FM ticked all the right boxesSurabhi Marwah, Business Standard

Budget 2014: Should Rationalise Tax for Oil and Gas SectorSanjay Grover, NDTV Profit website

GST: Seeking A Place In The Budget PlatterBipin Sapra, CNBC – The Firm website

Raise Tax Exemption Limit To Rs 3 Lakh At LeastShalini Jain, Businessworld.com

Budget 2014-15: 10 Commandments On Tax Policy For FMSudhir Kapadia, CNBC website - The Firm

Home sweet homeR.Anand, The Hindu Business Line

Reasons to cheerAmarpal Chadha, Asian Age | Deccan Chronicle

Tax implications of buying second house with a loanSurabhi Marwah, The Financial Express

CBDT Circular Targeting SEZ Units in IT SectorRajiv Chugh, CNBC-The Firm website

Impact of Finance Act 2014 on sale of unlisted securitiesPinky Khanna, The Financial Express

Need for a booster shotRitika Loganey Gupta, Financial Chronicle

A setback for alternative investment fundsSubramaniam Krishnan, The Financial Express

Taxman’s hostility must endHarishanker Subramaniam, The Financial Express

Budget 2014 – Corporate Tax RegimeSamir Kanabar, DNA

Budget 2014: Impact on ConsumersHeetesh Veera, DNA

Budget 2014: Impact on Manufacturing sectorSamir Kanabar & Heetesh Veera, DNA

Budget 2014 – Bold reforms in infrastructure sectorSamir Kanabar, DNA

Indirect Tax: FM has delivered!Heetesh Veera, DNA

MODIfied Budget 2014 gives reasons to cheer to Aam Aadmi!Mayur Shah, DNA

MSME sector needs access to finance, markets and skilled manpowerAmar Shankar, ET Online

Budget 2014: Infrastructure & ManufacturingGaurav Karnik, ET Online

Budget 2014: Why Govt May Not Eliminate STT?Amrish Shah, CNBC – The Firm website

Budget 2014: Cenvat Credit –Time For A Makeover?Abhishek Jain, CNBC – The Firm website

Budget 2014: Expectations Of Acche Din On Personal TaxPramod Achuthan, CNBC – The Firm website

Budget 2014: Indirect Tax Reforms AgendaDivyesh Lapsiwala. CNBC – The Firm website

Income Tax Cuts to Help Retail SectorRahul Kakkad, NDTV Profit website

Economic Growth Agenda in Budget to Drive Auto SectorChetan Kakariya, NDTV Profit website

Infrastructure Gets Much-Need Thrust from BudgetSamir Kanabar, NDTV Profit website

51 Tax Digest Home

No Significant Boost Given to Oil & Gas Sector in BudgetSanjay Grover, NDTV Profit website

Budget 2014: A Positive Beginning on Tax ReformsKT Chandy, NDTV Profit website

Budget 2014: An Attempt at Rationalisation of Indirect TaxesAbraham Kuruvilla, NDTV Profit website

Budget 2014: Tax Changes You Need to KnowAmarpal S Chadha, NDTV Profit website

Proposals in Budget 2014 are a mixed bag for the auto industryVinesh Kriplani, ET Online

Budget 2014: Suitable provisions required for the growth of the power sectorRaju Kumar, ET Online

Some key things that Budget 2014 has for a common manAlok Agrawal, ET Online

Budget 2014: Pharma sector left ailing for remedial measuresRahul Patni, ET Online

Budget 2014: Realty sector’s wish list fulfilledMaadhav Poddar, ET Online

Modi government has delivered a pragmatic Budget 2014Aashish Kasad, ET Online

Key amendments in the Indian transfer pricing regulationsAvan Badshaw, The Financial Express

Companies Act 2013: M&A norms need some tweakingAmrish Shah, The Financial Express

How the finance Minister can make the common man happyMayur Shah, DNA

Tax Bottlenecks for Telecom in IndiaVishal Malhotra, Voice & Data

Budget 2014 ExpectationsSunil Kapadia & Suresh Nair, CFO Connect Magazine

Budget 2014: Out-of-the-box ideas for FM Jaitley to manage coffers & fulfil hopesShalini Mathur, ET Online

Budget 2014: What the government can do to give auto industry the much needed pushVinesh Kriplani, ET Online

Budget 2014: Six changes needed for better roads, rail and air transportAdil Zaidi, ET Online

Budget 2014: REITs regime will facilitate investment in real estateMaadhav Poddar, ET Online

Budget 2014: Key expectations of the infrastructure sector from policy and tax perspectiveSamir Kanabar, ET Online

Budget 2014: Expectations from the pharmaceutical & healthcare IndustryRahul Patni, ET Online

Budget 2014: Changes FIIs hope FM brings to end ‘tax terrorism’Tejas Desai, ET Online

Budget 2014: 10 big changes that can transform the realm of corporate taxationAashish Kasad, ET Online

Budget 2014: 10 big indirect tax changes that can transform industryGyanendra Tripathi. ET Online

Budget 2014: 10 big changes in Personal Taxation that can transform the industrySurabhi Marwah, ET Online

Budget expectations 2014: Oil & gas sectorRaju Kumar, ET Online

Accelerating GST reforms: Need of the hour for auto sectorSarika Goel, ET Online

Jaitley Should Address Retrospective Tax, Defer GAARKT Chandy, NDTV Profit website

Budget 2014 Should Outline Roadmap for GSTAbraham Kuruvilla, NDTV Profit website

Income Tax Benefits Should Be Adjusted to InflationAmarpal Chadha, NDTV Profit website

Budget 2014 Should Ease Service Tax on Rent Payable by Small RetailersRahul Kakkad, NDTV Profit website

Arun Jaitley Should Offer More Tax Sops for Real Estate SectorMaadhav Poddar, NDTV Profit website

Look beyond the black money SITRajendra Nayak, The Financial Express

Getting related-party transactions rightAvan Badshaw, The Financial Express

Working abroad? EPFO makes coverage certificate issuance simple, hassle-freePuneet Gupta, The Financial Express

Inching closer to GSTBipin Sapra, The Financial Express

Complying with I-T provisions of clubbing incomeJyoti Vasan & Shakti Chawla, The Financial Express

52 Tax Digest

Direct Tax

Compilation of Tax Alerts

S. No. Title Date of the alert Citation/Notification/Circular

1. Mumbai Tribunal confirms levy of penalty in case of a transfer pricing adjustment

4 June 2014 Deloitte Consulting India Pvt. Ltd. v. ACIT [TS-148-ITAT-2014(Mum)-TP]

2. Pune Tribunal rules on eligibility of one-member shipping company to claim benefits under Cyprus DTAA

6 June 2014 Shaan Marine Services Pvt. Ltd. v. DDIT [TS-327-ITAT-2014(PUN)]

3. Delhi High Court upholds deductibility of guarantee commission to directors

6 June 2014 Controls & Switchgear Contractors Ltd. v. DCIT [W.P.(C) 2845/2014 & CM APPL. 5898/2014]

4. Cochin Tribunal rules no disallowance of expense for not withholding taxes as payment became taxable on account of amendments made subsequently with retrospective effect

12 June 2014 Kerala Vision Ltd. v. ACIT [TS-342-ITAT-2014(COCH)]

5. Delhi Tribunal rules on existence of PE and on profit attribution to the PE

18 June 2014 Nortel Networks India International Inc. v. DDIT [TS-355-ITAT-2014(DEL)]

6. First report by the Tax Administration Reform Commission, a comprehensive coverage

18 June 2014 The first report of TARC under the chairmanship of Dr. Parthasarathi Shome made available to public in June 2014.

7. Hyderabad ITAT rules no supervisory PE in the absence of construction or building site under India-Germany DTAA

30 June 2014 GFA Anlagenbau Gmbh v. DDIT [TS-383-ITAT-2014(HYD)]

8. Kolkata Tribunal denies capital gains exemption on conversion of a private limited company into an LLP for violation of exemption condition

2 July 2014 Aravali Polymers LLP v. JCIT [TS-385-ITAT-2014(Kol)]

9. Delhi Tribunal rules on inapplicability of disallowance for procedural breach

3 July 2014 Jai Surgicals Ltd. v. ACIT [TS-378-ITAT-2014(DEL)]

10. Tribunal admits contents of LinkedIn profiles of employees as additional evidence for PE determination of employer

8 July 2014 GE Energy Parts Inc. v. ADIT [TS-400-ITAT-2014(DEL)]

11. Delhi ITAT rules on DTAA benefit to recipient of income who is not a beneficial owner

9 July 2014 JC Bamford Investments Rocester v. DDIT [ITA No. 80/Del/2013]

12. Bombay HC rules on time limit for withholding tax proceedings

17 July 2014 DIT v. Mahindra & Mahindra Limited [TS-404-HC-2014(BOM)]

13. Chennai ITAT rules that gift by corporates is valid in law and exempt from capital gain tax

18 July 2014 Redington (India) Ltd. v. JCIT [TS-419-ITAT-2014(CHNY)]

14. Chennai Tribunal rules incubation of start-ups by a private trust is not a business activity

22 July 2014 IMFR Trust v. ACIT [TS-425-ITAT-2014(CHNY)]

15. Mumbai Tribunal rules charterer includes slot charter arrangement for availing treaty benefit under Article 8 of India–Malaysia DTAA

22 July 2014 MISC Berhad v. ADIT [TS-418-ITAT-2014(Mum)]

53 Tax Digest

S. No. Title Date of the alert Citation/Notification/Circular

16. CBDT clarifies allowability of profit-linked deduction to new SEZ unit upon transfer of technical manpower up to 20%

29 July 2014 CBDT Circular No. 12 / 2014 dated 18 July 2014

17. Delhi HC rules sale of CCDs is capital gains and exempt under India-Mauritius DTAA

6 August 2014 Zaheer Mauritius v. DIT [TS-464-HC-2014(DEL)]

18. Karnataka HC rules that sourcing support activities carried on by a foreign company is entitled to “purchase exclusion” provision

26 August 2014 DIT/ACIT v. Mondial Orient Ltd. [ITA No. 204/2010]

19. India’s Delhi Tribunal rules on TP issues regarding AMP expenses, software support services and CAPM risk

27 August 2014

20. Increase in statutory salary ceiling from INR 6,500 to INR 15,000 per month for coverage and contributions for local employees under the Indian social security schemes

28 August 2014 Notification of the proposals to increase the statutory salary ceiling

21. Delhi High Court rules 50% as the benchmark to evaluate ‘substantial value’ on taxation of indirect transfers

28 August 2014 DIT v. Copal Research Ltd. [TS-509-HC-2014(DEL)]

22. CBDT sets up a Committee to deal with retroactive “indirect transfer” taxation

1 September 2014 CBDT order dated 28 August 2014 directing to set up the Committee.

23. International Workers joining on or after 1 September 2014 not covered under the Pension Scheme

2 September 2014 Amended Pension Scheme applicable from 1 September 2014

24. Delhi Tribunal rules secured lender taking possession of mortgaged assets under SARFAESI Act does not result in “transfer”

2 September 2014 Rajasthan Petro Synthetics Ltd. v. ACIT[TS-525-ITAT-2014(DEL)]

54 Tax Digest

Indirect Tax

S. No. Title Date of the alert Citation/Notification/Circular

1. Key highlights of the Maharashtra State budget for 2014-15

6 June 2014 Key budget announcements made in the additional budget for FY 2014-15 with respect to MVAT and other state levies

2. Concessional Excise duty rates for automobiles, consumer goods and capital goods extended till 31 December 2014

26 June 2014 CBEC Notification No. 6/2014- Central Excise dated 25 June 2014

3. Draft Rules on establishment of Maharashtra check posts and generation of electronic waybills

8 July 2014 Notification No VAT 1514/CR 80/Taxation-1. Dated 23 June 2014

4. Draft Rules under Haryana VAT for composition scheme

9 July 2014 Draft Rules vide Notification No. Web 6/H.A.6/2003/S.60/2014 dated 5 July 2014, issued by the Excise and Taxation Department of Haryana,

5. Finance Bill passed by Lok Sabha – Proposed Indirect tax amendments

28 July 2014 Indirect tax amendments to the Finance (No.2) bill passed in the Lok Sabha on 25 July 2014

6. Delhi High Court quashes Rule 5A(2) of the Service Tax Rules and the Instructions issued by CBEC which prescribes manner of an audit and the records that can be called for by the authorities.

6 August 2014 Travelite (India) vs. UOI & Ors. [TS-310-HC-2014(DEL)-ST]

7. Bombay HC Ruling in case of Exide Industries Limited on exemption under Section 5(3) of CST Act for penultimate sale of goods for export.

14 August 2014 Exide Industries Ltd. v. State of Maharashtra and Ors[TS-315-HC-2014(BOM)-VAT]

55 Tax Digest

Regulatory

Home | Previous

S. No. Title Date of the alert Citation/Notification/Circular

1. FEMA update - Overseas Direct Investment

4 July 2014 A.P. (DIR Series) Circular No.1 dated 3 July 2014 issued by the RBI

2. FEMA Amendments on share warrants and partly paid equity shares

16 July 2014 Notifications with respect to the inclusion of share warrants.

3. Draft Guidelines for licensing of ‘Small Banks’ and ‘Payments Banks’ in the private sector

22 July 2014 Draft guidelines issued by RBI for public comments

4. CBDT provides clarification on taxability of AIFs having status of non-charitable trusts

30 July 2014 CBDT Circular no. 13 of 2014 dated 28 July 2014.

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