Tax Scout Oct-Dec, 2017 - Copy2 - Advocates & Solicitors · Tax Scout | OCT - DEC, 2017 ... • SC stays operation of Delhi HC judgment & order in Bhushan Steel on taxability of subsidy

© 2017 Cyril Amarchand Mangaldas

FOREWORDWe are delighted to present to you, the latest issue of the Tax Scout, our quarterly update on recent developments in the eld of direct and indirect tax laws for the quarter ending December 2017.

The OECD/G20 had formulated 15 Base Erosion Prot Shifting Action Plans to address base erosion and prot shifting carried out by tax planning arrangements. To implement these Action Plans, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Prot Shifting (MLI) was suggested as an alternative to the onerous process of treat-by-treaty amendment for implementing BEPS. As the cover story, we have discussed India’s position in respect of the provisions in the MLI and its implications on taxpayers.

Further, the implementation of GST and the Government of India’s pro-export approach had given an impetus to the government for re-looking at the Foreign Trade Policy 2015-2020. This time, as a part

of the Cover Story, we have discussed the various modications made to the Foreign Trade Policy 2015-2020, subsequent to its mid-term review, as released by the Directorate General of Foreign Trade.”

Additionally, we have also analyzed some of the important rulings by the Indian judiciary and certain key changes brought about by way of circulars and notications in the direct and indirect tax regimes

during the October - December Quarter.

We hope you nd the newsletter informative and insightful. Please do send us your comments and feedback at [email protected].

Regards,Cyril Shroff Managing Partner Cyril Amarchand Mangaldas Email: [email protected]

TAX SCOUTA quarterly update on recent developments in Taxation Law

OCTOBER 2017 - DECEMBER 2017

Tax Scout | OCT - DEC, 2017


INDEX

02

Cover Stories

• Implications of India’s position in respect of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Prot Shifting. 04

• Alchemised Foreign Trade Policy 2015 – 2020. 07

Case Law Updates – Direct Tax

• Delhi HC reads down section 145(2) of the IT Act and various ICDS provisions issued thereunder. 11

• Purpose of the subsidy is conclusive test to determine nature of the subsidy. 17

• Depreciation permissible even when the entire cost of the asset has been allowed as application of income. 19

• SC stays operation of Delhi HC judgment & order in Bhushan Steel on taxability of subsidy amount. 21

• Deemed income provisions under section 56(2)(viib) applies to all class of shares and tax ofcer can challenge the valuation report submitted by taxpayer. 23

• CBDT cannot issue circulars having retrospective operation. 25

• Delhi HC issues guidelines for reopening of assessment under section 147 of the IT Act. 27

• Fixed mobilization fees received by non-resident for transportation of drilling units to India, having nonexus with the expenses incurred, cannot be construed as reimbursement of expenses. 30

• No benet under section 80-IB if SSI does not continue to meet eligibility criteria in subsequent years. 33

• Only solar days relevant for establishment of service PE in India; FTS not taxable if no specicprovision under the DTAA. 36

• Outsourcing of back ofce support functions does not create a PE. 38

• No tax on JDA until its registration. 41

Case Law Updates – Indirect Tax

• Entire fees received by hospital is towards the provision of health care services. 45

• No service tax liability on amounts paid towards salaries and perquisites of deputed expats andcommission received for marketing of foreign entity. 48

• Bona de purchasers cannot be denied the benet of input tax credit under the Delhi VAT Act, 2004. 51

• Exemption of excise duty extends to education and higher education cess imposed on such excise duty. 54

• Provisions of a state legislation cannot override the objects of a benecial scheme. 56

Non Judicial Updates – Direct Tax

• CBDT releases nal rules on the Country by Country reporting and Master File implementation. 59

• CBDT clarication pertaining to indirect transfer. 61

• Draft amendment to rule 17A of the IT Rules and Form 10A. 61

• CBDT issues POEM clarication for operations carried on through regional headquarters. 62

Non Judicial Updates – Indirect Tax

• CBEC claries applicability of IGST on sale/transfer of goods while being deposited in a warehouse. 65

• CBEC issues clarications regarding the transaction value and levy of GST on various services such as accommodation services, betting and gambling in casinos, horse racing, admission to cinema, homestays,printing and legal services. 65

• CBEC claries refund/claim of countervailing duty as Duty Drawback 66

GST Updates

• Provisional benet of Input Tax Credit 68

• Relief for logistics sector 68

• Relief to issues pertaining to GSTN portal 68

Glossary 69


© 2017 Cyril Amarchand Mangaldas03

COVER STORIES



1. Implications of India’s position in respect of

the Multilateral Convention to Implement Tax

Treaty Related Measures to Prevent Base

Erosion and Prot Shifting

BACKGROUND

The OECD/G20 Base Erosion Prot Shifting

(“BEPS”) project was initiated to address base

erosion and prot shifting carried out by tax planning

arrangements that availed benecial provisions of

applicable tax treaties by exploiting mismatches in tax

rules across countries. The project identied 15 action

plans (“BEPS Action Plans”) to curb such practices,

and consequently, ensure that prots of an enterprise

are charged to tax at the place of value creation. It was

found that more than 3,000 DTAAs would have to be

amended, to introduce provisions that constrain

BEPS. Consequently, an Ad-hoc Group, of which

India was part of, was formed and entrusted with the

task of preparing a multilateral instrument for

implementing BEPS, which would be applicable

concurrently with DTAAs. This multilateral instrument

was suggested as an alternative to the onerous

process of t reat -by- t reaty amendment for

implementing BEPS. The Ad-hoc Group came up with

the Multilateral Convention to Implement Tax Treaty

Related Measures to Prevent Base Erosion and Prot

Shifting (“MLI”), and adopted it on November 24,

2016. Subsequently, India signed the MLI on June 7, 1 2017.

2As mentioned above, upon coming into effect, the

MLI would apply concurrently with existing DTAAs,

and modify their application, bringing it in line with the 3measures outlined in the BEPS Action Reports.

Further, a DTAA would be subject to such modication

only if both parties to such DTAA (collectively, referred

to as “Parties” and individually as “Party”), notify the 4DTAA as being covered under the MLI. When a DTAA

is notied by both Parties, it is referred to as a covered

tax agreement (“CTA”). It should be noted that a

jurisdiction is not obligated to subject to the MLI, all

DTAAs which it is party to.

Additionally, the MLI prescribes certain minimum

standards pertaining to abuse of treaty provisions and

dispute resolution, which all participating countries are 5 required to adhere and in respect of such provisions,

there may even be mandatory amendment of all CTAs 6to ensure observance of the minimum standards,

unless the CTA already meets such standards. In

relation to its provisions that do not pertain to the

prescribed minimum standards, the MLI may provide

exibility to a Party, by way of an option to opt out of

such provision or part of the provisions through

reservations. In general, the MLI provides, in majority

of its provisions, that should a Party not reserve the

applicability of a particular provision and not notify the

respective provision of a CTA, or if a Party does not

state that such provision is reserved in its entirety, then

that MLI provision would be added to the CTA and

prevail over the portion of the CTA to the extent of the

inconsistency. Further, in certain instances, the MLI

may also provide a Party, an option to choose among

alternative provisions intended to address the same

concern. The chosen alternative would be applicable,

however, only if both Parties opt for it. If one Party to

the DTAA chooses an option, and the other Party

chooses a different option or does not choose any

option, then none of the options would apply to the

relevant CTA.

Under its provisional list, India notied 93 DTAAs, i.e.

all DTAAs that it has entered into, thereby subjecting

such treaties to the selected MLI provisions. In light of

this background, the position adopted by India with

respect to the MLI provisions and the implications

thereof, are discussed in the ensuing paragraphs.

Implications of India’s Position

Provisions concerning Minimum Standards

Prevention of treaty abuse

As discussed earlier, prevention of treaty abuse is a

minimum standard that participants to the MLI are

required to adhere to. To that end, the MLI requires the

1 Government of India Press Release dated June 7, 2017.2 The MLI would enter into force on the rst day of the month following the expiry of 3 calendar months from the date on which 5 signatories have deposited their instrument of

ratication, acceptance or approval with the OECD. For each country signing the MLI after the fth instrument is deposited, the MLI would come into force on the rst day of the month following the expiry of three months from the date of such deposit.

3 In that regard, the MLI differs from protocols to a DTAA, as the latter directly amend the DTAA instead of merely operating on a concurrent basis. 4 Where an MLI provision is found to supersede or modify an existing provision of a CTA, the parties, to such CTA, are generally required to make a notication to the OECD

specifying such provisions.5 The minimum standards prescribed under the MLI pertain to BEPS Action 6 (Preventing the Granting of Treaty Benets in Inappropriate Circumstances) and BEPS Action 14

(Making Dispute Resolution More Effective), respectively. 6 To be determined in the course of the review and monitoring process as provided under the BEPS framework.



insertion of a ‘Principle Purpose Test’ (“PPT”) in the

CTAs. This would entail an express inclusion in the

language in the Preamble of CTAs to state that their

purpose is not to create opportunities for tax evasion,

tax avoidance or double non-taxation. As a result of

the PPT, benet of the CTA would not be granted in

respect of a transaction, if obtaining such benet was

one of the principal purposes of such transaction.

Being a minimum standard, PPT would be applicable

to all CTAs India has entered into.

Additionally, the MLI requires that participating

countries include an anti-abuse provision as a

minimum standard in the CTAs. As per the MLI, such

participants have an option of either opting for the

PPT alone. Alternatively, the countries may negotiate

PPT along with a simplied Limitation of Benets

(“LOB”) provision or a detailed one. The simplied

LOB provides for certain conditions which need to be

satised to avail the benets under a DTAA.

Alternatively, such countries may negotiate a detailed

LOB clause so as to satisfy the minimum standard.

India has opted for the PPT along with a simplied

LOB clause to apply to all its DTAAs. However, a

signicant number of India’s treaty partners have not

even opted for a simplied LOB clause. Therefore, in

all such cases, only a PPT would be applicable to the

relevant DTAAs.

The question, of whether one of the principal

purposes of a transaction was to avail benet under

an applicable CTA, to determine if application of PPT

would lead to denial of tax benets, entails a

subjective inquiry on part of tax-authorities of a

jurisdiction. It is possible that the IRA interpret the PPT

in wide terms so as to prevent aggressive tax planning

by the taxpayers. In such a case, a taxpayer,

aggrieved by denial of benets due to the operation of

the PPT, may approach courts of law to seek relief.

However, this gives rise to the possibility of courts in

different jurisdict ions developing their own

jurisprudence on this aspect, which may not be

consistent with each other. Therefore, guidance from

the OECD, with respect to circumstances in which the

PPT may be applicable, would be welcome.

Additionally, it is pertinent to note that India introduced

the General Anti Avoidance Rule (“GAAR”) under the

IT Act, which is effective from AY 2017-18. The IRA

may invoke the GAAR when they are of the view that a

taxpayer is party to an ‘impermissible avoidance

arrangement’, i.e. an arrangement to obtain a tax

benet. In such a case, the IRA may, along the lines of

‘substance over form’ principle, amend, deny or re-

characterize any transaction or even deny the benet

under a DTAA, if the transaction is found to lack

commercial substance. Therefore, it should be kept in

mind that notwithstanding that on account of the PPT,

a transaction is denied benets available under a

DTAA, GAAR may still be invoked by the IRA. This is 7 because the CBDT by way of a Circular dated January

27, 2017, claried that GAAR may be applied to a

transaction which is subject to a specic anti

avoidance rule, i.e. the PPT in the instant case.

Dispute resolution

The MLI requires that all CTAs should include Mutual

Agreement Procedures (“MAP”) as a minimum

standard. Further, the MLI provides that the

participating countries should allow a taxpayer who is

aggrieved on account of denial of benets under the

CTA by a Party, to present its case to a competent

authority of either Party under the MAP provisions of

the CTA. Alternatively, the Parties may choose to allow

such taxpayer to rst present its case before a

competent authority of the Party in which it is resident.

Subsequently, such competent authority would

bilaterally negotiate the dispute with its counterpart of

the Party. India has opted for the second alternative;

thus, under CTAs that it is party to, an aggrieved

taxpayer would be allowed to present its case only in

the country of its residence.

In the context of dispute resolution, it is important to

consider Article 19 of the MLI which provides for

mandatory binding arbitration in the event that

competent authorities of the Parties are unable to

reach a decision under MAP within two years. India

has expressed reservations against application of this

provision, citing its adverse implications on its

sovereignty. However, absence of this provision may

cause prolonged MAP proceedings in relation to a

dispute.

Lastly, it is important to note that MAP would involve

only competent authorities from each Party to the CTA, 7 Circular No. 7 of 2017 dated January 27, 2017.



the taxpayer would have virtually no engagement in

the same. This may be a cause of concern for

taxpayers considering that an inimical decision would

affect their interests the most.

Other provisions

Under its provisional list, India has accepted MLI

provisions addressing the articial avoidance of PE

under commissionaire structures. As mentioned

earlier, only when both Parties to a CTA notify the

provision as being applicable, would commissionaire

arrangements be considered as constituting a PE.

Accordingly, it would be prudent for the businesses to

maintain detailed documentation indicating that the

person alleged to be its agent undertook activities in

an independent fashion and that substantial review

and requisite modication of the contract was carried

out by the parent entity.

India has also not expressed reservations against MLI

provisions that exempt specic activities as being

considered to constitute a PE. As mentioned above,

the said provision would be applicable to a CTA only if

the other Party to the CTA does not reserve the same.

Certain provisions of the MLI seek to address

instances of articial splitting of contracts by a

taxpayer among several entities so that their activities

do not give rise to a PE. As India has not expressed

any reservations against this MLI provision, it would

apply to a CTA to which India is party, if the other Party

does not express a reservation against it.

Furthermore, it may be observed that India has not

accepted the MLI provisions pertaining to methods for

elimination of double taxation. Therefore, relief from

double taxation would be available in the same

manner as exists in the DTAAs, at present.

Other concerns

As noted earlier, the applicability of a particular MLI

provision is completely contingent on the choices that

Parties to a DTAA make. Therefore, events pertaining

to ratication of MLI by participating countries, entry

into force of the MLI and entry into effect of MLI for

each CTA, are crucial in the determination of how the

MLI would modify application of a DTAA. Accordingly,

these developments should be closely followed and

accounted for, when businesses seek to structure their

operations.

For instance, the MLI would result in modications to

India’s DTAAs with only those countries who are party

to the MLI, and wish to subject such DTAAs to the MLI.

However, countries such as the USA, UAE, Malaysia

and Thailand did not participate in the signing

ceremony. Further, Germany and Mauritius have not

notied their DTAAs with India as a CTA under the MLI.

Additionally, certain other jurisdictions such as

Panama have expressed their intent to sign the MLI.

Therefore, the DTAAs that India has entered into with

these countries would remain unaffected. Further, MLI

grants participating countries exibility with regards to

choosing optional provisions, making or withdrawing

from reservations even after their signing the MLI.

Thus, it is critical to observe closely changes that India

and other countries make so to accurately assess the

impact of the MLI.

In a similar fashion, it may be noted that the MLI

provisions pertaining to formation of PE permit Parties

to DTAAs to adopt a particular approach from among

the given options, the expanded PE exposure may

vary from country to country depending on the

decisions taken by such Parties.

Conclusion

The MLI is a positive step forward in the ongoing

efforts to address BEPS as it attempts to ensure that

prots are taxed where substantive economic

activities responsible for generation of such prots are

carried out and where value is created. Its application,

in respect of DTAAs that India is party to, is subject to

several factors such as decisions taken by the other

Party in relation to the MLI.

At the same time, given that the MLI was introduced to

combat business arrangements responsible for

BEPS, taxpayers in India, should determine carefully

which provisions of a DTAA and the MLI are applicable

to them. This is especially because violation of such

provisions would not only result in denial of benets

provided under such DTAA, but may also invite the

application of GAAR by the IRA.



2. Alchemised Foreign Trade Policy 2015 – 2020

The Directorate General of Foreign Trade (“DGFT”)

notied the revised Foreign Trade Policy 2015 – 2020

(“FTP”), with effect from December 05, 2017, post its

mid-term review.

The FTP has been revised and updated in view of

aligning it with the new GST regime implemented in

India with effect from July 01, 2017. The erstwhile

indirect tax regime provided for tax free domestic

procurement as well as import, of raw materials /

inputs and capital goods, under the Advance

Authorization, Export Promotion of Capital Goods

(“EPCG”) and 100% Export Oriented Unit (“EOU”)

schemes. Post implementation of GST, the

requirement of upfront payment of GST on such

procurements, resulted in blockage of working capital

for exporters. In order to address such woes, the

revised policy provides for the continuation of the

facility of GST free procurements, for such exporters.

Further, sale or transfer of duty scrips issued under

the Merchant Exports from India Scheme (“MEIS”)

and Service Exports from India Scheme (“SEIS”) are

to be considered as exempt supplies under GST

legislations. The DGFT has also entered into an MOU

with the Goods and Services Network for sharing of

details of foreign exchange realisation and importer

export code data in order to strengthen the processing

of export transactions of taxpayers under GST,

reduce human interface and increase transparency.

Schemes and Incentives

The revised policy also entails various reforms in the

export strategy of India by way of introduction of new

schemes for promotion of exports, enhancement of

incentives under the existing export promotion

schemes and trade facilitation measures, in line with

the Government of India’s initiatives such as Make in

India, Skill India, Digital India, Start-up India and

Swatch Bharat. In terms of the Foreign Trade Policy

Statement 2015-2020 (“Policy Statement”), the

intent is to focus on exports from sectors involving

higher value addition and employment generation

with a strong requirement for domestic manufacturing

and enhancing export of goods of importance in the

world trade arena. Such product sectors include

medical equipment and devices, textile, electronic

components, defence, agricultural products, marine,

carpets, leather, health, handloom, coir, diamond,

gold, jute, jewellery etc.

In this regard, a new trust based Self Ratication

Scheme (“SRS”) has been introduced to allow duty

free procurement of inputs for export production on

self- declaration basis. Under the SRS, exporters shall

only be required to self-certify the requirement of duty

free raw materials or inputs and take authorization

from DGFT. The said scheme is initially made

available to Authorized Economic Operators (“AEO”).

AEOs are designated exporters receiving preferential

treatment at Custom as they have received a

certicate issued by the Central Board of Excise and

Custom on fullment of the prescribed criteria, in this

regard. It is expected to be benecial, particularly for

the pharmaceutical, chemical, textile and engineering

sectors.

Further, the Government had launched the Trade

Infrastructure of Export Scheme (“TIES”) in March

2017. TIES focuses on enhancing India’s competence

in the global export markets by establishing enhanced

and focused export infrastructure, rst and last mile

connectivity for export oriented projects, improving

quality and certication measures. The Government

intends to extend assistance in setting up and

upgradation of export intensive infrastructure projects

such as certication laboratories, cold chains, land

customs stations, quality testing, export warehousing,

dry ports, Special Economic Zones, airport/ port cargo

terminals, etc., under the said scheme.

In order to promote the export of focused products to

specic countries, the revised FTP, has introduced the

Market Access Initiative Scheme (“MAIS”), to develop

such specic markets through market research and

surveys. MAIS is intended to enhance exports by

assisting Trade/ Export promotion organisations,

National Level Institutions, exporters, laboratories,

Research Institutions, etc. by way of access to new

markets or increase in share in the existing markets.

In view of enhancing the value limit on free of cost

exports, the status holders shall be entitled to export

freely exportable items on free of cost basis for export

promotion, subject to an annual limit of INR 1 Crore or

2% of the average annual export realization, during the



preceding 3 licensing years, whichever is lower. In

relation to the pharmaceutical exports, the annual

limit shall be 2% of the annual export realisation

during the preceding 3 licencing years. In case of

government supplies and supplies of vaccines and

l i fesaving drugs to heal th programmes of

International agencies such as United Nations

Organisation, World Health Organisation and Pan

American Health Organization, the annual limit shall

be 8% of the average annual export realization during

the preceding 3 years.

The export incentives available under the MEIS and

SEIS have also been enhanced. MEIS incentives

based on Freight on Board value of exports has been

increased from 2% to 4% for ready-made garments

and made ups sectors of the textile industry. In

relation to Micro, Small & Medium Enterprises/ labour

intensive industries such as leather, electronic and

telecom components, rubber products, agriculture,

hand-tools, marine products, etc., the MEIS

incentives for exports has been increased by 2%.

SEIS incentives have been increased by 2% for

notied services such as hotel, education, hospital,

restaurant, legal, accounting, etc. Further, the time

period of validity of duty credit scrips issued in relation

to MEIS and SEIS, has been extended to 24 months

instead of the earlier period of 18 months.

Trade Facilitation Measures

Pursuant to India ratifying the Trade Facilitation

Agreement (“TFA”), the National Trade Facilitation

Committee (“NTFC”) has been set up under the

Cabinet Secretary. TFA deals with provisions in

relation to transparency, technology, simplication of

p rocedu res , r i sk based assessmen t and

infrastructure augmentation. The NTFC has set up

steering committees to focus on outreach,

infrastructure, legal issues and time release study. In

addition, a National Trade Facilitation Action Plan has

been formulated which identies various trade

facilitation measures with implementation timelines.

The Export Data Processing and Monitoring System,

a comprehensive IT-based system has been

developed by the RBI for monitoring the export of

goods and software and facilitating AD banks to report

various returns through a single platform.

A new logistics division has been created in the

commerce department to develop and co-ordinate the

implementation of an action plan for the integrated

development of the logistics sector. The said division

has proposed the setting up of an IT backbone and a

National Logistics Information Portal which will also be

an online logistics marketplace to bring together

logist ics service providers, buyers and the

Government agencies, on a single platform. This is

expected to bring down the overall cost of logistics as

well as increase the speed and the ease of movement

of goods a long wi th enhancing the g lobal

competitiveness of Indian goods.

In view of the focus on simplication of processes and

procedures on various fronts and in continuation of

measures such as the use of PAN as IEC, inter alia the

following initiatives have been introduced –

streamlining the processes in relation to shifting of

capital goods from one unit of the IEC holder to the

other, permitting the clubbing of EPCG authorizations

where the export obligation period has expired,

notifying a negative list of capital goods under the

EPCG scheme and removal of limit on entitlement of

DTA sale by EOUs.

Further, importers certied under the AEO Programme

(Tier 2 and 3) have been notied for availing the facility

of deferred payment of customs duty. Round the clock

customs clearance facility has been extended to all

bills of entry at 17 air cargo complexes and 19 sea

ports.

The Government’s intention behind the revised policy

is also to focus on increasing India’s exports in under

and un-tapped markets in high potential regions such

as Africa, to cover not just trade in goods and

investment but also in capacity building, healthcare

and education. Sectors like agro-processing,

manufacturing, mining, textiles, consumer goods,

infrastructure development and construction are areas

of interest. Further, the intent is to have a greater

engagement with Latin America and the Caribbean

region, including encouragement of project exports

through easy access to credit facilities.

In this regard, the FTP Statement envisages closely

monitoring the exports’ performance and taking

immediate action through state of art data analytics. In



this regard, a state of the art trade analytics division

shall be set up in DGFT for data based policy actions.

The said division is to process trade information from

Directorate General of Commercial Intelligence and

Statistics and other domestic and international data

bases related to India’s key export markets and

identify specic actions to address export interests in

various markets and products.

A professional team has been set up for enhancing

ease of trading across borders which shall handhold,

support and assist exporters with their problems

pertaining to exports, accessing export markets and

meeting regulatory requirements. The said team shall

examine the procedures and processes related to

clearances involved in trading across borders with a

view to simplify and rationalize them along with

tracking their implementation. In addition, systems

have been put in place for co-ordination between

customs and infrastructure ministries, to closely

monitor and address the reduction in the dwelling time

at ports, airports and Inland Container Depots.

Conclusion

The revised policy clearly showcases the emphasis of

the Government on exports. It reects the

Government’s pro-activeness in facilitating economic

growth, not only through incentivisation of export

transactions, but also the use of contemporary

technological resources for the progressive and

adaptive growth of exports.

However, the success of these initiatives would

depend on the implementation of these schemes and

incentives. Recently, the Department Related

Parliamentary Standing Committee on Commerce

released its 139th report on the impact of GST on

exports (“Report”). The Report highlights various

operational issues faced by exporters in relation to

refunds, duty drawback scheme, rebate of state levies

scheme, use of duty credit scrips, high-seas

transactions, payment of tax under reverse charge,

e t c . u n d e r t h e G S T r e g i m e , a n d m a k e s

recommendations for the resolution of the same.

Therefore, albeit theoretically well aligned, the timely

addressing of practical bottlenecks faced by

exporters, in their day to day operations, will be crucial

for the Government in achieving its intended objective

of export promotion.



CASE LAW UPDATES

- DIRECT TAX



8 In Chamber of Tax Consultants the Delhi HC read

down the powers of the Government in notifying

Income Computation and Disclosure Standards

(“ICDS”), under section 145 of the IT Act, which

conict with principles of taxation contained in the IT

Act, IT Rules and applicable judicial precedents as

they stand.

FACTS

The Finance Act, 1995 substituted section 145 of the

IT Act to provide that the taxpayers had to follow either

mercantile or cash system of accounting. The

substituted section 145 of the IT Act also empowered

the Government to notify any Accounting Standards

(“AS”) to be followed by any class of taxpayers or in

respect of any class of income. Pursuant to the

amendment, the Government notied two AS vide a 9Notication dated January 25, 1996, which were

borrowed from the ASs issued earlier by the Institute

of Chartered Accountants of India (“ICAI”).

Subsequently, the CBDT appointed the Accounting

Standards Committee to, inter alia, study the

harmonization of AS issued by ICAI with direct tax

laws and accordingly, suggest ASs to be adopted

under section 145 of the IT Act. This committee

drafted and recommended 14 tax ASs, against which

the Chamber of Tax Consultants (“Petitioner”), a

voluntary non-prot organisation, made detailed

representations pointing out how the proposed ASs

were against well-established legal positions.

However, Finance Act (No. 2), 2014 amended section

145 of the IT Act, empowering the Government to

notify ICDS, to be followed by any class of taxpayers

or in respect of any class of income. Successively, the

CBDT circulated 12 draft ICDS for public comments.

Eventually, following a series of notications issued by

the CBDT, the ICDS were nally notied vide a 10Notication dated September 29, 2016 (“Impugned

Notication”) which were required to be followed by

all the taxpayers following mercantile system of

accounting, for the purposes of computation of income

chargeable to tax under the head ‘Prots and gains of

business or profession’ and ‘Income from other

sources’, with effect from AY 2017-18. Subsequently, 11 the CBDT by a Circular dated March 23, 2017

(“Impugned Circular”), issued clarications in the

form of frequently asked questions to provide clarity

regarding the ICDS for better implementation thereof.

Following the issue of this circular, the Petitioner

approached the Delhi HC challenging the vires of

section 145 of the IT Act, as well as of the Impugned

Notication and the Impugned Circular.

ISSUES

(1) Whether the amendments to section 145 of the IT

Act are an instance of delegation by the

Parliament to the Government, of essential

legislative powers?

(2) Whether ICDS are an instance of excessive

delegation of legislative powers? Whether the

impugned ICDS are contrary to the settled law as

explained in various judicial precedents and are,

therefore, liable to be struck down?

(3) Whether the impugned amendments to section

145 of the IT Act, Impugned Notication and the

Impugned Circular, are violative of Articles 14, 19

(1) (g), 141, 144 and 265 of the Constitution?

DELHI HC READS DOWN SECTION 145(2) OF THE

IT ACT AND VARIOUS ICDS PROVISIONS ISSUED

THEREUNDER.

8 Chamber of Tax Consultants v. Union of India (2017) 87 taxmann.com 92 (Delhi HC).9 Notication No. 9949 [F.No. 132/7/95-TPL] dated January 25, 1996.10 Notication No. 87/2016 dated September 2, 2016.11 Circular No. 10 of 2017 dated March 23, 2017.



ARGUMENTS

It was argued on behalf of the Petitioner that the ICDS

had modied the basis of taxation as it prescribed that

income should be computed as per commercial

accounting principles but to the extent modied by the

ICDS. It was argued further that section 145 of the IT

Act, while delegating the power to the Government to

issue ICDS, had in effect delegated essential

legislative functions to amend the IT Act, especially to

the extent ICDS provisions altered the chargeability

and computation of taxable income. Thus, the

Petitioner contended that such unfettered powers

could not be delegated to the Government and it could

not override the provisions of the IT Act in exercise of

its delegated functions.

Further, the Petitioner urged that the ICDS

notications were contrary to the law, as its

implementation would render the judgments of HC

and SC, otiose. In this regard, reliance was placed on 12the decision of the Shri Prithvi Mills Ltd.

It was also argued by the Petitioner that the ICDS was

violative of the right to equality, enshrined in Article 14

of the Constitution, as it was applicable only to

taxpayers following mercantile system of accounting

and such classication of taxpayers did not have any

reasonable basis. Lastly, the Petitioner argued that

the ICDS created additional burden on the taxpayer,

as the taxpayer would be required to maintain two

sets of books of account, which would constitute

unreasonable restriction on freedom to conduct

business. Thus, the ICDS were violative of Article

19(1) (g) of the Constitution.

On the other hand, it was argued on behalf of the IRA

that the ICDS was only applicable to computation of

income and did not obligate the taxpayers to maintain

separate books of accounts. It was asserted that the

ICDS was introduced to codify the standards for

computation of income for greater clarity and to put a

check on the powers of the AO. Therefore, there was

no reason to object to the same. The IRA also argued

that the ICDS did not have the effect of overruling any

judicial precedent. Lastly, it was contended by the IRA

that every legislation brought with an economic

interest was based on experimentation. They relied 13 upon the SC case of Azadi Bachao Andolan to urge

that it was not open for the HC to examine the merits

and demerits of tax policy and how provisions of the

statute could best be implemented.

DECISION

Issue (I): Delegation of legislative function

The Delhi HC noted that the Impugned Circular, while

answering the question of whether the ICDS would

prevail over judicial precedents, had claried “that

ICDS have been notied after due deliberations and

after examining judicial views for bringing certainty on

the issues covered by i t . Cer ta in jud ic ia l

pronouncements were pronounced in the absence of

authoritative guidance on these issues under the Act

for computing income under the head 'Prots and

gains of business or profession' or income from other

sources…” Thus, the HC, after perusing the contents

of the Impugned Circular, was of the view that the

ICDS provisions were intended to prevail over judicial

precedents.

The HC explained that as per Article 265 of the

Constitution, no tax can be levied except under the

authority of law. The HC placed reliance on the

decision of Shri Prithvi Cotton Mill Ltd (supra) and held

that only the legislature was competent to make a

validation of law to override judicial precedents. Thus,

the power conferred upon the Government to notify

ICDS, under section 145(2) of the IT Act could not have

the effect of changing the basic principles of

accounting that have been recognized in the IT Act or

overriding a binding judicial precedent, without

carrying out necessary amendments to the IT Act

itself. Therefore, the HC read down section 145(2) of

the IT Act to restrict the powers of the Government to

notify ICDS to the extent that they do not override the

judicial precedents.

Issue (ii): Excessive delegation of powers

The HC agreed with the contention of the Petitioner,

and observed that the ICDS has modied the basis for

computation of income as provided by the IT Act and

12 Shri Prithvi Mills Ltd. v. Broach Borough Municipality, (1969) 2 SCC 283.13 Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706.



14 as interpreted by the Courts. It placed reliance on various judicial precedents and held that the accounting

standards did not have the power to determine the income chargeable to tax under the IT Act. It held that the

computation of income for the purpose of income-tax is governed by the provisions of law and as interpreted by the

Courts.

Having held that the ICDS is not meant to overrule the provisions of the IT Act, the IT Rules and the relevant judicial

precedents, the HC examined ICDS vis-a-vis the binding judicial precedents in the backdrop of legal provisions.

14 Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, (1997) 227 ITR 172/93 Taxman 502 (SC); B.S.C. Footwear Ltd. v. Ridgway Inspector of Taxes, (1972) 83 ITR 269 (H.L.); Challapalli Sugars Ltd. v. CIT, (1975) 98 ITR 167 (SC).

15 CIT v. Triveni Engg. & Industries Ltd. (2011) 336 ITR 374 (Delhi HC) and CIT v. Advance Construction Co. (P.) Ltd. (2005) 275 ITR 30/143 Taxman 61 (Gujarat HC).16 CIT v. Triveni Engg. & Industries Ltd. (2011) 336 ITR 374 ( Delhi HC).17 Shakthi Trading Co. v. CIT (2001) 250 ITR 871/118 Taxman 301 (SC).

I C D S I - A c c o u n t i n g Policies : Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss was in accordance with ICDS

ICDS I I - Valuation of Inventories :

In case of dissolution of a p a r t n e r s h i p r m o r association of person or body of indiv iduals, not wi th s t a n d i n g w h e t h e r t h e business carried on by such entities is discontinued or not, the inventory on the date of dissolution shall be valued at the net realisable value.

Petitioner

l Petitioner contended that the concept of prudence has been done away wi th, which was previously provided for under AS 1.

l ICDS I was contrary to various 15judicial precedents , to the extent it

provided that concept of prudence was not to be followed.

Respondents

l Respondents argued that the concept of prudence had not been done away with under ICDS I, but had to be followed on a case to case basis.

l Concept of prudence would continue to apply under various ICDSs like ICDS III (relating to construction contracts), ICDS X (relating to provisions of contingent liability and contingent assets).

Petitioner

It was argued that ICDS II was contrary to the SC decision in Shakthi

17Trading Co. , where the SC held that on the dissolution of a rm, where the business of rm was not discontinued and was taken over by other partners, the stock-in-trade of the rm could be valued at cost or market value, whichever was lower.

l The HC observed that ICDS X specically prohibited recognition of cost or liability to be incurred in future. Similarly, ICDS III allowed expec ted l osses on l y on a proportionate basis. Thus, the HC held that these ICDS were not in accordance with the concept of prudence and contrary to judicial

1 6dec is ions which he ld that expected losses had to be allowed as deduction.

l The HC also held that the concept of prudence was embedded in section 37 (1) of the IT Act which allows deduction in respect of expenses 'laid out' or 'expended' for the purpose of business.

l Thus, the HC held ICDS I to be contrary to the IT Act and judicial precedents, to the extent it did away with the concept of prudence.

l HC noted that section 145A of the IT Act (non obstante provision) permits a taxpayer to value its inventories in accordance with a method regularly employed by it. Therefore, the HC held that where a part icular method had been adopted by a taxpayer, the same method would govern the valuation of inventories, irrespective of the ICDS.

l The HC also held that paragraph 24 of ICDS II was contrary to the decision of the SC in Shakthi T r a d i n g C o ( s u p r a ) a n d accordingly, held it to be ultra vires the IT Act.

ICDS Contentions HC's Decision




l Retention money

HC held that the treatment of re ten t ion money had to be determined on case-to-case basis, by applying the settled principles of accrual of income. The HC further held that ICDS III was contrary to the principle laid down in various judicial precedents that retention money does not accrue until and unless the defect liability period is over and it is certied that no liability is attached further.

l Set off of incidental income

The HC held that ICDS III was contrary to the decision of Bokaro Steel (supra)

Thus, to the extent explained above HC held ICDS III as ultra vires the IT Act.

l Export Incentive

HC held that ICDS IV was contrary to the decision of the SC in the case Excel Industries (supra), to the extent ICDS IV required a taxpayer to recognize income from export incentive in the year of making of the claim if there was reasonable certainty of its ultimate collection.

l Revenue recognition method

The HC held ICDS IV to be ultra vires the IT Act, to the extent it permitted only one method of income recognition, as it was contrary to b inding jur id ical precedents

l Retention money

Petitioner

It was argued that ICDS III was c o n t r a r y t o a p l e t h o r a o f

18decisions, where the Courts held that the retention money did not accrue to a taxpayer unless and until the defect period was over.


Petitioner

It was argued that ICDS III read with ICDS IX, ran contrary to the decision of the SC in Bokaro Steel

19Ltd. wherein it was held that if the taxpayer received any amount which was inextricably linked with the process of setting up of plant and machinery, such receipts would reduce the cost of its assets.

l Export Incentive

Petitioner

Petitioner pointed out that ICDS IV required a taxpayer to recognize income from export incentive in the year of making of the claim if there was 'reasonable certainty' of its ultimate collection. Thus, the Petitioner argued that ICDS IV was contrary to the decision of the SC in

20Excel Industries, wherein it was held that income from export incentive accrued in the year in which the claim was accepted by the Government.

l Revenue recognition method

Petitioner

It was argued that according to AS 9, either proportionate completion or completed service contract method could be adopted for recognition of revenues from service contract. It was also asserted that Courts in a plethora of

21cases had held that the taxpayer

ICDS II I- Construction Contracts:

l Retention money

Contract revenue shall comprise of the init ial amount of revenue agreed in the contract, including retentions and the same shall be assessed on the basis of proport ionate completion method.


ICDS III, read with ICDS IX dealing with 'borrowing cost' provides that the contract cost would not be reduced by any incidental income.

I C D S I V - R e v e n u e Recognition :

l Export Incentive

Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved.

l Revenue recognit ion method

S e r v i c e t r a n s a c t i o n s revenue shall be matched with service transaction cost and income shall be r e c o g n i z e d o n t h e p r o p o r t i o n o f w o r k completed.

18 CIT v. Simplex Concrete Piles India (P.) Ltd. (1989) 179 ITR 8; CIT v. P&C Constructions (P.) Ltd. (2009) 318 ITR 113 (Madras HC); Amarshiv Construction (P.) Ltd. v. Dy. CIT (2014) 367 ITR 659 (Gujarat HC); and DIT v. Ballast Nedam International (2013) 355 ITR 300 (Gujarat HC)

19 CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC)20 CIT v. Excel Industries Ltd.(2013) 358 ITR 295 (SC)21 CIT v. Bilahari Investment (P.) Ltd. (2008) 299 ITR 1 (SC); CIT v. Manish Build Well (P.) Ltd. (2011) 16 taxmann.com 27(Delhi HC); Paras Buildtech India (P.) Ltd. v. CIT (2016) 382

ITR 630 (Delhi HC)

14




l Interest Income

Interest shall accrue on time basis determined by the amount outstanding and the rate applicable.

ICDS VI-Effect of change in foreign exchange rate: I n respec t o f fo re ign currency loans, exchange differences arising on the s e t t l e m e n t o r o n c o n v e r s i o n s h a l l b e recognised as income or as expense in that year.

ICDS VII- Government grants :

R e c o g n i t i o n o f Government grant shall not be postponed beyond the date of actual receipt.

ICDS VIII-Valuation of securities: At the end of a n y p r e v i o u s y e a r , securities held as stock-in-trade shall be valued at a c t u a l c o s t i n i t i a l l y r e c o g n i s e d o r n e t realisable value at the end of that previous year, whichever is lower.

Such comparison of actual cost initially recognised and net realisable value shall be done category wise and not for each individual security

may either follow proportionate completion method or contract completion method.

l Interest Income

Petitioner

It was argued that application of ICDS IV would result in non-performing assets of NBFCs becoming taxable, even though such interest was not recoverable.

Respondent

It was argued that where interest income was recognized on time basis, any loss arising on such income becoming irrecoverable would be allowed as deduction under the section 36(1)(vii) of the IT Act.

Petitioner

It was argued by the Petitioner that ICDS VI was contrary to the SC

22decision of Sutlej Cotton Mills Ltd. where it held that exchange loss or gain in relation to capital item would be capital in nature.

Petitioner

It was argued by the Petitioner that generally, conditions are attached to the receipt of government grant, non-fullment of which may lead to return of such amount. Thus, it could not be said that the income had accrued even though the grant had been received.

Petitioner

It was argued by the Petitioner that the method o f va lua t ion o f securities under the ICDS was different from what was prescribed under the AS, to the extent it requires securities to be valued category wise (as stipulated in ICDS VIII), therefore, the taxpayer would be required to maintain two books o f accounts , one for accounting purposes and the other one for income tax purposes.

l Interest Income

HC observed that paragraph 8 of ICDS IV was introduced to create a m e c h a n i s m o f t r a c k i n g unrecognized interest amounts for future taxability and had requisite legislative backing through the amended provision of section 36(1)(vii) of the IT Act.Thus, the HC held paragraph 8 of ICDS IV to be valid.

HC held that to the extent ICDS VI sought to treat change in foreign exchange as income, i t was contrary to the SC decision in Sutlej Cotton Mills Ltd. (supra) and, hence, ultra vires the IT Act.

The HC held that such treatment of grants as provided under ICDS VII was contrary to the accrual system of accounting, hence, ultra vires the IT Act.

The HC accepted the argument of the Petitioner and noted that ICDS VIII provided for a bucket approach of valuation (i.e. securities should be valued category wise, rather than on individual basis), however, ICDS II did not provide for any such method for valuation of inventories. Thus, the HC held that the respondents themselves had adopted different methods of valuation and such changes could not have been made without corresponding amendments to the IT Act . Hence, the HC held paragraph 10 of ICDS VIII as ultra vires the IT Act.

22 Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC).

15



Issue (iii): Constitutional validity of Impugned

Notication and Impugned Circular

The HC observed that the powers of the CBDT to

issue notications was meant only to clarify the law

and not change it. Further, it noted that in the instant

case some provisions of the ICDS went beyond

clarifying the law and mandated accounting principles

contrary to what was contained in the IT Act, the IT

Rules and judicial precedents. Thus, the HC held that

the ICDS as notied by the Government, were an

instance of excessive delegation,

therefore, the HC read down section

145 of the IT Act to limit the powers of the

Government to notify ICDS which did

not override the binding judicial

precedents and the provisions of the IT

Act. Consequently, the HC ruled that to

the extent the provisions of the ICDS

were contrary to the binding judicial

precedents and the provisions of the IT Act, the

Impugned Notication and the Impugned Circular

were ultra vires.

SIGNIFICANT TAKEAWAYS

This decision of the Delhi HC provides a welcome

relief for the taxpayers at large and provides the much

needed clarity on the matter of whether the ICDS

“”

ICDS notified under section 145(2) of the

IT Act cannot override the binding judicial

precedents

could override the IT Act and binding judicial

precedents. It may be noted that the decision of the

Delhi HC would be binding on the taxpayers within the

jurisdiction of the Delhi HC but an issue may arise with

regards to applicability of this decision to taxpayers

outside the jurisdiction of the Delhi HC. In this regard, it

may be noted that the Bombay HC in the case of 23

Ballarpur Ind. Co. held that a decision rendered by a

HC would be binding, unless a contrary opinion had

been rendered by the jurisdictional HC or the SC.

Additionally, it may be noted that the ICDS

have not been completely struck down

and the balance provisions of the ICDS

would continue to apply. Thus, in order to

provide certainty to taxpayers, it would be

desirable for the CBDT to clarify the status

of applicability of ICDS to taxpayers

across India. It may also be pertinent to

note that the taxpayers who have already

led their returns for the AY 2017-18, in compliance

with the ICDS provisions, as they stood, may have to

revise their returns in line with this decision of the Delhi

HC. However, the contingency of Delhi HC judgment

being reversed by the apex court should be borne in

mind.

23 Ballarpur Ind. Co. v. UOI, Writ Petition No. 1735 of 2001.

16



PURPOSE OF THE SUBSIDY IS CONCLUSIVE TEST TO

DETERMINE NATURE OF THE SUBSIDY.

24 In Chaphalkar Brothers Pune, the SC held that

whether the receipt of subsidy is capital or revenue in

nature will have to be determined by having regard to

the 'purpose' for which the subsidy is given. Further, it

was held that subsidy granted to promote

construction in capital intensive industries is capital in

nature.

FACTS

The Government of Maharashtra noticed that the

average occupancy in cinema theatres had reduced

considerably and the new concept

of multiples theatres had emerged.

Further, these complexes were

highly capital intensive and with

long gestation period, requiring

government support and incentive

in entertainment duty. Thus, the

Government introduced a subsidy

scheme to boost investment/

promote construction of new

multiplex theatre complexes.

The scheme was brought out by amending the

Bombay Entertainment Duty Act, 1923 as follows:

l For the rst 3 years entertainment duty was

exempted;

l For next 2 years applicable entertainment duty

upto 25% was levied.

Chaphalkar Brothers (“Assessee”) was granted the

aforementioned subsidy by way of exemption from

payment of entertainment duty. The AO held that the

subsidy was in the nature of a revenue receipt since

the concession was given in the form of a charge on

the gross value of the ticket and contribution towards

day to day running expenditure. The CIT(A) upheld

the order of the AO.

Being aggrieved by the CIT(A) order, the Assessee

further preferred an appeal before the ITAT. The ITAT

held that the scheme does not provide any assistance

for reimbursement of day to day revenue expenditure,

but the concession was meant to build up and to

promote new multiplex cinema halls which are nothing

but for the construction purpose and hence

reimbursement is to cover up the capital expenditure.

The Bombay HC held that since the object of subsidy

was to promote construction of multiplex theatre

complexes, the receipt of subsidy would be on capital

account.

Being aggrieved by the order of the

HC, the IRA led an appeal before

the SC.

ISSUES

Whether the subsidy received by the

taxpayer was in the nature of capital

or revenue?

ARGUMENTS

The Assessee contended that the subsidy was capital

in nature, on the ground that the statement of object for

introducing the scheme by the Government stated that

the grant of subsidy was to promote the construction of

new cinema houses. Further, the Assessee also

contended that the 'purpose' of the subsidy was the

test for nding the nature of the scheme and not the

mode of computation or the form in which it was

passed by the Assessee. The Assessee relied on 25Balaji Alloys, wherein it was held that the fact that the

subsidy took a particular form and was granted only

after commencement of production would make no

difference, to the nature of the subsidy and the

'purpose' test is the determinative factor.

“”

Character of the subsidy to bedetermined by having regardto the purpose for which the

subsidy is given”/ “Source and form of subsidy is immaterial to

determine the nature of the subsidy

24 CIT v. Chaphalkar Brothers, Pune, Civil Appeal Nos. 6513-6514 of 201225 Shri Balaji Alloys v. CIT 333 ITR 335 (J&K).

17



On the other hand, the IRA submitted that the subsidy

was a revenue receipt, as the subsidy came into play

after the multiplexes started functioning and

contributed towards day to day running expenses by

waiver of entertainment duty on the tickets issued.

DECISION

26The SC placed reliance on Sahney Steel and Ponni 27 Sugars & Chemicals Limited and held that the

subsidy is capital in nature.

In the case of Sahney Steel, the SC held that the idea

of the subsidy scheme was to provide a helping hand

for 5 years in order to enable the industry to be viable

and competent. The SC held that since funds were

made available to the taxpayer to assist it in carrying

on its trade and business, there can be little doubt that

the object of various assistances under the subsidy

scheme was to enable the taxpayer to run the

business more protably. The test whether the receipt

of subsidy is capital or revenue will have to be

determined by having regard to the purpose for which

the subsidy is given. The source of the fund is

immaterial.

In the case of Ponni Sugars, the SC held that the

character of the receipt in the hands of the taxpayer

has to be determined with respect to the purpose for

which the subsidy is given. The point of time at which

the subsidy is paid is not relevant. The source and the

form of subsidy are immaterial. If the object of the

subsidy scheme was to enable the taxpayer to run the

business more protably, then the receipt is revenue

in nature. On the other hand, if the object of the

assistance under the subsidy scheme was to enable

the taxpayer to set up a new unit or to expand the

existing unit then the receipt of the subsidy was on

capital account. Therefore, it is the object for which the

subsidy is given which determines the nature of the

subsidy.

Applying the principle laid down by the aforesaid

cases, the SC held that the subsidy given is capital in

nature as the objective, stated in the statement of

objects and reasons of the amendment ordinance was

that since the average occupancy in cinema theatres

have been started in the recent past, the concept of a

complete family entertainment centre, more popularly

known as multiplex theatre complex has emerged. It

was observed that these complexes are highly capital

intensive and their gestation period is quite long and

therefore, they need government support in the form of

incentives. The object of the grant of the subsidy was

to encourage persons to construct multiplex theatre

complexes, and thus, would be capital in nature.


The issue whether subsidy received from the

government is capital or revenue in nature has always

been a matter of debate before the courts.

In this judgement, the SC while upholding some of its

earlier decisions, also observed that the subsidy was

not meant for repaying the loan taken for construction

of multiplexes and hence, it cannot be held to the

ground that subsidy receipt was revenue in nature. If

the object of the scheme was to promote cinema

houses by constructing multiplex theatres, then

irrespective of the fact that the multiplexes have been

constructed out of own funds or borrowed funds, the

receipt of subsidy would be on the capital account.

Thus, the SC judgement reinforces that the 'purpose'

test is the determinative factor for the nature of any

subsidy, irrespective of the form in which it is granted

or the purpose for which such subsidy was utilised.

26 Sahney Steel and Press Works Limited v. CIT 228 ITR 253 (SC).27 CIT v. Ponni Sugars and Chemicals Limited 306 ITR 392 (SC).



DEPRECIATION PERMISSIBLE EVEN WHEN THE ENTIRE

COST OF THE ASSET HAS BEEN ALLOWED AS

APPLICATION OF INCOME.

In Rajasthan and Gujarati Charitable Foundation 28 Poona, the SC held that even if the entire

expenditure incurred for acquisition of a capital asset

is treated as application of income for charitable

purposes under Section 11(1)(a) of the IT Act, the

taxpayer is entitled to depreciation under Section 32

of the IT Act. Further, it was held that Section 11(6) of

the IT Act which bars depreciation on expenditure

applied for charitable purposes is prospective and

applies from AY 2015-16 onwards.

FACTS

Rajasthan and Gujarati Charitable Foundation Poona

(“Assessee”) is a charitable institution registered

under Section 12A of the IT Act. The Assessee

claimed the entire expenditure incurred for acquisition

of capital assets as application of income for

charitable purpose under Section

11(1)(a) of the IT Act. Further, the

Assessee also claimed depreciation on

the said capital asset.

The AO passed the order disallowing the

depreciation claimed by the Assessee on

the capital asset on the ground that it will

lead to double benet to the Assessee, i.e.,

depreciation and capital expenditure. The CIT(A)

afrmed the order passed by the AO. The ITAT

reversed the order passed by the CIT(A) and the HC

accepted the decision of the ITAT, dismissing the

appeal of the tax department.

Being aggrieved by the order of the HC, the IRA led

an appeal before the SC.

ISSUES

Whether depreciation is allowable on the assets, the

cost of which has been fully allowed as application of

income under Section 11 of the IT Act?

ARGUMENTS

The AO contended that once the capital expenditure is

treated as application of income for charitable

purposes, the Assessee had virtually enjoyed a 100%

write off of the cost of assets. Therefore, depreciation

should not be allowed as the grant of depreciation

would amount to giving double benet to the

Assessee.

On the other hand, the Assessee contended that

depreciation on capital asset will be available under

the normal provisions of the IT Act, irrespective of the

fact that the cost of the capital asset is claimed as

capital expenditure or not.

DECISION

The SC placing reliance on Institute of 29 Banking Personnel Selection, held

that even if the entire expenditure

incurred for acquisition of a capital asset is treated as

'application of income' for charitable purposes under

Section 11(1)(a) of the IT Act, the taxpayer is entitled to

depreciation under Section 32 of the IT Act.

The depreciation claimed on the capital assets should

be considered as a legitimate deduction in computing

the real income of the Assessee on general principles,

i.e., the income of the trust is required to be computed

under Section 11 of the IT Act after providing for

allowance for depreciation and deduction thereof from

gross income of the trust.

28 CIT v. Rajasthan and Gujarati Charitable Foundation Poona Civil Appeal No. 7186 of 2014.

“”

Depreciation is a legitimate deductionin computing income

of a trust



It was also held that expenditure incurred for acquiring

capital asset which has been allowed in the year of

acquisition of the assets as 'application of income' of

the trust, does not mean that in computing income

from those assets, depreciation cannot be taken into

account. The Assessee is entitled to depreciation

under Section 32 of the IT Act while computing the

income of the trust, even if the entire cost of the capital

asset is claimed as a deduction. Further, it was held

that Section 11(6) of the IT Act which bars

depreciation on expenditure applied for charitable

purposes is prospective and should be applied only

from AY 2015-16.


The tax department is mostly objecting depreciation

claim by charitable trust in scrutiny based on their

opinion that expenditure is claimed twice, once as

'application of income' at the time of acquiring of asset

and then again at the time of claiming depreciation.

Over the years, various HCs have dealt with this

question. While the Punjab & Haryana HC and Delhi

HC have ruled that depreciation would be allowable,

on the contrary, the Kerala HC ruled that depreciation

would not be allowable.

It has been held by the HCs, that allowing depreciation

in the computation of income will not lead to a double

deduction as deduction of depreciation is different

from application of income. The provision relating to

compulsory application of income is altogether a

different concept and would come into play only after

the income is determined. In determining the income,

depreciation has to be taken into account. Application

of income is not computation of income of the

charitable institution. Therefore, the question whether

depreciation is to be allowed or not has nothing to do

with the application of income. Income is always to be

computed on commercial principles and as per

taxpayer's accounting system, subject to the statutory

provisions.

Finance (No. 2) Act of 2014 inserted a new sub-

section (6) to Section 11 of the IT Act with effect from

April 1, 2015. The section provides that for the purpose

of accumulation or setting apart of income for

application, depreciation on assets, the acquisition of

which have been claimed as application shall not be

allowed. Thus, the amendment has now settled the

legal position, which must be borne in the mind by the

taxpayer while computing the income for charitable

trust.

29 CIT v. Institute of Banking Personnel Selection 131 Taxman 386.



“”

21

SC STAYS OPERATION OF DELHI HC JUDGMENT &

ORDER IN BHUSHAN STEEL ON TAXABILITY OF

SUBSIDY AMOUNT.

SC has issued notices to hear petition challengingthe Delhi HC judgment on

taxability of subsidy

30In Bhushan Steel Ltd., SC has issued notices for hearing of the petition seeking special leave to appeal against the judgment and order of the

31Delhi HC in Bhushan Steels. Accordingly, it has also stayed the operation of the impugned judgment of the Delhi HC. The Delhi HC in the case of Bhushan Steels (supra), had ruled that amount received under a subsidy scheme was revenue in nature on account of absence of restrictions to utilize the amount for capital purposes alone.

FACTS

Bhushan Steels and Strips Ltd. (“Assessee”), was a company engaged in the manufacturing of galvanized steel strips and sheets. As some of its productions units were located in an area that had been notied by the government of Uttar Pradesh (“UP”) as backward area, it was exempted, under a state government scheme, from payment of sales-tax in respect of goods that were manufactured in a new industrial unit. This scheme stood revised in 1991, and post-revision, certain entities were exempted from paying sales-tax that they collected, to the extent of their capital expenditure.

The AO added the sum to the taxable income of the Assessee. On appeal, the CIT(A) found in favour of the Assessee, noting that the impugned sum was meant to be an incentive for establishment of industries in backward regions of the state. Accordingly, it could not be taxed as a trading receipt. The Delhi ITAT dismissed the appeal preferred by the IRA against the order of

the CIT(A). Accordingly, the IRA approached the Delhi HC.

The HC observed that the Assessee enjoyed the freedom to use retained sales-tax for any purpose, and without any restrictions on the end use. Thus, it agreed with the IRA that the intent behind the subsidy was to incentivize the recipient to expand its business by increasing its protability. Thus, the subsidy was revenue in

nature. It further noted that the o r i g i n a l s c h e m e o f 1 9 9 0 i n paragraph 6(A) and 6(B), provided for a capital subsidy to set up 'Prestige' units; the Court explained that amounts indicated thereunder were capital in nature. However, under the terms of the supplemental scheme, int roduced in 1991,

Assessee was allowed retention of sales-tax amounts after such industrial unit which could possibly claim benet under the scheme was already set up. Therefore, subsidy could not be considered as being capital in nature. Lastly, Court claried that the prescribed limit on the benet to the extent of hundred percent of capital expenditure, was only a reference point and did not determine the nature of receipt.

Aggrieved by the ruling of the Delhi HC, the Assessee approached the SC.

ISSUES

Whether the Delhi HC was correct in holding that the sum retained by the Assessee was taxable being revenue in nature?

30 Bhushan Steel Ltd. v. CIT, Delhi SLP (C) No. 30728-30732/2017 (SC). 31 0CIT v. M/s Bhushan Steels and Strips Ltd. ITA 315 of 2003 (Delhi HC).



ARGUMENTS

Assessee claimed that sales-tax amount so collected and retained was capital in nature. It was also argued that the state government provided the subsidy for establishment of industrial units in specic areas. Even under an earlier notication, its benet could be availed only after Assessee's cold-rolled unit went into production. The exemption applicable to its 'Prestige' unit was also available only on fresh investment on behalf of Assessee. Further, benets of original scheme that was amended in 1991 were extended to existing units only on expansion of their capacity. In a nutshell, it was the case of the Assessee that the subsidy was meant to recoup capital expenditure incurred in setting up a new unit or expansion of capacity of an existing one and thus, was entitled to the exemption of paying sales tax to the State.

In rebuttal , IRA submitted that lack of conditionality dictating that the received sum must be expended only for capital purposes, and consequently, as freedom was available to Assessee to utilize it for any other end, meant that State intended to increase the protability of the recipient. As absence of obligation, to pay the collected sales-tax amounts to the State, led to augmentation of Assessee's income, subsidy was revenue in nature. In this regard, IRA placed

32reliance on decision of the SC in Sahney Steel. wherein it held that character of subsidy had to be determined keeping in mind purpose behind granting it. Therefore, if the purpose was to help the recipient in setting up its business, subsidy would be capital in nature. However, if it was given for assisting recipient in carrying on business operations, and given only after and was conditional upon production, subsidy had to be treated as assistance for purpose of trade i.e. revenue in nature. Further, IRA urged that the quantitative limit, i.e. amount that could be retained, being specied in reference to capital expenditure did not indicate the nature of the subsidy. Lastly, IRA submitted that as the subsidy scheme operated only after expansion, i.e. after capital expenditure had already been incurred

and capacity expanded, it could not be construed to be a capital receipt.

DECISION

The petition led by the Assessee seeking a leave to appeal the above-mentioned judgment and order of the Delhi HC, is pending before the SC. Division Bench of the SC has issued notices for the hearing of the same. Further, it has stayed the operation of the impugned judgment of the Delhi HC.


Whether amount received under a subsidy is capital or revenue in nature has been subject matter of litigation on numerous occasions. The SC has also addressed the debate in several cases, including the case of Sahney Steel (supra).

It is pertinent to note that the SC in that case enunciated the following principles to determine the nature of receipt:

l Character of subsidy in the hands of the recipient, i.e. its capital or revenue nature, will have to be determined having regard to the purpose for which the subsidy was given;

l Source of the fund from which subsidy is given is immaterial;

l Manner in which the subsidy is given is of no consequence;

l If subsidy is given to the assessee to assist him in carrying on his trade or business, it is a revenue receipt;

l If the monies are given only after and condi t iona l upon commencement o f production, such subsidy must be treated as assistance for the purposes of trade or business;

While this ruling has been cited on several instances, judicial precedents on the topic suggest that the conclusion is largely factual in nature. In this background, it remains to be seen how the apex court would determine the nal outcome in the matter.

32 Sahney Steel and Press Works Ltd. v. CIT 228 ITR 253 (SC).



DEEMED INCOME PROVISIONS UNDER SECTION 56(2)

(VIIB) APPLIES TO ALL CLASS OF SHARES AND TAX

OFFICER CAN CHALLENGE THE VALUATION REPORT

SUBMITTED BY TAXPAYER.

33In Microrm Capital Pvt. Ltd. the Kolkata bench of

ITAT held that the provisions of Section 56(2)(viib) of

the ITA applies on issue of all classes of shares

including redeemable non-cumulative preference

shares (“RNCPS”). Further, it was also held that the

tax ofcer was duty bound to examine the valuation

report submitted by the taxpayer.

FACTS

Microrm Capital Pvt. Ltd. (“Assessee”) is engaged in

the business of investment and nancing. During AY

2013-14, the Assessee allotted 0.1% RNCPS, with

face value of INR 10 each at a premium of INR 1,990

per share. The RNCPS were redeemable on expiry of

10 years from the date of allotment at a redemption

price of INR 5200 per RNCPS. The RNCPS could be

redeemed at any time before the expiry of 10 years

with mutual consent at mutually agreed terms.

The RNCPS were valued at INR 2,000 per RNCPS as

per the valuation report from a chartered accountant

obtained under Rule 11UA(c)(c) of the IT Rules. The

valuer had used discounted cash ow method and

used a discounting factor of 10%. The RNCPS were

allotted to a group company and also to an

independent third party.

The AO accepted the discounted cash ow method

used in the valuation report, however, he applied

discounting rate of 15% instead of 10% adopted by

the valuer. The AO determined the market value of

RNCPS at INR 1,285.41 per RNCPS as against INR

2,000 and made an addition of INR 14.64 crore under

Section 56(2)(viib) of the IT Act.

Being aggrieved by the order of the AO, the Assessee

preferred an appeal before the CIT(A). The CIT(A)

upheld the addition made by the AO but reduced the

quantum of addition by changing the discounting rate

of 15% used by the AO for computing the market value

of the shares to 12.5% without providing any basis for

the same.

Being aggrieved by the CIT(A) order, the Assessee

preferred an appeal before the ITAT.

ISSUES

(1) Whether provisions of Section 56(2)(viib) of the IT

Act are applicable on issue of redeemable non-

cumulative preference shares?

(2) Whether the AO can examine the valuation report

provided by the valuation expert and modify the

value?

ARGUMENTS

Assessee contended that Section 56(2)(viib) of the IT

Act was introduced with an objective to deter

generation and use of unaccounted money through

infusion of funds from shareholders at substantial

premium. Further, RNCPS are quasi-debt instruments

and not shares per se, and hence, RNCPS are not

covered under the provisions of Section 56(2)(viib) of

the IT Act.

The Assessee also argued that, Section 56(2)(viib) of

the IT Act read with applicable rules require that the

valuation of RNCPS should have been supported by

report of an expert. The AO was not an expert in

33 Microrm Capital Pvt. Ltd. v. DCIT ITA No. 513/Kol/2017 and ITA No. 963/Kol/2017.



“

”

AO has the right and is duty bound to

examine the valuation report. All types

of shares are covered under

Section 56(2)(viib).

valuation, and hence, could not interfere and tamper

with the fair market value determined by the valuer. In

case AO was not in agreement with the valuation, only

option available to him was to refer the matter to an

expert.

It was also argued by the Assessee, that the

discounting rate of 15%, based on home loan rates,

was not appropriate because the investors had no

chance of investing in housing loans, as they were

regulated by National Housing Bank and Reserve

Bank of India. The AO had ignored the prevailing rate

of return on preference shares of other companies

that ranged from 8-10%.

On the other hand, the IRA submitted that Section

56(2)(viib) of the IT Act uses the word 'shares' and

hence, was applicable to RNCPS. Further, it was also

submitted that there was no provision in law to refer

the valuation of shares to another expert

by the AO for valuation and the AO had the

right and was duty bound to examine

whether the valuer had based his

valuation on relevant material and

whether the valuation was properly done

and assessed on all aspects which had a

bearing on income of the taxpayer.

Further, for the discounting rate used by

the AO, it was submitted that the

discounting rate of 15% was appropriate because

home loan rates were very conservative, as they were

given at concessional rates and that too with full

security.

DECISION

The ITAT held Section 56(2)(viib) of the IT Act uses the

term 'shares' and it covers all classes of shares and

RNCPS could not be excluded from its ambit.

Further, the ITAT after placing reliance on Duncans 34Industries Ltd., held that the AO could interfere with

the valuation report which was not based on relevant

material. The AO was duty bound to examine the

valuation report and record his ndings on the same.

Such nding should have been based on relevant

material and rational view taken judiciously. Further, it

was held that it was not necessary for the AO to refer

the matter to other expert and the AO could have

replaced the irrelevant material and modify the

valuation.

With respect to the discounting rate adopted for the

valuation, the ITAT held that the rates of return on

preference shares issued by other companies for the

relevant period were relevant for arriving at the

discount rate. Thus, the valuation done by the valuer

was based on relevant facts and the rate of 10%

discount factor being based on proper comparable,

was appropriate, and hence, accepted. Weightage

was also given to the fact that an independent investor

had invested in RNCPS on the same terms

and therefore the fair value was considered

to be at arms' length price.


The term 'shares' has always been a matter

of debate, i.e., what all will come under the

ambit of the term 'shares'. This decision

upholds applicability of Section 56(2)(viib) of

the IT Act on all types/ classes of shares, i.e.,

equity and preference (including redeemable and

irredeemable).

The right of the AO to challenge the valuation report

has also been claried by holding that the AO has the

right as well as is duty bound to challenge the valuation

report submitted by the taxpayers. However, it also

conrms that if the valuation is based on appropriate

material facts then, the same need not be disturbed

but should be accepted. Further, the AO should also

record the facts and materials.

34 Duncans Industries Ltd. v. State of UP and Ors. CA No. 5929 of 1997.



CBDT CANNOT ISSUE CIRCULARS HAVING

RETROSPECTIVE OPERATION.

Retrospective or prospective applicability of circular

issued by the CBDT has been one of the most 35debated issue. In Gemini Distilleries, the SC held

that the CBDT cannot issue instructions or circular

having retrospective operation.

FACTS

Section 268A of the IT Act empowers the CBDT to

issue instructions or orders or directions for xing

monetary limit for regulating ling of appeals by

income tax authorities.

The CBDT by exercising the power

provided under Section 268A of the IT 36Act issued instructions wherein

monetary limits and other conditions for

ling departmental appeals before ITAT,

HC and SC were prescribed and revised

from time to time. The monetary limits

were set with the objective of reducing litigation and

taxpayers' grievances.

Further, the instructions provides that all the appeals

led on or after the date of coming into force of such

instructions shall be governed by such instructions,

i.e., the instructions to be considered before ling any

departmental appeal shall be the instructions as in

force on the date of ling of such appeal.

ISSUES

Whether the instruction or circular issued by the

CBDT has retrospective operation or not?

ARGUMENTS

Gemini Distilleries (“Assessee”) by placing reliance 37on para 10 of CBDT circular issued on December

10, 2015 contended that the circular directs

retrospective application of the monetary limits. Para

10 of the said circular reads as under,

“This instruction will apply retrospectively to pending

appeals to be led henceforth in High Courts /

Tribunals. Pending appeals below the specied tax

limits in para 3 above may be withdrawn / not pressed.

Appeals before the Supreme Court will be governed by

the instructions on this subject, operative at the time

when such appeal was led.”

Therefore, Assessee by placing reliance on the above

mentioned para contended that the monetary limits

are applicable retrospectively, as in

various judgements it has been held that

circulars which are benecial to the

taxpayer are applied retrospectively

while oppressive circulars are applied

prospectively.

DECISION

The SC examined the issue relating to the

retrospective or prospective applicability of circular

issued by the CBDT and by setting aside the ruling of

the Karnataka HC held that CBDT cannot issue any

instruction or circular having retrospective operation.

Further, it was held that the instruction or circular

issued by the CBDT on February 9, 2011 is not

retrospective in nature and will nor govern cases which

have been led before 2011. The said circular or

instruction is meant to govern cases which are led

after the issuance of the instructions.

In its ruling, the SC placed reliance on Suman 38 Dhamija case, wherein it was held that the CBDT

circular dated February 9, 2011 is not retrospective in

nature and shall not govern cases which have been

led before 2011.

35 CIT v. Gemini Distilleries TS-476-SC-201736 Instruction no 3/2011 dated February 9, 2011 and Circular no 21/2015 dated December 10, 201537 Circular no 21/2015 dated December 10, 201538 CIT v. Suman Dhamija TS-480-SC-2015.

“”

CBDT instruction setting monetary

appeal filing limit not retrospective.



Therefore, based on the above ruling of the SC, it can

be said that the circulars issued by the CBDT cannot

have retrospective applicability and should come into

force from the date of issue of such circular.


The applicability of these instructions has been a

matter of repeated judicial interventions, i.e., whether

the instructions are applicable retrospectively or

prospectively. The courts have passed two

contradicting judgments regarding the applicability of

the circulars issued under Section 268A of the IT Act,

one holding that the instructions issued by the CBDT

prescribing the monetary limits for ling departmental

appeals are retrospective in nature, even though such

instructions specically state that they shall apply only

in relation to the departmental appeals after the date

of coming into force of such instructions, while the

other holding that such instructions are only

prospective in nature.

As a result of these two equally opposing views

available in respect of the retrospective or prospective

applicability of the departmental instructions, the

controversy aroused.

The controversy relating to the applicability of CBDT

circular has now been put to rest by the SC by holding

that the circulars issued by the CBDT cannot have

retrospective applicability and should come into force

only from the date of issue of the circular.

As a result of this ruling, many taxpayers who had

earlier faced tax demands of between Rs.4 lakhs to

Rs.10 lakhs may be impacted. The cases which were

dismissed by the ITAT, may now be revived and

referred back to the ITAT. This will increase litigation

and legal cost for the tax payers.



DELHI HC ISSUES GUIDELINES FOR REOPENING OF

ASSESSMENT UNDER SECTION 147 OF THE IT ACT.

39In Sabh Infrastructure Ltd., the Delhi HC had held

that unless it is established by the IRA that the tax

payer had not fully and truly disclosed material facts,

reopening of assessment under section 147 of the IT

Act is invalid.

FACTS

Sabh Infrastructure Ltd. (“Assessee”) is a company

engaged in the business of real estate and property

development. During the relevant year under

consideration, the Assessee had received share

premium from ve companies and the sum total of

shares so subscribed exceeded INR 10 million.

During the assessment proceedings, the AO had

sought details and documents with respect to share

premium received during the year and the Assessee

had inter alia submitted details of the

share premium received from each of

the ve companies, conrmation from

the said companies as well as details of

PAN, return of income, auditor's reports,

balance sheets and prot and loss

accounts were also submitted.

Thereafter, the AO did not make any

further inquiries but passed the order

under section 143(3) of the IT Act without

making any reference to the examination undertaken

regarding the share premium received by the

Assessee.

Subsequently, four years later, a reassessment notice

was issued under section 148 of the IT Act on the

ground that income had escaped assessment and the

'reasons to believe' stated that the Assessee had not

disclosed fully and truly all material facts in its return of

income resulting in under assessment of income on

account of share premium.

The Assessee had objected to the reopening of

assessment under section 147 of the IT Act by

contending that the reasons to believe do not contain

any allegation as to what material facts and

information the Assessee had failed to disclose. Apart

from raising jurisdictional grounds, the Assessee had

also objected to the reopening of assessment on

merits. However, the AO rejected the contention of the

Assessee. Being aggrieved by the decision of the Ld.

AO, the Assessee had led a writ petition before the

HC.

ARGUMENTS

The Assessee submitted that there was no failure to

disclose fully and truly all material facts, during the

assessment proceedings and it highlighted the

specic questionnaire issued by the AO,

d u r i n g t h e c o u r s e o f s c r u t i n y

assessment proceedings, wherein the

details of each of the ve companies

who had invested in the share capital of

the Assessee was examined. The

Assessee contended that the AO, only

after satisfying himself that there were

no inrmities in the share application

money rece i ved f r om the sa id

companies, passed an order under

section 143(3) of the IT Act.

The Assessee submitted that since four years had

already expired from the end of relevant assessment

year before the issuance of notice under section 148 of

the IT Act, rst proviso to section 147 of the IT Act gets

squarely attracted and therefore, there exists a higher

onus upon the IRA to discharge its burden of proving

that there was non-disclosure by the Assessee. It

relied on the decision of SC in the case of Kelvinator

“

”

Investigation carried outby the IRA on a third party

cannot be sole reason to initiate reassessment

proceedings under section 147 of the IT Act.

39 Sabh Infratsructure Ltd. v. ACIT (W.P. No. 1357/2016 Delhi HC) dated September 25, 2017.40 CIT v. Kelvinator of India Ltd. (2010) 187 Taxman 312.



40 India Ltd. to contend that the instant reopening is

merely a change of opinion and the same is not

permitted under section 147 of the IT Act.

The Assessee further submitted that the IRA merely

relied upon the information received by the

Investigation Wing of the IRA, from the statement of a

person recorded under section 131 of the IT Act, and

came to the conclusion that the ve companies from

whom the Assessee had received share application

money was 'paper companies'. The Assessee also

alleged that the AO did not independently verify the

facts contained in the said statements but reopened

the assessment proceedings in a mechanical

manner.

The IRA contended that the AO, during the course of

scrutiny assessment proceedings, never had the

information that the ve companies from whom the

Assessee had received share application money

were 'paper companies' and the fact that the AO had

subsequently become aware of the fact that these

companies could be 'paper companies' would be

sufcient to justify the issuance of notice under

section 147 and 148 of the IT Act.

DECISION

The HC held that the law is now well settled that

reasons should be self-explanatory and it cannot be

thereafter supported by any extraneous material and

further that the order disposing of the objections

cannot act as a substitute for reasons to believe.

The HC took note of the fact that names of the

companies mentioned in the 'reasons to believe'

contained the names of the very same ve companies

which were initially examined during the course of

scrutiny assessment proceedings and as such, there

was no new material found or mentioned in the

reasons to believe which were contained in the

information provided by the Assessee prior to the

conclusion of assessment under section 143(3).

In view thereof, the HC had held that the case of the

Assessee cannot be reopened merely based on

surmise and conjecture that the companies from

which the Assessee received share application money

are 'paper companies' without further facts and fresh

material evidences to substantiate the same. The HC

had relied on the decision in case of Multiplex Trading 41 & Industrial Corporation Ltd. wherein it was held that

reopening of assessment is invalid when the primary

facts disclosed is not said to be false and issue is only

with respect to inference drawn. Since, in the instant

case, the IRA had failed to establish that the Assessee

had failed to disclose fully and truly all material facts,

the assumption of jurisdiction under section 147 and

148 of the IT Act was erroneous.

Thereafter, taking into consideration the numerous

writ petitions being led challenging the initiation of

reassessment proceedings under section 147 of the IT

Act on the same grounds despite the same being

settled in a number of cases, the HC issued the

following guidelines that have to be adhered while

initiating reassessment proceedings:

(i) While communicating reasons for reopening the

assessment, the copy of the standard form used

by the AO for obtaining the approval of Superior

Ofcer should itself be provided to the Assessee

and the same shall contain comment or

endorsement of the said Superior Ofcer with his

name, designation and date. In other words,

merely stating the reasons in a letter addressed by

the AO to the Assessee should be avoided;

(ii) The reasons to believe ought to spelt out all the

reasons and grounds available with the AO for re-

opening of assessment especially in those cases

where the rst proviso to section 147 of the IT Act

is attracted. The reasons to believe ought to also

paraphrase any investigation report which may

form the basis of the reasons and any enquiry

conducted by the AO on the same and if so, the

conclusions thereof;

(iii) where the reasons make a reference to another

document, whether as a letter or report, such

document and / or relevant portions of such report

should be enclosed along with the reasons; and

41 CIT v. Multiplex Trading & Industrial Corporation Ltd. 378 ITR 350.



(iv) the exercise of considering the Assessee's

objections to the reopening of assessment is not a

mechanical ritual. It is a quasi-judicial function.

The order disposing of the objections should deal

with each objection and give proper reasons for

the conclusion. No attempt should be made to

add to the reasons for reopening of the

assessment beyond what has already been

disclosed.


While the decision of the HC reiterated the settled

position as propounded by the SC in the case of 42 Kelvinator India Ltd. and followed by various other

43 decisions in regards to initiating a reassessment

proceedings on a mere change of opinion without any

fresh / tangible material to prove that the tax payers

42 Supra.43 Oracle India Pvt. Ltd. v. ACIT (2017) SCC online 9360; Unitech Limited v.DCIT (2017) SCC Online 9408; BDR Builders and Developers Pvt. Ltd v. ACIT (2017) SCC Online

9425, Swarovski India Pvt. Ltd. v. DCIT W.P.(C) 5807/2014 dated August 30, 2017.

did not disclose fully and truly all the material

information, the decision assumes signicance in view

of strictures passed by it regarding the mechanical

manner adopted by the IRA in initiating the

reassessment proceedings against various tax

payers.

It is pertinent to note that the IRA would generally not

share the copy of certain documentary evidences

which are critical for establishing certain jurisdictional

issues viz. independent inquiry undertaken by the AO,

form submitted to the superior ofcer for approval,

approval provided by the superior ofcer etc. By virtue

of this decision, it becomes mandatory for the IRA to

share the relevant documentary evidences necessary

for determining the validity of reassessment

proceedings.



“

”

The payments which falls out of the ambit of ‘income’, as per

the conjoint reading of section 4, 5 and 9 of the IT Act, shall not

be taken into consideration for computing presumptive income under section 44BB

of the IT Act.

30

FIXED MOBILIZATION FEES RECEIVED BY NON-RESIDENT

FOR TRANSPORTATION OF DRILLING UNITS TO INDIA,

HAVING NO NEXUS WITH THE EXPENSES INCURRED,

CANNOT BE CONSTRUED AS REIMBURSEMENT OF

EXPENSES.

44 In Sedco Forex International Inc. & others, the

SC held that the xed mobilization fees received for

transportation of rigs from a foreign country to the

ports in India for the purpose of conducting extraction

of mineral oil in India are taxable under section 44BB

of IT Act since the same lacks the characteristics of

reimbursement.

FACTS

Sedco Forex Internat ional Inc. and others

(“Assessee”) were non-residents engaged in the

business of providing services and

f a c i l i t i e s i n c o n n e c t i o n w i t h

exploration and production of mineral

o i l . T h e y h a d e n t e r e d i n t o

agreement(s) with Indian operators

viz. Oil and Natural Gas Corporation

(“ONGC”) and Enron Oil and Gas Ltd

for hire of rigs for the purpose of

carrying out oil and exploration

activities in India. In terms of the

contract, the Assessee received

payments in two parts (a) mobilization fees i.e. fees

for transportation of rigs from outside India to India

and (b) compensation for work undertaken.

The Assessee computed its income on a presumptive

basis as per section 44BB of the IT Act and did not

include the mobilization fee to the gross revenue for

the purpose of computation of 'prots and gains'. The

AO, however, included the same to the gross receipts

to arrive at 'prots and gains' on a presumptive basis

by holding that the contract was an indivisible one and

various payments in terms of the contract ought to

have been taken as a whole for the purpose of

computing presumptive tax under section 44BB of the

IT Act, especially in view of the fact that the provision

specically prescribes that the aggregate of amounts

received in connection with extraction of mineral oil

would be considered.

While the CIT(A) and ITAT afrmed the action of the

AO, the HC went a step ahead to hold that the

reimbursement of expenses incurred by the Assessee

was to be included in the gross receipts for the purpose

of computing the income under

section 44BB of the IT Act, which is a

code by itself and provisions of

section 5 and 9 of the IT Act would

h a v e n o a p p l i c a t i o n w h i l e

determining the income under

section 44BB of the IT Act.

Aggrieved against the order passed

by the HC, the Assessee preferred an

appeal before the SC.

ISSUES

Whether, in facts and circumstances of the case,

reimbursement of expenses need to be included in the

income computed under section 44BB of the IT Act?

Whether, in facts and circumstances of the case,

provision of section 5 and 9 of the IT Act has no

application in computation of income under section

44BB of the IT Act?

44 Sedco Forex International Inc. & Others v. CIT (Civil Appeal No. 4906 of 2010 & ors) dated October 30, 2017.



ARGUMENTS

The Assessee submitted that the mobilization of rigs

from ports outside India to India was the obligation of

the ONGC for the purpose of conducting exploration

activities in India. The Assessee performed it on

behalf of ONGC and ONGC merely reimbursed these

expenses which did not have any prot element and

that is the reason why the contract had two different

types of payment viz. (a) mobilization fees and (b)

compensation for the work undertaken. It was

emphasized by the Assessee that the expenditure

incurred by the Assessee on mobilization was much

higher than the actual payment received. In view of

the same, it was submitted that the mobilization fees

was in the nature of reimbursement of expenses and

the same could not be treated as 'amount' within the

meaning of sub-section (2) of section 44BB of the IT

Act.

It was further submitted by the Assessee that India

follows a territorial system of taxation specially qua

business income of non-residents, which is taxed only

as it is attributable to operations within the Indian

territory and the same would be discernible on the

conjoint reading of section 4, 5 and 9 of the IT Act i.e.

income of a non-resident is taxable in India only if it is

received or deemed to have been received in India or

accrued or deemed to have been accrued in India. In

so far as business income is concerned, it becomes

taxable only if it is attributable to the operations

carried out in India.

In view of the same, while the Assessee submitted

that mobilization fees was not received/deemed to

have received in India and it was in respect of services

outside India, and therefore, does not accrue/arise or

deemed to have arisen in India. In so far as section

44BB of the IT Act is concerned, the Assessee

submitted that it merely provides computation

mechanism for the purpose of simplication of

computation of income of certain non-residents as 45 explained in CBDT Circular and therefore, the rst

pre-requisite is always to nd out as to whether

particular income had accrued or arisen or deemed to

have accrued or arisen in India by relying on various

46decisions, including A.Sanyasi Rao & Ors., 47Ishikawajima-Harima Heavy Industries Ltd., etc.

DECISION

The SC observed that the provisions of section 44BB

of the IT Act is a special provision providing

computation mechanism for computing prots and

gains in case of non-resident tax payers engaged in

providing services and facilities in connection with the

exploration and production of mineral oil. Therefore,

provisions of section 4, 5 and 9 of the IT Act cannot be

sidetracked and it agreed with the contention of the

Assessee that, in the rst instance, it is to be seen

whether a particular income arises or accrues or

deemed to have accrued or arisen in India and the

question of computation of said income would arise

only after the determination of taxable income in India.

To this extent, the SC overruled the decision of the HC.

Insofar as characterization of mobilization fees as

reimbursement expenses in concerned, the SC

upheld the decision of lower authorities by holding that

mobilization fees received by the Assessee has no

nexus with the actual expenses incurred for

transportation of rigs to India. It referred to the clauses

in the agreement entered into with Indian operators

viz. ONGC and Enron Oil Ltd. In terms of which a xed

amount had been agreed to be paid as mobilization

fees to the Assessee for transportation of drilling units

from outside India to India and further that the clauses

of the agreement nowhere mention that the same is for

reimbursement of expenses. Therefore, in view of the

fact that Assessee was entitled to receive the said

xed sum as mobilization fees without having any

regards to the actual cost incurred by it for the

transportation of drilling units, the SC held that the

payment of mobilization fees cannot be construed as

reimbursement of expenses and that the same needs

to be considered as 'income' and according clause (a)

section 44BB(2) of the IT Act, any payments

(irrespective of whether it is received in India or outside

India) would be taxable in India, if it relates to

exploration activities in India.

45 Circular No. 495 dated September 22, 1987.46 Union of India & Anr. v. A.Sanyasi Rao & Ors. (1996) 3 SCC 465.47 Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408.




The issue of taxability of mobilization / demobilization

charges has been a subject matter of litigation for a

while now. While the Delhi ITAT in the case of Western

Geo International Ltd. Vs ADIT (2014) 150 ITD 283

had held that mobilization charges would be included

in gross receipts under section 44BB of the IT Act, the

Mumbai ITAT and the Special Bench in case of Jindal 48 49Drilling Leasing and Saipem SPA had held it

otherwise.

The SC, in the instant case, had made it clear that

mobi l izat ion charges would be taken into

consideration for the purpose of computing income

under section 44BB of the IT Act if it attains the

characteristics of income as per the charging

provisions of the IT Act. Therefore, the claim of

mobilization charges being reimbursement in nature

shall have to be substantiated by establishing a close

nexus between the mobilization fees and the cost

incurred for transportation of rigs i.e. the terms of the

contract should clearly establish that the operators

shall bear the charges incurred for transportation of

rigs and the compensation shall be provided only for

the usage of rigs.

48 ACIT v. Jindal Drilling Leasing ITA No. 6452/Bom/91 dated April 30, 1998.49 Saipem SPA VS DCIT (2004) 88 ITD 213.



NO BENEFIT UNDER SECTION 80-IB IF SSI DOES NOT

CONTINUE TO MEET ELIGIBILITY CRITERIA IN

SUBSEQUENT YEARS.

50 In AceMulti Axes Systems Limited, the SC held

that the taxpayer is not entitled to the benet of

deduction under section 80-IB of the IT Act if it does

not qualify as a 'small scale undertaking' in

subsequent years even if in the initial year the

eligibility criteria was satised. The SC overruled the

decision of the HC that the object of legislature in

section 80-IB is to encourage industrial expansion

which implies that incentive should

remain applicable even where on

account of industrial expansion SSI

ceases to be SSI as long as it

satised the eligibility criteria of an

SSI in the initial year. The SC

observed that the provision relating

to incentive should be construed

liberally only when there is ambiguity

or absurdity or where conditions of

eligibility are substantially complied.

It held that the scheme of the statute is clear that the

incentive is applicable to a 'small scale industrial

undertaking' (“SSI”). Thus, if the taxpayer ceases to

be SSI, it would not be eligible for benet of deduction

under section 80-IB. It further held that by not allowing

the said incentive to an SSI even if it was eligible in the

initial year, the intention of the legislature was in no

manner defeated.

FACTS

AceMulti Axes Sysytems Limited (“the Assesee”) is

engaged in the manufacture and sale of components/

parts of CNC lathes and similar machines. It was an

SSI and regularly claimed deduction under section

80-IB (3) of the IT Act. In AY 2005-06, the ninth year of

claiming benet under section 80-IB (3) of the IT Act, it

ceased to be an SSI. The AO completed the

assessment by allowing the benet after certain

adjustments. However, the CIT exercising his review

powers under section 263 of the IT Act, directed the AO

to disallow the deduction under section 80-IB(3) of the

IT Act since it was no longer an SSI in AY 2005- 06. The

CIT (A) and the ITAT, upheld the order of the CIT.

However, the HC reversed the decision of the lower tax

authorities and allowed the Assessee's claims.

ISSUES

When once the eligible business of a

taxpayer is given the benet of

deduction under section 80-IB of the

IT Act on ground that the taxpayer

having satised the conditions

mentioned in sub-section (2) of

section 80-IB, could the taxpayer be

denied the benet of the deduction on

the ground that, in the subsequent

years, it ceased to be an SSI?

ARGUMENTS

As per section 80-IB (2) of the IT Act, the following

conditions needed to be satised in order to be eligible

to claim deduction:

(a) It was not formed by splitting up or reconstruction

of a business already in existence.

(b) It was not formed by transfer of machinery or plant

being previously used.

(c) It manufactured or produced any article or thing,

other than certain specied articles or things.

However, in case of an SSI, it could manufacture

or produce even those articles or things.

(d) It must have more than 10 employees if the unit

was running with the aid of power, and more than

20 employees, in case the unit was running

without the aid of power.

“

”

On examination of the scheme of the provision, there is no manner of doubt that the incentive meant

for small scale undertakings cannot be availed if they do not

continue to be such undertakings in the subsequent years.

50 DCIT v. Ace Multi Axes Systems Ltd. Civil Appeal No. 20854 of 2017.



If these conditions were satised, then an 'industrial

undertaking' which had commenced operations

between April 1, 1995 and March 31, 2002 was

eligible for a deduction of 30% (25% in case of a non-

company) of the prots of the unit under section 80-

IB(3) of the IT Act. For an SSI, there is an additional

condition that needs to be satised, i.e., it must be an

SSI unit as per Explanation (g) given in section 80-IB

(14) of the IT Act which refers to section 11B of the

Industries (Development & Regulations) Act, 1951

(“IDR Act”) which in turn prescribe a limit for

investment in plant and machinery to designate the

industrial undertaking as SSI unit.

The Assesee further argued that since it's operations

had started within the aforesaid period and it had also

fullled the requirements of section 80-IB (2) of the

Act, it was eligible for deduction in the initial year. In a

subsequent year, even though it no longer was an SSI

as per section 11B of the IDR Act on account of

increase in limit of investment in plant and machinery,

such a relief could not be denied as the provisions of

section 80-IB did not require the fullment of eligibility

conditions in the subsequent years.

On the contrary, the IRA argued that out of the ve

conditions, the rst two conditions are static or

unchangeable i.e., if in the initial year of manufacture

or production it is substantiated that it has fullled

these two conditions, the AO does not have aby

ground to challenge the subsequent eligible years of

the block period deny the benet u/s 80IB. The rest

three conditions are volatile and unstable. The

industrial undertaking must show in each subsequent

year of claim that these three conditions have not

been violated. Such claims of the assessee has to

face the analysis and scrutiny of the AO. Thus, since

each A.Y. is separate and independent, the revenue

authorities had every power to examine and analyse

the facts and gures as well as relevant law points of

each year to nd out whether all these three

conditions are fullled or not. They placed reliance on 51the ratio of the Natraj Stationery and M/s. Janak

52Dehydration (P) Limited.

The AO then argued that in case of an SSI, in addition

to the four conditions mentioned in section 80-IB (2) of

the IT Act, there was an additional condition that the

unit should be categorized as a SSI as per section 11B

of the IDR Act. The requirements of manufacturing

article or things, minimum number of employees, and

categorization an SSI under section 11B of the IDR Act

were volatile and unstable on a year-on-year basis.

The eligible undertaking had to show in each

subsequent year of claim that these three conditions

had not been violated. In case of the Assessee, it was

an SSI unit in the initial assessment years, but in the AY

2005 06, it was not an SSI and accordingly, deduction

sought under section 80-IB(3) of the IT Act had to be

denied.

DECISION

The SC noted that section 80-IB provides for

deductions of specied percentage from the prots

and gains of the SSI as dened in Clause 14(g) which

in terms refers to Section 11 B of the IDR Act subject to

the fullment of conditions in clause 2 of section 80-IB.

The SC held that while certain qualications are

required only in the initial assessment year, e.g.

requirements of initial constitution of the undertaking,

certain other qualications have to continue to exist for

claiming the incentive such as employment of

particular number of workers as per sub-clause 4(i) of

Clause 2 in an assessment year, etc. For industrial

undertakings other than small scale industrial

undertakings, not manufacturing or producing an

article or things specied in 11th Schedule is a

requirement of continuing nature, etc., it held that the

scheme of the statute does not in any manner indicate

that the incentive provided has to continue for 10

consecutive years irrespective of continuation of

eligibility conditions. Applicability of incentive is

directly related to the eligibility and not de hors the

same. If an industrial undertaking does not remain

small scale undertaking or if it does not earn prots, it

cannot claim the incentive.

The SC took note of the observations in the impugned

order of the HC that the object of legislature is to

encourage industrial expansion which implies that

incentive should remain applicable even where on

account of industrial expansion SSI ceases to be SSI.

51 Natraj Stationery v. CIT, 312 ITR 22.52 M/s. Janak Dehydration (P) Limited vs. Asst. CIT (2010) 134 TTJ (Ahd. ITAT).



However, it remarked that the logic for these

observations is not clear. Incentive is given to a

particular category of industry for a specied purpose.

An incentive meant for SSI cannot be availed by an

assessee which is not such an undertaking. It does

not, in any manner, mean that the object of permitting

industrial expansion is defeated, if benet is not

allowed to other undertakings.

The SC buttressed its view by remarking that the

concept of vertical equity is well known under which all

the assessees need not be uniformly taxed.

Progressive taxation is a well-known element of tax

policy. Higher slabs of tax or higher tax burden on an

assessee having higher income or higher capacity

cannot in any manner, be considered unreasonable.

Thus, in case an SSI ceases to be such an

undertaking, it would be required to pay higher taxes

and while there is no conict with the principle that

interpretation has to be given to advance the object of

law, the SC held that the Assessee having not

retained the character of SSI, is not eligible to the

incentive meant for that category. Permitting incentive

in such case will be against the object of law.

The SC further placed distinguished from its decision 53in Bajaj Tempo (“Bajaj Tempo case”), wherein it

was held that where there is ambiguity or absurdity or

where conditions of eligibility are substantially

complied, the provision relating to the incentive must

be interpreted liberally to promote the objective of

growth and development. The SC observed that

construing liberally does not mean ignoring the

conditions for exemption. The main issue considered

in the said judgment was that though the undertaking

was a genuine 'new industrial undertaking' which was

the qualication for the exemption, a nominal part of

the undertaking was out of the existing undertaking

and building of an existing undertaking was taken on

lease. Thus, the intention of legislature is in no

manner defeated by not allowing the said incentive if

the assessee ceases to be the class of industrial

undertaking for which the incentive is provided even if

it was eligible in the initial year.

54Similarly, in Citizen Co-operative Society Ltd this

Court considered the incentive under Section 80-P

meant for a primary agricultural credit society or a

pr imary cooperat ive agr icul tural and rural

development bank. The assessee was held not to be

entitled to the said incentive as business of the

assessee was held to be nance business to which the

incentive was not admissible even though the principle

of liberal interpretation in terms of Bajaj Tempo case

was applied.

Lastly, the SC placed reliance on the decision of the 55SC in State of Haryana v. Bharti Teletech Ltd.,

wherein the issue was regarding the eligibility of an

assessee to get benet of exemption from tax. It was

observed that while the exemption notication should

be liberally construed, the beneciary must fall within

the ambit of the exemption and fulll the conditions

thereof. In case such conditions are not fullled, the

issue of application of the notication does not arise.

Thus, for the above reasons, the SC held that the

Assessee is not entitled to the benet of exemption if it

loses its eligibility as a SSI in a particular assessment

year even if in initial year eligibility was satised.


The issue with respect to the eligibility of incentive

provisions vis-à-vis fullment of conditions in the initial

year of undertaking has been a matter of debate 56before the courts. The Karnataka HC had held that

the intention of the legislature behind granting a

deduction under section 80-IB of the IT Act was to

support industrial growth and wealth creation during

the initial period of 10 years and thus, merely on

account of the creation of wealth and its re-investment

into business for further growth, the deduction could

not be denied. The ratio of the Karnataka HC was 57reiterated in M. Ambalal & Co. wherein it was held as

follows: “the rule regarding exemptions is that

exemptions should generally be strictly interpreted but

benecial exemptions having their purpose as

encouragement or promotion of certain activities

should be liberally interpreted.”

However, the SC placing reliance on other caselaws

(as discussed above) has held that the Assessee

would not be entitled to benet of exemption if it loses it

eligibility as an SSI in the subsequent years. Thus, the

taxpayers have to ensure that they meet the eligibility

criteria on a year on year basis while claiming

deduction under section 80-IB of the IT Act and other

incentive-related provisions.

53 Bajaj Tempo v. CIT [1992] 62 Taxman 480/196 ITR 188 (SC)54 Citizen Co-operative Society Ltd. v. ACIT [2017] 84 taxmann.com 114/250 Taxman 78/397 ITR 155 State of Haryana v. Bharti Teletech Ltd. [2014] 3 SCC 556.56 Ace Multi Axes Systems Ltd. v.Dy. CIT [2014] 49 taxmann.com 168 (Kar.)57 Commissioner of Customs v. M. Ambalal & Co. [2011] 2 SCC 74.



ONLY SOLAR DAYS RELEVANT FOR ESTABLISHMENT

OF SERVICE PE IN INDIA; FTS NOT TAXABLE IF NO

SPECIFIC PROVISION UNDER THE DTAA.

Recently, the Bangalore ITAT in the case of Electrical material Center Co. Limited v. Deputy Director of

58Income Tax held that for establishing a service PE in India, only solar days should be considered and not man days, i.e., the days when two or more partners/employees were present in India together, the number of days in India should be counted as only once. The ITAT also held that the fact that the India-Saudi Arabia DTAA does not provide for the FTS clause, the services provided by the engineers in India cannot be taxed as FTS and would fall under the residual clause of 'other income' under Article 22(1) of the India-Saudi Arabia DTAA.

FACTS

Electrical material Center Co. Limited (“Assessee”), a company based in Saudi Arabia sent four service engineers in India to provide services to an Indian entity. The total number of days that the engineers stayed in India were 90. However, the AO held that the due to the presence of four service engineers in India for 90 days each, the total number of days should be 360 days.

Further, the AO also ruled that payments received by the Assessee should be taxable as royalty under the IT Act. Further, the AO also held that in the absence of FTS clause in India-Saudi Arabia DTAA, the denition of FTS as provided in the IT Act should be applied. Accordingly, the AO taxed the receipts as FTS as well as Royalty. The DRP conrmed the order and aggrieved by order of the AO/ DRP, the Assessee led an appeal before the ITAT.

ISSUES

(1) Whether solar days or man days should be considered for counting the number of days for

which the employees were present in India so as to constitute a service PE in India?

(2) Whether the services provided by the engineers in India should be taxable in the absence of FTS clause in the India-Saudi Arabia DTAA?

ARGUMENTS

The Assessee argued that the AO was wrong in considering the man days of the services rendered instead of the period for which the activities continue in India (i.e. the solar days). For this purpose, the Assessee relied on the decision of the Mumbai ITAT in

59the case of Clifford Chance v. DCIT (“Clifford Chance”). Further, the Assessee argued that the receipt in question is not Royalty and it is FTS and therefore, it is not taxable because there is no specic provision for taxability of FTS in the India-Saudi Arabia

DTAA.

However, the IRA by relying on the recent Bangalore ITAT case of ABB

60FZ-LLC v. DCIT (“ABB case”) argued that service PE could be established even without the p h y s i c a l p r e s e n c e o f t h e employees in India. The ITAT in the ABB case also held that service PE is not dependent upon the xed place of business as it is only

dependent on the continuation of the activity, which does not mandate physical presence in India.

Further, the IRA argued that where the DTAA does not contain a specic provision for the taxability of a particular payment, the provisions of the IT Act would be applicable. Thus, the fees received by the Assessee is taxable as FTS under section 115A of the IT Act.

“

”

Multiple counting of more than one employees present in India

has to be avoided for determination of PE and the receipt should be

taxed as ‘other income’ under Article 22 (1) of the India-Saudi Arabia DTAA.

58 Electrical material Center Co. Limited v. DDIT TS-451-ITAT-2017 (Bang. ITAT).59 Clifford Chance v. DCIT [2002] 82 ITD 106 (Mum. ITAT).60 ABB FZ-LLC v. DCIT [2017] 83 taxmann.com 86 (Bang. ITAT.)



DECISION

ITAT reached its conclusion by placing reliance on the decision of the Mumbai ITAT in the case of Clifford Chance which ruled that only solar days should be considered and not the number of man-days that the individuals were present in India. The Court in Clifford Chance held that “Multiple counting of the common days is to be avoided so that the days when two or more partners were present in India, together, are to be counted only once. Multiple counting would lead to absurd results. For example, if 20 partners were present in India together for 20 days in one scal year, multiple counting would result in 400 days. There cannot be more than 365 days in a year”.

Therefore, ITAT was of the opinion that multiple counting of more than one employees present in India has to be avoided. Since in the present case, the engineers were present in India for only 90 days, it was less than the number of days prescribed under the DTAA for a service PE to be formed in India. Thus, the Assessee could not have been construed to have a PE in India.

Notably, the ITAT rejected the argument of the IRA which, relying on the ABB case, argued that service PE could be established even without the physical presence of the employees in India. The ITAT in ABB case also held that service PE is not dependent upon the xed place of business as it is only dependent on the continuation of the activity, which does not mandate physical presence in India. In the present case, ITAT distinguished the ABB case on the difference in facts. The ITAT observed that in the case of ABB, managerial and consultancy services were provided which could also be provided without a physical presence in India. Whereas, in the present case, engineers provided personalized services in India and there is no evidence of online services being rendered by the Assessee. Therefore, based on these differences in facts, the ITAT ruled that ruling of ABB is not applicable to the present facts of the case.

On the taxability of income earned by the Assessee on account of FTS, the ITAT accepted the contention of the Assessee and held that since the DTAA does not contain a clause on taxation of FTS, FTS should not be taxable in India. The Taxpayer placed reliance upon the judgment of Madras HC in Bangkok Glass

61 Industry Co. Ltd. vs. ACIT, wherein the IRA had argued that payment receipts were not taxable as Business Prots under the India- Thailand DTAA, however, the receipts would fall under 'other income'

clause of the DTAA. The HC, in that case, held that FTS was not taxable as royalty and rejected AO's nding that FTS was taxable under residual clause under the DTAA.

Similarly, in the present case, ITAT held that there are no provisions under the DTAA addressing taxability of FTS and this should be taxed as 'other income' under Article 22 (1) of the India-Saudi Arabia DTAA. There are some exceptions provided in Article 22 (2) where Article 22 (1) is not applicable but those exceptions do not include FTS. Therefore, FTS is not taxable in India because it will fall in Article 22 (1) and as per this Article, income is taxable in the state of residence i.e. Saudi Arabia. The ITAT held that in the absences of adequate facts to determine the nature of receipts, the matter must be remanded back to the AO for examining taxability as royalties.


This judgment has conrmed the basic principle of Service PE i.e. 'solar days' would be considered and not 'man days' for the purpose of determining Service PE in India. This is also in accordance with the OECD Commentary of 2014 (“Commentary”), which states that when a foreign enterprise is performing services through atleast one individual over a substantial period, then the period does not apply in relation to the individual but in relation to the enterprise. Thus, the same individual does not have to be present throughout these periods, as long as an individual is present, it would be counted as a one day. The Commentary further states that this would apply regardless of how many individuals are performing such services.

This judgment is also important as it discusses the decision of ABB case, which discussed the principles of virtual PE. It could be argued that the ITAT by distinguishing from the ABB case, on the ground that since no services were provided from outside India has implicitly accepted the correctness of the decision that were services are provided, then physical presence of employees is not required.

Lastly, the ITAT has claried that in absence of the 'FTS' clause in the DTAA, the receipts would fall under Article 22 of the DTAA i.e. the residual clause. This is a welcome ruling as it would provide some relief to the taxpayers, where the revenue tax the receipt as per the provisions of the IT Act in absence of specic clause in the DTAA.

61 Bangkok Glass Industry Co. Ltd. vs. ACIT TS-5375-HC-2012(MADRAS)-O (Madras HC).



OUTSOURCING OF BACK OFFICE SUPPORT

FUNCTIONS DOES NOT CREATE A PE .

62In the case of E Funds Corporation, the SC upheld

the HC judgment and held that an Indian subsidiary

constitutes an independent legal entity for taxation

purpose, and hence the relationship of holding-

subsidiary or control exercised by a parent on its

subsidiary by itself does not result in a PE of the

foreign entity in India unless the contrary is proved.

On facts, the SC found that outsourcing of activities to

the Indian subsidiary was not to result in either a xed

place or agency PE in India. It further held that

deputation of employees of the foreign entity to carry

out stewardship activities to protect the interests of

the foreign entity would not result in a service PE in

India. Similarly, employees of the subsidiary who work

under the supervision and direction of the Indian

afliate also do not result in a service PE India. On

attribution of prots, it held that no prots would be

attributable if the PE is compensated at

arm's length.

FACTS

e-Funds Corporation and e-Funds IT

Solutions Group Inc. (“Assessees”)

were companies incorporated and

resident in the USA. Further, e-Funds

International India Private Limited (e-

Funds India) is the wholly-owned Indian subsidiary of

e-Funds Corporation. The Assessees were engaged

in the business of electronic payments, ATM

management services, decision support and risk

management. E-funds India was the Asssessees'

captive back ofce and carried out data entry

operations in respect of the above businesses of the

Assessees.

The IRA held that the Assesseees had a taxable

presence in India as per the IT Act by way of business

connection as well as a PE as dened under Article 5

of the India-USA DTAA. This was upheld by the ITAT.

However, the ITAT disagreed with the method of prot

attribution adopted by the IRA. Aggrieved both the

Assessee and the IRA appealed before the Delhi HC.

63The Delhi HC in e-Funds Corporation, decided that

even if the employees of a foreign company were

seconded to its Indian subsidiary to carry its core

activities, it would not constitute a xed place PE for

the foreign company in India since the premises of the

Indian subsidiary would not be 'at the disposal' of the

foreign company. that visits by The Delhi HC also held

its employees for undertaking stewardship activities or

secondment of employees to work under the control

and direction of the Indian subsidiary should not lead

to the establishment of a service PE.

Aggrieved by the order of the Delhi HC, the IRA had

led an appeal with the SC, which

dismissed the appeal and upheld the

decision of the Delhi HC.

ARGUMENTS

The IRA placing reliance on the United

States Securi t ies and Exchange

Commission Form 10K of e-funds Corp.

and the Transfer Pricing (“TP”) report

argued that most of the employees of the

Assessees were in India. That the Assessee's

business was carrying out call centers and software

development centers and it had call centers and

software development centers only in India. The

Assessees were involved in marketing activities and

its contracts with clients were assigned to e-Funds

India. Further, the Master Service Agreement between

the Assessee and e-Funds India gave complete

control over the personnel employed by e-Funds India.

On account of these facts, the IRA argued that the

Assessee had a xed place PE in India as the

“

”

Where Indian entity only rendered support services

to enable the Assessee to render services to

clients abroad, it would not give rise to a

PE in India.

62 ADIT v. M/s E-Funds IT Solution Inc Civil Appeal No. 6082 of 2015.63 E-Funds IT Solution Inc. v. ADIT, 364 ITR 256 (Delhi HC).



premises of e-funds India were at the disposal of the

Assessee. The IRA further argued that as per the

consolidated Annual Report of the Assessee and the

TP Report most of the employees of the Assessee's

were in India and they had carried out activities under

the supervision of the Assessee. Further, the IRA

argued that the two employees who were seconded

by the Assessee to e-funds India were providing more

than stewardship services. In sum, it was submitted

that the personnel engaged in providing these

services were ostensibly the employees of e-Funds

India but were de-facto under the control and

supervision of the Assessee. Thus, the Assessee

constituted a service PE in India. The IRA further

argued that as the Assessee failed to establish that

they did not constitute dependent agency PE

(“DAPE”), an adverse inference must be drawn

against them.

On the contrary, the Assessee argued that no Fixed

Place PE was constituted as the Assessee did not

have the right to use the premises for the purpose of

their own business. Further, the TPO's order indicated

that the various agreements were on arm's length

basis and thus, no prots were attributable. With

respect to the service PE, the Assesee argued that no

services were rendered in India as all the customers

were located outside India. That the entire personnel

were engaged by e-funds India and that the Assessee

may indirectly exercise control is only for purposes of

protecting their own interest. Ultimately, he argued

that the Assessee had 4 businesses namely, ATM

Management Services, Electronic Payment

Management , Dec is ion Suppor t and R isk

Management and Global Outsourc ing and

Professional Services, all of which were carried

outside India and that e-Funds India was only carrying

out back ofce services.

DECISION

Fixed Place PE

The SC held that the following factors were

considered by the IRA and the ITAT for contending

that the Assessees had a PE in India:

(i) The Assessees and their Indian subsidiary were

closely connected.

(ii) The Indian subsidiary provided services to, and

was dependent on, the Assessees for its earnings.

(iii) The Indian subsidiary did not bear sufcient risk.

(iv) Intangible software was provided by the

Assessees to the Indian afliate free of cost.

(v) T h e A s s e s s e e s w e r e s u b - c o n t r a c t i n g

work/services to India, with an intent and purpose

to save costs and to increase protability.

The SC held that the above factors are not relevant in

deciding whether the Assessees had established a PE

in India. It also observed that for the constitution of a

xed place PE, it needs to be established whether the

Assessees had a xed place of business in India and

whether such a place was carrying on the Assessees'

business in India. It further held that the non-resident

could be said to have a xed place of business in India

if the “physically located premises in India were 'at its

disposal'. As per the recent SC ruling in the case of 4Formula One, a xed place is dened as one that is at 6

the disposal of the non-resident only when the non-

resident has the right to use the said place at its sole

discretion and also has control over the same. In the

instant case, since the business premise of e-Funds

India was not 'at the disposal' of the Assessees, it was

held that they did not establish a xed place PE in

India.

Service PE

The SC observed that although the seconded

employees were present in India, no services were

rendered by them on behalf of the Assessees in India

as the seconded employees were under the control

and supervision of e-Funds India. As the preliminary

condition of Article 5(2) (l) of the India-US DTAA of

rendering any services in India on behalf of the

Taxpayers was not satised, the SC held that no

service PE was constituted.

It must be noted that unlike the negative observations

of the Delhi HC, the SC did not rule on whether the

seconded employees were under the control and

supervision of e-Funds India, but dismissed the Tax

Authorities' argument on the ground that no services

were rendered by such employees in India on behalf of

the Assessees.

64 Formula One World Championship Limited v. CIT SCC (2017) SC 474.



Dependent Agency PE (DAPE)

The SC held that a subsidiary by itself cannot be

considered to be a dependent agent of the parent

merely on account of the relationship between the two

entities as it would negate the overriding effect of

Article 5(6) of the DTAA that seeks to give recognition

to separate legal entity principles. However, it also

observed that a subsidiary may be construed as a

DAPE if it habitually exercises an authority to

conclude contracts on behalf of the principal or

habitually secures orders almost wholly or wholly for

the principal.

The SC observed that although e-Funds India was

engaged in providing inputs and information to the

Assessees to enable them to enter into contracts with

end customers which were subsequently sub-

contracted to it, there was no evidence of e-Funds

India participating in the negotiations or concluding

contracts with end customers on behalf of the

Assessees Accordingly, it was held that it could not be

regarded as a DAPE of the Taxpayers in India.

Prots attributable to the PE

The SC held that if the Indian entity is compensated by

its non-resident afliate on arm's length for the

services rendered by it, no further prots would be

attributable in India. Further, the SC also claried that

any settlement under the Mutual Agreement

Procedure during any tax period cannot be

considered as a precedent for subsequent years.


This SC decision has brought in further clarity in the

ever-contentious issues of formation of PE and prot

attribution and should help taxpayers planning their

business transactions. In the instant case, the SC

claried that even if back ofce services were

outsourced to the Indian entity and were carried out by

the Indian entity through its own employees and

employees seconded by the overseas parent, it would

not amount to a xed place PE of the foreign entity so

long as the business premises of the Indian entity were

not at the disposal of the foreign entity. It was also held

that the foreign entity will not constitute a DAPE, if the

seconded employees do not carry any business

activities or negotiate and conclude contracts on

behalf of the foreign entity. The SC also held that as no

services were rendered in India and the control and

supervision over the seconded employees was

exercised by eFunds India, no service PE of eFunds

US was constituted in India.

Lastly, reiterating the principle enunciated by the SC in 65the case of Morgan Stanley, the SC also upheld that

once the services rendered and activities performed in

India have been compensated on arm's length basis,

no further income can be attributed to the PE of the

foreign entity in India.

65 DIT v.Morgan Stanley (2007) 7 SCC 1



NO TAX ON JDA UNTIL ITS REGISTRATION.

66In the case of Balbir Singh Maini. the SC upheld

the contentions of the taxpayers by conrming the

decision of the Punjab & Haryana HC and held that

for a transaction to be regarded as 'transfer' under

section 2(47)(v) of the Act, all conditions of section

53A of Transfer of Property Act, 1882 should be

satised and possession of the property should be

obtained by the transferee in part performance of the

contract. It also observed that only real income should

be brought to tax and not notional income.

FACTS

Balbir Singh Maini and Others (“Assessees”) were

members of a housing society (“the Society”) which

owned certain land in a village. The Society entered

into a tripartite JDA with certain developers (“the

Developers”). Under the Joint Development

Agreement (“JDA”), it was agreed that the Developers

would undertake development of 21.2 acres of land

owned and registered in the name of the Society and

in respect of which it would give development rights in

lieu of consideration. It is pertinent to note that

although the JDA was executed, it was not registered

and as per the terms of the JDA, possession of the

property was to be handed over simultaneously along

with the registration of the JDA.

Further, the Developers made only part payment of

consideration and thus, the Assessees offered to tax

the proportionate amount received by him. However,

the JDA was subsequently abandoned as the

necessary permissions for development were not

granted. The AO held that the Assessees were liable

to capital gains tax as possession of land was

transferred under the JDA. The ITAT conrmed the

decision of the lower authorities but the HC reversed

the decision of the ITAT and the lower authorities.

ARGUMENTS

The IRA argued that since physical and vacant

possession has been handed over under the JDA, the

same would tantamount to “transfer” within the

meaning of section of 2(47)(v). It was also concluded

that the Assessees was liable to pay capital gains tax

during current assessment year under consideration

on the entire amount already received and / or

receivable in future.

However, the Assessees argued that no possession of

land was given by the transferor to the transferee in

part performance of the JDA so as to fall within the

domain of section 53A of the Transfer of Property Act,

1882 (“TOPA”) and in the absence of the fullment of

the ingredients of Section 53A of, no 'transfer' under

section 2(47)(v) of the IT Act would be said to have

taken place. The Assessees argued that the

possession delivered was as a licensee for the

development of land and not as a transferee.

DECISION

After going through the facts and circumstances and

contentions of the Assessees as well as the IRA, the

SC observed that under section 2(47) (v), the term

'transfer' included any transaction which allowed

possession to be taken/retained in part performance of

a contract of the nature referred to in section 53A of

TOPA. In other words, even those arrangements

which conrmed the privileges of ownership without a

corresponding transfer of title would be covered under

section 2(47)(v).

The legislative intent behind introduction of clause (v)

to section 2(47) from assessment year 1988-89 as

discernible from a circular issued by the CBDT is to

embrace within its ambit those transactions of sale of

property where taxpayer would enter into agreements

for developing properties with builders and the seller

would confer rights and privileges of ownership to the

buyer without executing / registering a formal

conveyance deed in order to avoid capital gains tax.

Thus, by deeming ction, 'transfer' was assigned an

extended meaning for taxation purposes by

incorporating and including that where possession of

66 CIT v. Balbir Singh Maini, Civil Appeal No. 15619 of 2017.



any immovable property was taken or retained in part

performance of a contract of the nature referred to in

section 53A of TOPA. Correspondingly, capital gains

would be levied in the year in which such transactions

were entered into even if the transfer of immovable

property is not effective or complete under the general

law.

Section 53A of TOPA was incorporated to provide

protection to a transferee to retain his possession

where, he had taken possession of the property,

pursuant to part performance of the contract. But the

following conditions have to be fullled if a transferee

wants to defend or protect his possession under

section 53A of TOPA:

(1) there must be a contract to transfer for

consideration any immovable property;

(2) the contract must be in writing, signed by the

transferor, or by someone on his behalf;

(3) the writing must be in such words from which the

terms necessary to construe the transfer can be

ascertained;

(4) the transferee must in part performance of the

contract take possession of the property, or of any

part thereof;

(5) the transferee must have done some act in

furtherance of the contract; and

(6) the transferee must have performed or be willing

to perform his part of the contract.

Section 53A of the TOPA was amended in 2001 along

with corresponding amendments in section 17(1A)

and section 49 of the Registration Act, 1908 according

to which documents containing contracts to transfer

for consideration shall have to be mandatorily

registered. Thus, if an agreement, like the JDA in the

present case, was not registered, it would have no

effect in law for the purposes of section 53A.

Taking note of the amendment to section 53A, the SC

went on to hold that in order to qualify as a “transfer” of

a capital asset under section 2(47)(v) of the Act, there

must be a “contract” which is enforceable under law

(i.e. comply with section 53A of the TOPA). A perusal

of section 17(1A) and section 49 of the Registration

Act, 1908 provides that in the eyes of law, there was

no contract which could be taken cognizance of, for the

purpose specied in Section 53A. Therefore, for the

JDA to be considered for the purposes of section 53A

of TOPA, it was required to be a registered instrument.

Since the JDA was not registered in the instant case,

the SC held that in the absence of registration of such

an agreement, the same was not enforceable under

general law and thus, the transaction would not fall

under section 2(47)(v).

The SC also observed that the ITAT was not correct in

referring to the expression “of the nature referred to in

Section 53A” in Section 2(47)(v) to arrive at the

opposite conclusion that since the requirement of

registration was introduced only in 2001, the JDA was

not required to be registered to attract section 2(47)(v).

The SC went on to explain that all that was meant by

this expression was to refer to the ingredients of

applicability of section 53A to the contracts mentioned

therein and only where the contract contained all the

essential ingredients under section 53A that section

2(47) (v) would apply. Accordingly, it was held that

such an expression could not be stretched so as to say

that though registration of a contract is required only

after 2001, section 2(47)(v) would include within its

purview only such contracts mentioned in section 53A,

but without the requirement of registration.

However, the SC rejected the view of the HC that

section 2(47)(vi) would not apply in the absence of any

change in membership of the Society. It observed that

under section 2(47)(vi), any transaction that has the

effect of transferring or enabling the enjoyment of any

immovable property would come within its purview.

Such a transfer could be by way of becoming member

or acquiring shares in a co-operative society or in any

'or in any other manner whatsoever'. The SC further

observed that the HC had erred by not adverting to the

expression 'or in any other manner whatsoever' in sub-

clause (vi), which would show that it was not

necessary that the transaction must necessarily refer

to the membership of a cooperative society. A reading

of the JDA in the present case would show that the

Assessee continued to be the owner throughout its

tenor, and at no stage purported to transfer ownership

rights to the Developers. At the highest, possession

alone was granted under the JDA for the specic

purpose of development of property. Thus, section

2(47)(vi) would not be attracted in the present case.



Lastly, it was also held that the income from capital

gain on a transaction which never materialized was at

best, a hypothetical income as the JDA was

abandoned due to lack of required approvals /

permissions. As the income did not result at all, there

was no prot or gain which would arise from the

transfer of a capital asset, which could be brought to

tax under Section 45 read with Section 48 of the

Income Tax Act. In other words, the SC expounded

the principle of “real income” and followed the well-

established precedents set up by the Indian judiciary.


With the real estate industry experiencing

unprecedented growth, both landowners and

developers have entered into several innovative

business models to ensure that the landowners

participate in the future potential of the project being

developed and at the same time not requiring

developers to shell out the entire consideration for the

land before commencing any work. Entering into a

JDA has become one of the most common forms of

arrangement between them. The landowner and the

builder collaborate on the basis of which the

landowner contributes his land whereas the builder

brings in his expertise in construction so as to develop

the project with both parties sharing the income

earned from a developed project in a pre-determined

ratio. Of course, depending on the facts and

circumstances of the case, multiple variations of this

structure can be seen, with the broad contours of the

arrangement remaining the same.

The taxability of income accruing or arising from a JDA

has been under litigation for a long time. Primarily,

Indian tax authorities contend that the landowner

should be liable to pay tax at the time of entering into

the JDA whereas taxpayers have been contending

that the tax should be payable only at the time of

registration of the JDA. This contentious issue has

hopefully attained nality with the SC verdict in this

case.

The SC has reiterated that for a transaction to be

regarded as 'transfer' under section 2(47)(v) of the Act,

all the conditions of section 53A of Transfer of Property

Act, 1882 should be satised and possession of the

property should be obtained by the transferee in part

performance of the contract. It also observed that only

real income should be brought to tax and not notional

income.

43



CASE LAW UPDATES

- INDIRECT TAX



ENTIRE FEES RECEIVED BY HOSPITAL IS TOWARDS

THE PROVISION OF HEALTH CARE SERVICES.

67In the case of Sir Ganga Ram Hospital and Anr ,

the CESTAT held that health care services being

rendered by the hospital were being facilitated by the

doctors, as a result the entire fees received from the

patients was towards the provision of health care

services.

FACTS

Sir Ganga Ram Hospital, Apollo Hospital, Max

Healthcare Institute and Indrapastha Medical

Corporation (“Appellants”) were engaged in the

business of managing well known hospitals and

medical centres at various locations in India.

Appe l lan ts have entered in to cont rac tua l

arrangements with a number of doctors and

professionals to provide medical services to patients

in their premises. Appellants have provided such

doctors and professionals with the requisite facilities

i n f o r m o f i n f r a s t r u c t u r e ,

machinery, etc. to enable them to

carry out their services in the

Appellants' hospitals. In terms of

the contractual arrangement

between the Appellants and

doctors, the fees received by the

Appellants were divided in the pre-

determined ratio as per the

r e s p e c t i v e c o n t r a c t u a l

arrangements.

The Revenue (“Respondent”)

held the view that the charges collected and retained

by the Appellants were in the nature of “collection

fee/facilitation fee” received by the Appellants for

providing infrastructural facilities to such doctors and

professionals. Therefore, the amounts retained by the

Appellants formed a taxable consideration for

services rendered by them, and exigible to Service

Tax under the category of 'business support services'

for the period prior to June 1, 2012 (“Positive List

Regime”) as well as for the period after it (“Negative

List Regime”).

Accordingly, the Appellants were held liable for the

payment of Service Tax for rendering business support

services under the FA. The Appellants challenged the

orders passed by different authorities by ling six

appeals before the CESTAT for the examination of the

issue as to whether the Appellants were rendering any

taxable services to the doctors engaged on a

contractual basis. The Respondent also appealed

against one of the orders passed by a Commissioner

of Service Tax, in favour of Appellants.

ISSUES

Whether the Appellants were rendering any taxable

services to the doctors and professional engaged by

them on a contractual basis to

attend to their patients?

ARGUMENTS

The Appellants submitted that the

doctors were not business entities

in terms of Section 65(104c) of 68 FA. The services in the nature of

business support services were

essentially outsourced service.

Whereas in the instant case the

Appellants were engaged in

providing health care services, using the services of

the doctors appointed under the revenue sharing

arrangements. The revenue sharing arrangements

provided for the xed percentage of the total revenue,

earned by the Appellants and the doctors.

In the alternative, the Appellants contended that even

where any services were being provided, it was by the

doctors to the Appellants. The doctors were helping

“

”

Hospitals do not provide any infrastructural support services to

its retainer doctors by making available the essential facilities for the hospitals’ operations, and the amounts retained by the hospitals

as a percentage of the fees received from the patients are not in the nature

of consideration for services provided by them to doctors.

67 Sir Ganga Ram Hospital and Anr. v. CCE Delhi-1 and Anr. 2017 (12) TMI 509 (CESTAT-New Delhi).68 CIT v. Dr K K Shah 135 ITR 146 (Guj).



the Appellants in providing health care services and

were getting remunerated for the same.

The Appellants further contended that the opinion of

the Respondent that the services rendered in

connection with health care services were to be taxed

as support services of business or commerce, would

defeat the purpose of exemption to health care

services available both under the Positive List

Regime as well as in Negative List Regime. The

Appellants brought to the attention of the CESTAT that

the activities of the Appellants were not restricted to

the provision of space, it also included other services

in nature of blood bank, emergency units, operation

theatres, monitoring of patients, follow up with

patients, etc. Such facilities were majorly utilised for

the diagnosis and treatment of patients.

On the other hand, the Respondent stated that the

doctors were engaged in a business activity and were

receiving considerat ion for the same. The

Respondent further contended that the doctors

utilized the support services provided by the

Appellants, without which they could not have

undertaken their activities as professional doctors.

The revenue sharing arrangement could not alter the

nature of services provided by the Appellants to

doctors. The contractual arrangement between the

Appellants and doctors stipulated various duties and

responsibilities. Accordingly, the amounts retained by

the Appellants were taxable consideration for

providing taxable services in the nature of support

services of business or commerce.

DECISION

The CESTAT observed that the health care services

provided by the Appellants were facilitated by the

doctors. Accordingly, the entire fees received by the

Appellants from its patients were towards the

provision of health care services.

The CESTAT disagreed with the submission of the

Respondent tha t the Appe l lan ts prov ided

infrastructural support services. In this regard, they

reviewed the contractual arrangements between the

doctors and the Appellants. It observed that these

provided the details of the duration of the contracts,

obligations and duties of the parties, the procedure for

termination and the fees payable by Appellants to

doctors. Accordingly, the CESTAT observed that such

contractual arrangements were for joint benet of the

Appe l l an t s and the doc to rs , w i t h sha red

responsibilities, benets and obligation and not for the

provision of any facility of specic nature or services,

by the Appellants to such doctors.

The Appellants were engaged in providing health care

services and the same could not be done either by

direct employment of doctors or by having contractual

arrangements. The contention of the Revenue that the

amounts retained by the Appellants, were in the nature

of consideration for services, was not evident from the

contractual arrangements. Accordingly, the CESTAT

held that there were no business support services

provided pursuant to such arrangements.

The CESTAT also observed that the denition of

'support services of business or commerce' in the

Positive List Regime, provided that such services

should be in relation to business and commerce. The 69 CESTAT relied on Gujrat HC judgment and held that

there was no taxable activity classiable in such

contractual arrangements.

In relation to the Negative List Regime, CESTAT

placed reliance upon the scope of the terms 'health

care services' and 'clinical establishment' as dened in

the relevant exemption notication and disagreed with

the view of Respondent, that a part of the

consideration received for health care services from

patients was taxable. It held that the view of

Respondent has no legal justication and would have

defeated the purpose of enacting such an exemption.

In the light of above, CESTAT held that the Appellants

were not providing any services to the doctors and

professionals.


As an impact of this judgment, the ambiguity in relation

to revenue sharing model adopted by various

hospitals with doctors and professional has been

claried. The case highlights that the hospitals neither

provide any infrastructural support services to their

doctor, nor was the amount retained by the hospital for

providing any services. Therefore, the judgment plays

69 Ibid.



a signicant role in understanding the scope of the

exemption available to health care services under the

erstwhile indirect tax regime.

This judgment is also signicant due to the

interpretation accorded by it to revenue sharing

models in the previous regimes. Under the erstwhile

regime there was persistent litigation on the issue of

levy of service tax on services provided inter se the

distributors/sub-distributors of lms under revenue

sharing models for undertaking movie exhibitions,

advertising, etc.

Under the GST regime as well, exemption is available

to health care services, in terms of the Notication No.

12/2017- Central Tax (Rate) dated June 28, 2017 read

with the relevant State GST notication in case of

intrastate supply and Notication No. 9/2017-

Integrated Tax (Rate) dated June 28, 2017. The

terminology used in the abovementioned notications

and the denitions of the terms are worded in the

same fashion and are parallel to that under the

erstwhile regime. Accordingly, the ratio of this

landmark judgment shall play a signicant role even

under the GST regime.

47



“

”

Remittance of foreign currency by an Indian entity to its foreign parent for making

payments for social security andbenefits in the foreign jurisdiction,

for expats deputed to it, would not qualify as a consideration

for services rendered to the Indian entity.

NO SERVICE TAX LIABILITY ON AMOUNTS PAID

TOWARDS SALARIES AND PERQUISITES OF

DEPUTED EXPATS AND COMMISSION RECEIVED

FOR MARKETING OF FOREIGN ENTITY.

70In the case of BMW (India) Pvt. Ltd., the CESTAT

held that no Service Tax was payable by an Indian

entity, on the salaries and perquisites transferred by it

to its foreign parent in relation to deputed expats,

commission received by it on account of marketing

services provided by it and charges received for

services rendered in relation to International

Purchasing Ofce in India.

FACTS

BMW (India) Pvt. Ltd. (“Appellant”)

was a 100% subsidiary of BMW AG

Germany (“BMW AG”) and was

engaged in the manufacturing cars

at its production unit located in Tamil

Nadu. BMW AG assigned a certain

number of its employees to the

Appellant and such employees were

in direct control and supervision of

the Appellant.

Further, the Appellant was engaged

in marketing of the cars and had

acted as International Purchasing Ofce in India for

BMW AG. During the course of audi t , the

Commissioner of Service Tax noticed that the

Appellant had not discharged the Service Tax liability

for the following:

(i) On the amounts in the nature of salaries and

perquisites of the expat employees, paid by the

Appellant in relation to Manpower Recruitment or

Supply Agency Service under reverse charge

mechanism (“RCM”);

(ii) On amount of commission received for services

rendered in relation to marketing and sale of cars

in India by BMW AG; and

(iii) On charges received from BMW AG for services

rendered in nature of International Purchasing

Ofce in India.

The Department (“Respondent”) issued four show

cause notices in relation to the aforementioned

services provided during the period April, 2006 to

September, 2011. Subsequently, an order dated

August 31, 2012 was passed by

CCE, New Delhi, conrming the

demand of Service Tax of INR

4,67,42,480 for import of manpower

supply service under RCM, INR

16,65,550 for rendering marketing

a n d s a l e s e r v i c e a n d I N R

1 , 7 4 , 7 6 , 3 8 1 f o r r e n d e r i n g

International Purchasing Ofce

services.

The Appellant appealed against the

said order before the CESTAT,

Chandigarh.

ISSUES

(1) Whether Service Tax was leviable on the salaries

and perquisites of the employees paid by the

Appellant to BMW AG for receiving manpower

recruitment supply agency service under RCM?

(2) Whether Service Tax was leviable on the

commission received from BMW AG for rendering

70 M/s BMW (India) Pvt. Ltd. v. CST, New Delhi TS-313-CESTAT-2017-ST.

48



71 CST Noida v. Computer Science India Pvt. Ltd 2015 (37) STR 62 (All.); Volkswagen India Pvt. Ltd. v. CCE, Pune 2014 (34) STR 135 (Tri. Mum).72 ibid.73 Volkswagen India Pvt. Ltd. v. CCE, Pune 2014 (34) STR 135 (Tri. Mum.).74 Microsoft Corporation India Pvt Ltd v. CST, New Delhi, 2014 (36) STR 766 (Tri.-Del.).

services in nature of marketing and sale of cars in

India?

(3) Whether Service Tax could be charged on the

amounts received from BMW AG on account of

services rendered in relation to the International

Purchasing ofce in India?

ARGUMENTS

In relation to the Service Tax liability of the Appellant

for manpower supply services, it contended that the

following were the essential requirements for a

service to qualify as a manpower recruitment or a

supply agency, under Section 65(105) (k) of FA.

(1) There has to be a service provided or to be

provided to any person;

(2) The service has to be provided by manpower

recruitment or a supply agency; and

(3) The service must be provided in relation to the

recruitment or a supply of manpower, temporarily

or otherwise, in any manner.

BMW AG was not manpower recruitment or a supply

agency, therefore, the services did not qualify as a

manpower recruitment or a supply agency. In this

regard, the Appellant placed reliance upon a plethora 71of judgments to establish that the element of

taxability had not arisen in the case of the Appellant.

The Appellant claried that the said employees of

BMW AG were not under the employment of BMW

AG, at the time they were engaged in employment

with the Appellant. Such employees were contributing

toward the provident fund as per Indian Laws and

were paying Income Tax in India. The Appellant

substantiated its arguments by providing the

employment agreement of some of the concerned

employees.

Further with respect to the commission received from

BMW AG and charges for International Purchasing

Ofce, the Appellant argued that the market

operations undertaken by the Appellant were not at

the behest of any Indian customer but for BMW AG,

and were exported outside India.

The Respondent contended that the Appellant made

remittances in foreign currencies to BMW AG for the

salaries of the employees/expats deputed to the

Appellant. The Respondent alleged that BMW AG had

supplied the concerned employees to the Appellant.

Accordingly, the services provided by BMW AG was in

the nature of manpower supply services. Further, the

Respondent contended that the Appellant had

provided taxable services to BMW AG by promoting,

marketing and selling their goods.

The Respondent also contended that the services

rendered for International Purchasing Ofce by the

Appellant were services provided in India and such

services were being used in India, hence such service

could not be considered as an export of service.

Accordingly services rendered were exigible to

Service Tax in India.

DECISION

The CESTAT analysed the agreement between the

Appellant and BMW AG, dated November 17, 2008,

and observed that the employees were deputed by

BMW AG and employees were now under direct

control and supervision of the Appellant. These

employees had paid Income Tax in India and made

provident fund contributions. The amount remitted to

BMW AG was in relation to the amount payable for

social security and other benets in the foreign

jurisdiction. Thus, CESTAT by relying upon the 72Computer Science India Pvt Ltd. and Volkswagen

73India Pvt. Ltd., held that BMW AG was not providing

manpower supply services to the Appellant and

accordingly no Service Tax was payable by the

Appellant under RCM.

In relation to the commission received for rendering

service in relation to promotion and sale of cars in India

for BMW AG, the CESTAT stated that the Appellant

provided Business Auxiliary Services. The CESTAT

relied on the case of Microsoft Corporation India Pvt.

49



74Limited which laid down the principle that where a

service was being provided to a service recipient

based outside India and used by such service

recipient outside India, such services would qualify as

export of services, even when such service was being

used for selling goods within India.

Further, the services rendered in relation to the

International Purchasing Ofce, the Appellant

provided the details of the local vendors who met the

requirements laid down by BMW AG. The Appellant

contended that the consideration received by the

Appellant for the same was independent of

subsequent action by utilization of such information

by BMW AG.

The CESTAT by relying upon the judgments dealing

with export of services held that services rendered by

the Appellant in relation to promotion and sale of cars

in India for BMW AG and in relation to the International

Purchasing Ofce qualied as export of services.

Consequently, the demands in these respect were

also set aside by the CESTAT.


The said judgment aligns the treatment of such

transaction under indirect taxes with that under

income tax laws of India. This shall ensure that the

assessee is not faced with differential treatment owing

tosuch transactions under multiple Indian tax statutes,

and burdened with additional tax burden, while

complying with requirements prescribed under other

Indian laws.

The judgment is also signicant as the same principles

would apply even under GST regime, and expats

deputation where the entire control and supervision

was undertaken by the Indian entity would not be

considered as manpower supply services supplied by

the foreign entity.

50



“

”

A purchasing dealer cannot be denied the benefit

of ITC only because the selling dealer failed to

discharge its obligation to pay tax to the Government.

THE BENEFIT OF INPUT TAX CREDIT UNDER

THE DELHI VAT ACT, 2004.

BONA FIDE PURCHASERS CANNOT BE DENIED

75 In Arise India Limited, the Delhi HC upheld the 76constitutional validity of Section 9(2)(g) of the Delhi

VAT Act, 2004 (“DVAT Act”), subject to the condition

that the no bona de purchasing dealer who had

complied with all requirements under the DVAT Act

was denied the benet of ITC.

FACTS

Section 9(2)(g) of the DVAT Act disallowed the ITC to

dealers or class of dealers, if the taxes paid by

purchasing dealer was not deposited to the

Government by the selling dealer or unlawfully

adjusted against the its output tax liability.

In pursuance to restriction on the availability of ITC

under Section 9(2)(g) of the DVAT Act, several

purchasing dealers inter-alia including

Arise India Limited (“Petitioners”) were

denied the benet of the taxes paid on

the input on grounds inter-alia including

that:

(a) The selling dealer defaulted in

payment of the taxes to the

Government;

(b) The ITC availed on purchases by

SCT did not match the sale details led by the

selling vendors;

(c) The details provided by the selling dealer was

suspicious; etc.

The Petitioners therefore, challenged the assessment

orders (“Impugned Orders”) as well as the validity of

Section 9(2)(g) of the DVAT Act before the Delhi HC.

ISSUES

Whether Section 9(2)(g) of the DVAT Act was

unconstitutional and violative of Article 14 and Article

19(1)(g) of the Constitution?

ARGUMENTS

The Petitioners argued that Section 9(2)(g) of the

DVAT Act treated both the 'guilty purchasers' and

'innocent purchasers' at par, whereas they constituted

two different classes. Therefore, inasmuch as the

aforesaid provision treated both the innocent and

guilty purchasers alike, it was violative of Article 14 of

the Constitution.

Further, the Petitioners argued that Section 9(2)(g) of

the DVAT Act qua the purchasing dealer was arbitrary,

irrational and unduly harsh as the ITC was denied to

him because of the default of the selling

dealer over whom he had no control.

The Petitioner contended that if at all the

selling dealer had defaulted in payment

of tax, the authorities had the power to

recover the tax from him under Section

43 of the DVAT Act, instead of denying

the benet of ITC to the innocent

purchasing dealer.

It was also contended by the Petitioners that they had

complied with all requirements under the DVAT Act i.e.

to ensure that the selling dealer was a registered

dealer, and issuance of a valid tax invoice. Once these

requirements were complied with, the ITC could not be

denied to the Petitioners, merely due to the default of

the selling dealers.

75 W.P. (C) 2106/2015, Delhi HC, Decision dated October 26, 2017.76 The relevant extract of Section 9(2)(g) of the DVAT Act reads as: “(2) No tax credit shall be allowed – (a).. (g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully

adjusted against output tax liability and correctly reected in the return led for the respective tax period.”

51



The Petitioners further argued that the words 'actually

deposited' in Section 9(2)(g) of the DVAT Act should

be read as 'selling dealer ought to have deposited'

and should exclude from its ambit a purchasing dealer

who had duly complied with all requirements

prescribed under the DVAT Act. The Petitioners also

argued that the object and purpose of the DVAT Act

wereto be taken into consideration while interpreting

the aforesaid provisions, which is to give benet to the

assessees.

On the o the r hand , t he VAT depar tmen t

(“Respondent”) argued that arbitrariness could not

be a ground for challenging a provision as being

violative of Article 14 of the Constitution. The

Respondent further argued that mere hardship

caused by the impossibility of compliance with the

provisions could also not be a ground for striking down

a statutory provision.

The Respondent further argued that similar provision

existed in the Maharashtra VAT Act, 2002 (“MVAT

Act”), the validity of which was upheld by the Bombay

HC in the case of Mahalaxmi Cotton Ginning and Oil 77Industries.

In addition, the Respondent also cited the relevant

Cabinet Note prepared at the time of insertion of the

aforesaid provision, and argued that a scal

legislature had to be given a greater leeway and there

had to be a presumption of soundness of the

legislative policy. The Respondent argued that it was

for sound reasons that the said provision was

introduced since it was found that there were a large

number of instances where selling dealers, after

collecting the tax, failed to deposit it with the

Government. Hence, such provision could not be held

unconstitutional.

DECISION

The Delhi HC while analyzing the relevant provisions

held that there were only two conditions for the

purchasing dealer to be eligible for availing ITC under

the DVAT Act. The rst condition was that the selling

dealer held a valid registration under the DVAT Act

and second that such registered selling dealer had

issued valid 'tax invoices' in terms of Section 50 of the

DVAT Act to the purchasing dealer.

The HC held that a purchasing dealer could not be

expected to keep track of whether the selling dealer

had in fact deposited the tax to the Government.

Further, as long as the purchasing dealer had

complied with the requirements under the DVAT Act,

he was not expected to keep track of whether the

selling dealer had deposited the tax or not.

The HC held that the legislature failed to distinguish

between bona de purchasing dealers and those who

are not acting in good faith. There was a need to

restrict the denial of ITC only to the dealers who were

in connivance with selling dealers who had failed to

deposit the tax collected by them. There was no need

to punish bona de purchasing dealers. It was held

that such a failure to distinguish between compliant

bona de purchasers against the non-compliant

purchasers, would be certainly hit by Article 14 of the

Constitution.

The HC also looked into the Doctrine of “Reading

Down” which allows the court to mend a provision of

law through the process of interpretation, where

provisions were vague and ambiguous, so as to

ensure it conforms with the intention of the legislature.

The HC observed that Section 9(2)(g) of the DVAT

gave unreasonable power to the Respondent to

proceed against the purchasing dealer even in the

instances where the purchasing dealer had no control

on the actions of the selling dealers. In addition, there

were other provisions under the DVAT Act under which

the Respondent could proceed to recover the tax from

the selling dealer.

Regarding the comparison of the aforesaid provision

with a similar provision under the MVAT Act, the HC

held that there was no provision in the MVAT Act

similar to Section 40A of the DVAT Act. Section 40A of

the DVAT Act provided the mechanism to address a

situation where the selling dealer and the purchasing

dealer were in collusion with a view to defraud the

Respondent. Therefore, the Respondent should only

have gone against the defaulters i.e. selling dealers or

purchasing dealers who have colluded to defraud the

Respondent.

In light of the above, the HC held that the expression

“dealer or class of dealer” in Section 9(2)(g) of the

DVAT Act was to be interpreted as not including a

77 Mahalaxmi Cotton Ginning and Oil Industries v. State of Maharashtra, (2012) 51 VST 1 (Bom.).

52



purchasing dealer who had bona de entered into

transactions and complied with other conditions

under the DVAT Act. If the interpretation of the

Respondent was agreed to, it would have to be held to

be violative of Article 14 of the Constitution. The HC

further held that in an event where the Respondent

has the evidence to show that the purchasing dealer

and the selling dealer acted in collusion to defraud the

authorities, then the Respondent could proceed

under Section 40A of the DVAT Act.

Accordingly, the HC set aside the Impugned Orders.


This decision of the HC is an important jurisprudence

as the HC has for the rst time interpreted the phrase

'dealer or class of dealer' in the aforesaid provision.

The HC restricted the meaning of the said phrase to

'selling dealers and to the guilty purchasing dealers

colluding in non-payment of the taxes to the

Government'. The HC clearly held that under no

circumstances, purchasing dealers who had no

control on the actions of the selling dealer could be

denied the benet of ITC due to the default of the

selling dealers.

This judgment of the HC is also signicant due to the

possible impact it may have under the GST regime.

The GST legislations also allow the benet of ITC to

the purchasing dealers only after the selling dealer has

actually paid the tax collected from the purchasing

dealer to the Government and led the requisite

returns in this regard. The Purchasing dealer has no

means to ensure that the selling dealer deposits the

tax to the Government. Besides this, provisions similar

to DVAT Act is also contained in the GST legislation

which provides for recovery of tax from the selling

dealer. Accordingly, the current interpretation is

completely applicable to the GST legislations.

Though this decision of the HC is a welcome respite to

the dealers who are denied the benet of ITC merely

due to defaults by the selling dealer, the interpretation

given by the HC may lead to challenges to Section

16(2)(c) of the CGST Act by the assessees on the 78aforesaid ground.

Under the GST regime also, notices have been issued

to a few purchasers denying the ITC. In light of the

above decision, the purchaser may also evaluate the

option of ling writs in such circumstances. It will be

interesting to see how HCs react to similar challenges

under GST.

78 The relevant extract of Section 16 reads as: “(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or

both to him unless,––(a) .. (c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of ITC

admissible in respect of the said supply; and ..”

53



“”

Surcharge payable on the duty amount cannot

be imposed if duty payable is Nil.

EDUCATION AND HIGHER EDUCATION CESS

IMPOSED ON SUCH EXCISE DUTY.

EXEMPTION OF EXCISE DUTY EXTENDS TO

79In SRD Nutrients Private Limited, the SC held that

where the primary tax itself was refunded to a

manufacturer by virtue of an exemption notication,

refund of Education Cess and Higher Education Cess

(“Cesses”) cannot be withheld by the department on

the ground that such exemption notication

specically does not exempt the Cesses.

FACTS

SRD Nutrients Private limited (“Appellant”) was

engaged in the manufacture of Malted Milk Food

(Horlicks) and had a factory in the State of Assam,

duly registered with the Central Excise Department. In

2007, in order to promote industrial development, vide

Notication No. 20/2007-Ex. dated April 25, 2007

(“Notication”), the Central Government exempted

the levy of excise duties on the goods manufactured

and cleared from the notied areas in the North-

Eastern States.

For the aforesaid exemption, the

manufacturers were initially required to

pay the applicable excise duty at the time

of clearance of goods, and thereafter

claim its refund.

The Appellant was denied the refund of

Cesses payable along with excise duty by

the assessing ofcer on the ground that the

Notication only provided for the refund of excise duty

and not the Cesses. The said order of the assessing

ofcer was later conrmed by the Commissioner

(Appeals) and the CESTAT, Delhi. Thereafter, the

Petitioner led an appeal before the SC.

In this regard, there were conicting judgments of the

CESTAT Delhi which gave contradictory views on the 80same provision. In the case of Cyrus Surfactants,

the CESTAT Delhi had held that where excise duty was

exempted by virtue of the Notication, Cesses were

also refundable along with the excise duty. Whereas, 81in Jindal Drugs Ltd., another bench of CESTAT Delhi

took a view that the excise department was under no

obligation to refund the Cesses as the Notication only

exempted the excise duty.

ISSUES

Whether the Cesses paid along with the excise duty by

the Appellant were also eligible for a refund in terms of

the Notication?

ARGUMENTS

The Notication provided for 100% exemption from

levy of excise duty. Education Cess was levied at 2%

on the amount of excise duty leviable on the goods

cleared. The Appellant contended that since

Education Cess was in the nature of

surcharge on the excise duty, in the

absence of the primary tax i.e. excise duty,

the question of payment of any surcharge

thereupon would not arise. Accordingly,

when the duty itself was exempted, the

Cesses were also exempted.

The Appellant also placed reliance on Circular No.

134/3/211/ST dated April 08, 2011, which claried that

since the Education Cess was levied and collected as

a percentage of service tax, no Education Cess would

be payable when service tax was Nil by virtue of

exemption notication i.e. Notication No. 41/2007-

S.T, dated December 06, 2007. The Appellant argued

that since the Notication was pari materia with the

aforesaid exemption notication under service tax, the

same interpretation would apply in the instant case as

well.

79 Civil Appeal Nos. 2781-2790 of 2010, SC, Decision dated 10 November, 2017.80 Cyrus Surfactants Pvt. Ltd. v. CCE, Jammu 2007 (215) ELT 55 (Tri-Del.).81 CCE, Jammu v. Jindal Drugs Ltd. 2011 (267) ELT 635 (Tri-Del).

54



The Appellant also argued that it is a settled position of

law that while interpreting tax laws, if two divergent

views were possible, the court should adopt the

interpretation which favored the assessee.

On the other hand, the Respondent argued that the

Notication only provided for exemption of the excise

duty and not Cesses. Further, the mechanism to

provide the exemption was to rst pay the duties and

later claim the refund thereof. Therefore, when it

came to refunding of the excise duty in terms of the

Notication, it was only excise duty that was to be

refunded and not the Cesses.

The Respondent further argued that the Cesses were

payable under Section 11 of the Finance Act, 2004,

and a notication issued under Section 5A of the CEA

could not exempt the Cesses imposed under any

other statute.

DECISION

The SC looked into the aforesaid circular wherein the

Government itself had taken the position that where

the whole of service tax was exempted, then the

Cesses would also not be payable. In light of said

circular, the SC held that when there was no excise

duty payable, due to an exemption, there could not be

any Cesses levied as well, inasmuch as Cesses were

to be calculated on the aggregate of duties of excise.

The SC held that the Cesses would also be refundable

along with excise duty once the excise duty itself was

exempted from levy.


This judgment is signicant in so far as it not only

settles the contradictory views of different benches of

the CESTAT regarding the refund of Cesses in case of

exemption of primary duty, but is also the rst decision

of the SC to clearly state that where there is no levy of

primary duty itself, there could not be any surcharge

thereon.

It is also noteworthy that the SC has extended the

benet of an exemption notication issued under CEA

to Cesses imposed through Finance Act, 2004, and

clearly detailed the rationale behind such extension.

55



PROVISIONS OF A STATE LEGISLATION CANNOT

OVERRIDE THE OBJECTS OF A BENEFICIAL SCHEME.

82In WS Retail Services (P) Ltd., the Karnataka HC

held that the provisions of Karnataka VAT Act, 2003

(“KVAT Act”) could not override the objects and

purpose of Karasamadhana Scheme, 2017 (“KSS

2017”). Accordingly, the deposits made by an

assessee under the KSS 2017 would be rst adjusted

against the taxes due and thereafter against interest

and penalty.

FACTS

The Government of Karnataka had introduced KSS

2017 vide Notication G.O. No. FD 24 GSL 2017

dated March 31, 2017, for providing a waiver of 90%

of interest and penalty, on payment of tax along with

remaining 10% interest and penalty by May 31, 2017,

under various State legislations inter-alia including

Karnataka Sales Tax Act, 1957, CST Act, KVAT Act.

The waiver was subject to the conditions inter alia

including that assessees would withdraw their

pending litigation before any Court or Tribunal.

WS Retail Services (P) Ltd. (“Petitioner”) had led

applications under KSS 2017. The applications of the

Petitioner were rejected on the grounds that the

payments of taxes or deposits (“Pre-deposit”) which

had been made at the time ling an appeal before

higher forum against the assessment orders passed

by the assessing authorities, were to be rst adjusted

by such authorities against the outstanding 'interest' 83 in terms of Section 42(6) of the KVAT Act and not

against the amount of outstanding tax, so as to

determine the 'arrears of tax' or 'arrears of interest and

penalty', as dened in the KSS 2017.

Therefore, the Petitioner led the present case

challenging the application of Section 42(6) of the

KVAT Act on KSS 2017.

ISSUES

Whether the Pre-deposit made at the time of ling

appeal against the assessment orders would be set off

against interest initially, and thereafter for payment of

arrears of tax and penalty under KSS 2017?

ARGUMENTS

The Petitioner contended that the adjustment of Pre-

deposit should have been made rst against the tax

liability under the assessment orders, and then the

balance amount of tax and 10% of interest and penalty

was required to be paid off, availing the benet of KSS

2017. The Petitioner contended that the dues were to

be determined in accordance with the original

assessment orders only and not by any further

adjudication while undertaking the scrutiny of the

Applications under KSS 2017. Therefore, the

Revenue Authorities (“Respondents”) were not

entitled to make an adjustment of Pre-deposits

towards interest rst, and then claim the recovery of

remaining arrears of tax.

It was further argued that Pre-deposits were in the

nature of deposits and not payments under specic

heads such tax, interest, penalty, etc. Therefore,

adjustment of such deposit was to be rst made

against the tax payable, and if any balance amount

remains, such adjustment could be made against

interest and penalty.

The Petitioner contended that the language of KSS

2017 clearly indicated the intent of the legislators was

not to distort the purposes of the said scheme, but to

provide benet to the assessees.

The Petitioner also argued that KSS 2017 was a

special delegated legislation and Section 42(6) of the

KVAT Act cannot override such legislation, in a manner

82 WS Retail Services (P) Ltd. v. State of Karnataka [2017] 87 Taxmann.com 187 (Karnataka).83 Section 42(6) of the KVAT Act reads as: “(6) Where the amount paid falls short of the aggregate of the tax or any other amount due and interest payable, the amount so paid shall rst be adjusted towards interest

payable and the balance, if any, shall be adjusted towards the tax or any other amount due.”

56



which causes prejudice to the Petitioner. It was

argued that Section 42(6) existed only under KVAT

Act, i.e. one of the 8 legislations covered by KSS 2017

and the same was incapable of being applied

uniformly for all the enactments covered under KSS

2017.

The Respondent on the other hand argued that the

provisions of KSS 2017 had to be harmoniously read

with the provisions of KVAT Act. Therefore, in terms of

Section 42(6) of the KVAT Act, the amount paid by the

dealer which falls short of the aggregate of the tax or

any other amount due and interest payable, shall rst

be adjusted towards the interest payable and the

balance, if any, shall be adjusted towards the tax or

any other amount due.

The Respondent further argued that there was no use

of word 'deposit' under the KVAT Act and other

legislations covered in KSS 2017, and therefore, the

payment of amount by the Petitioner could not be

deemed a deposit. Further, Section 42(6) of the KVAT

Act which provides for 'adjustment' of amount paid by

the assessees states that amount so paid has to be

rst adjusted towards the interest and balance

thereafter only, had to be adjusted against the tax and

other amounts due. Accordingly, the Respondents

could not be faulted in the computation of arrears of

tax, interest, and penalty as per the provisions of KSS

2017.

The Respondent further contended that KSS 2017

was a voluntary scheme, and the waiver provided

therein, did not create any vested right in the

Petitioner to claim the adjustment of the amounts paid

by them against the tax dues rst and only thereafter

against the interest and penalty, as contended by

them.

DECISION

The HC observed that KSS 2017 was a self-contained

and special piece of legislation, brought to achieve the

twin objectives of the quicker and easy recovery of the

arrears of tax demands and putting an end to pending

litigation. Therefore, the provisions of the KVAT Act

could not have an overriding effect over the KSS 2017.

The HC held that there had to be a harmonious reading

of the two legislations, and where there was a grey

area, the interpretation of the terms of the scheme

under question was to be made in favour of the tax

payers.

The HC held that the rst essential component of the

entire demand under the assessment orders under the

tax laws was always the tax, and then only interest and

penalty could have been determined. If the tax itself

was not due, the question of levying interest and

penalty upon that would not have arisen.

The HC nally held that payments and adjustments

under Section 42(6) of the KVAT Act would not apply to

special schemes like KSS 2017. The said scheme

envisaged the complete payment of tax assessed rst,

and then only 10% of assessed interest and penalty.

Accordingly, the adjustment of amount lying deposited

or paid after the assessment order should also follow

the same sequence and the order of preference, else it

would defeat the very purpose of the scheme.


This decision of the HC is an important jurisprudence

on voluntary disclosure benecial schemes that are

issued by the Centre and States. The HC has clearly

stated that while the benecial schemes are to be read

in harmony with the existing statutory provisions, the

statutory provisions could not override the effect and

purpose of such schemes.

This will be an important precedent and will help

assessees enjoy complete and intended benets from

future voluntary disclosure schemes introduced by the

Government.

57



NON-JUDICIAL UPDATES

- DIRECT TAX



1. CBDT RELEASES FINAL RULES ON THE

COUNTRY BY COUNTRY REPORTING AND

MASTER FILE IMPLEMENTATION.

The Finance Act, 2016 had introduced section 286 of

the IT Act to provide for furnishing of country-by-

country report (“CbCR”) in respect of such groups of

enterprises that engage in business operations in

more than one jurisdiction (“International Group”).

This was in line with India's commitment to implement

recommendations contained in Action Plan 13 of the

Base Erosion and Prot Shifting (“BEPS”) Project,

embarked upon by the OECD. Consequently, section

92D of the IT Act, which pertains to preparation of

transfer pricing documentation, was also amended to

prescribe for furnishing of a master le in case of

aforementioned enterprises (“Master File”).

In that context, the CBDT had released on October 6,

2017, draft rules and forms in relation to ling of

Master File and the CbCR, and requested comments

from stakeholders. After due consideration of

received suggestions, the CBDT released, vide its

Notication No. S.O. 3497(E) dated October 31,

2017, the nal rules regarding submission of such

documents to the IRA (“Final Rules”).

Accordingly, Rule 10DA and Rule 10DB have been

introduced. Further, Forms 3CEAA, 3CEAB, 3CEAC,

3CEAD and 3CEAE also stand notied. The ensuing

paragraphs summarize the Final Rules and their

implications on taxpayers.

Master File – Rule 10DA

The rule prescribes thresholds for applicability,

timelines, requirements and procedures with respect

to the submission of the Master File. The relevant

information related to the Master File is required to be

led in Forms 3CEAA and 3CEAB.

It is relevant also to note that while conditions

prescribed under Indian laws are largely aligned with

Action Plan 13 of the BEPS Project, there are minor

differences between the two. For instance, Action

Plan 13 recommends that the Master File should

contain a brief written functional analysis describing

principal contributions to value of individual entities

within the group, i.e. key functions performed,

important risks assumed, and important assets used.

On the other hand, Rule 10DA prescribes specically

that the reporting entity is required to maintain a

description of functions performed, assets employed

and risks assumed for all the CEs of the International

Group that contribute at least ten percent of the

revenues or assets or prots of such group. Further,

while Action Plan 13 prescribes that the Master File

should contain a general description of how group is

nanced along with the important nancing

arrangements, the Indian law mandates that le

should contain d isc losure of the nancing

arrangements with top ten unrelated lenders.

Occasionally, the Indian regime may mandate

additional compliances. For instance, details of all

such entities of an International Group that engage in

development and management of intangible property,

are required to be submitted to the IRA, along with their

addresses. However, the BEPS Project does not

mandate such disclosure.

On account of these differences, the taxpayers should

exercise caution when preparing their submissions to

the IRA, and ensure that the additional compliance

requirements specic to India, if any, are duly fullled.

With respect to the procedural provisions, an

important factor in determination of obligations under

this rule is whether the relevant entity, may be

considered as a “constituent entity” of an International

Group, as dened in section 286 (9) of the IT Act

(“CE”). If an entity falls within the ambit of the term, it

would be required to le Part A of Form 3CEAA for AY

2017-18, by March 31, 2018 (for successive AYs, the

relevant date is November 30 of the respective AY).

As far as Part B of Form 3CEAA is concerned, it is

required to be submitted by March 31, 2018 for AY

2017-18 (for successive AYs, relevant date is

November 30 of the respective AY) only if the following

conditions are fullled:

l Consolidated group revenue of the International

Group as per the consolidated nancial

statements exceeds INR 500 crores; and

l The aggregate value of international transactions

during the accounting year as per books of

account:

59



l Is in excess of INR 50 crores, or

l Is in excess of INR 10 crores in respect of

purchase, sale, transfer, lease or use of

intangible property during that year.

With regard to the ling of Form 3CEAB, it is relevant

to determine if there are more than one CEs of an

International Group, resident in India. If there is only a

single entity resident in India, then Form 3CEAB is not

required to be led. Otherwise, the International

Group may opt to designate one of the entities as

responsible for ling Form 3CEAA (as discussed

above), and intimate the Directorate General of

Income Tax, regarding the same, in Form 3CEAB.

This form is required to be led thirty days prior to the

specied due date (i.e., by February 1, 2018 for AY

2017-18; for successive AYs, relevant date is October

31 of the respective AY).

Country-by-country Report – Rule 10DB

This new rule prescribes the threshold for the

applicability of provisions concerning CbCR on an

entity, the information required to be maintained, the

format as well as the timeline for furnishing the report.

The relevant information related to the CbCR is

required to be led in Forms 3CEAC, 3CEAD and

3CEAE. The due date for ling CbCR is on March 31,

2018 being extended vide Circular No. 26 of 2017

dated October 25, 2017.

It should be noted that the provisions pertaining to the

ling of the CbCR would be applicable only if the

consolidated group revenue of the International Group

is in excess of INR 5500 crores in the accounting year

preceding the reporting accounting year.

Case

Parent entity or alternate reporting entity, resident in India

CE resident in India, of parent entity not resident in India

CE resident in India, of parent entity not resident in India in cases specied under section 286(4) of the IT Act (i.e. when India does not have an agreement with the country where the parent resides for exchange of CbCR; or

there has been a systemic failure of such country or territory, and said failure)

Requirement

File CbCR in Form 3CEAD

File CbCR notication in Form 3CEAC with Director General of Income Tax (Risk Assessment), intimating the following:

a) Whether the entity is the alternate reporting entity of the International Group; or

b) Details of the parent entity or the alternate reporting entity, as the case may be, of the International Group and the country or territory in which the said entities are resident

File CbCR in Form 3CEAD (for every reporting accounting year).

File Form 3CEAE only if there are mo re t han one CEs o f an International Group resident in India, to designate one of the entities as responsible for ling Form 3CEAD (as discussed a b o v e ) , a n d i n t i m a t e t h e Directorate General of Income Tax, regarding the same.

Due Date

Required to be furnished two months prior to the specied due date i.e., March 31, 2018 for AY 2017-18 (for successive AYs, the relevant date is November 30, 2018 of the respective AY)

Required to be led two months prior to the due date as specied in section 139(1) of the IT Act, i.e., January 31, 2018 for AY 2017-18 (for successive AYs, the relevant date is September 30, 2018 of the respective AY)

Required to be led by the due date mentioned above.

Due date has not been prescribed so far.

The requirements in case of each form pertaining to CbCR are as tabulated below:

60



2. CBDT CLARIFICATION PERTAINING TO

INDIRECT TRANSFER

84The CBDT issued a circular , clarifying that the

provisions of indirect transfer provided under Section

9(1)(I) of the IT Act read with Explanation 5 shall not

apply in respect of income accruing or arising to a

non-resident on account of redemption or buyback of

its share or interest outside India.

Section 9(1)(I) of the IT Act provides that all income

accruing or arising, whether directly or indirectly,

through or from any business connection in India, or

any property in India, or any asset or source of

income in India or through the transfer of a capital

asset situated in India, shall be deemed to accrue or

arise in India. Explanation 5, 6 and 7 to Section 9(1)(i)

of the IT Act further dene the scope of the said

provision.

Concerns were expressed by investment funds,

including private equity funds (“PEF”) and venture

capital funds (“VCF”), that on account of the indirect

transfer provisions, non-resident investment funds

investing in India, which are set up as multi-tier

investment structures, suffer multiple taxation of the

same income at the time of subsequent redemption or

buyback. Such taxability arises rst at the level of the

fund in India on its short term capital gain or business

income and then at every upper level of investment in

the fund chain on subsequent redemption or buyback.

The CBDT received representations to exclude

investors above the level of the direct investor, who is

already chargeable to tax in India on such income

from the ambit of indirect transfer provisions of the IT

Act.

The Finance Act, 2017 amended the indirect transfer

provisions of the IT Act with effect from April 1, 2015

whereby Category I and Category II Foreign Portfolio

Investors (“FPIs”) have been exempted from indirect

transfer provisions through the insertion of proviso to

Explanation 5 to Section 9(1)(I) of the IT Act. However,

there could be situations in multi-tiered investment

structures, where the interest or share held indirectly

by a non-resident in an Investment Fund or Venture

Capital Company (“VCC”) or VCF, is redeemed in an

upstream entity outside India in consequence of

transfer of shares or securities held in India by the

specied funds, the income of which have been

subject to tax in India.

In such cases, the application of indirect transfer

provisions on redemption of share or interest in the

upstream entity may lead to multiple taxation of the

same income. In respect of Category I and Category II

FPls, such multiple taxation will not take place on

account of the insertion of proviso to Explanation 5 to

Section 9(1)(I) of the IT Act, vide Finance Act, 2017.

With a view to bring clarity, CBDT vide circular dated

November 07, 2017, claried that the provisions of

indirect transfer provided under Section 9(1)(I) of the

IT Act read with Explanation 5 shall not apply in respect

of income accruing or arising to a non-resident on

account of redemption or buyback of its share or

interest held indirectly (i.e. through upstream entities

registered or incorporated outside India) in VCC or

VCF if such income accrues or arises from or in

consequence of transfer of shares or securities held in

India by VCC or VCF and such income is chargeable to

tax in India.

The above mentioned benet shall be applicable only

in those cases where the proceeds of redemption or

buyback arising to the non-resident do not exceed the

pro-rata share of the non-resident in the total

consideration realized by VCC or VCF from the said

transfer of shares or securities in India. It is further

claried that a non-resident investing directly in VCC

or VCF shall continue to be taxed as per the extant

provisions of the IT Act.

3. DRAFT AMENDMENT TO RULE 17A OF THE IT

RULES AND FORM 10A

Section 12A of the IT Act was amended vide Finance

Act, 2017 to provide that where a trust or an institution,

which has been registered as a chari table

trust/institution under the IT Act, subsequently

modies or adopts new objectives and such objectives

are not in consonance with the conditions of

registration, then such trust or institution would be

required to register itself again by making an

84 Circular No. 28/2017 dated November 07, 2017

61



application. The amended section further provides

that such an application should be made in the

prescribed manner, within 30 days of adoption or

modication of the objects. Thus, to give effect to the

amended section 12A of the IT Act, CBDT has issued 85 a draft Notication of amendment to Rule 17A of the

IT Rules and Form 10A, providing the manner in

which application would be made under the

aforementioned section.

It may be noted that in addition to prescribing

additional information, which should accompany

Form 10A, the proposed Rule 17A provides that Form

10A would be required to be led electronically. It may

be noted that this draft notication was open for the

comments and suggestion of the stakeholder till

October 27, 2017.

4. CBDT ISSUES POEM CLARIFICATION FOR

OPERATIONS CARRIED ON THROUGH

REGIONAL HEADQUARTERS

As per section 6(3) of the IT Act, if the place of effective

management (“POEM”) of a company, not being an

Indian company, is in India in the relevant previous

year, it is considered to be resident in India.

Accordingly, global income of such company would

be liable to tax in India. Under the IT Act, the term

“POEM” is dened to mean a place where key

management and commercial decisions necessary

for conduct of business of an entity as a whole are, in

substance, made. In that regard, in January, 2017, the

CBDT issued guidelines for the determination of the 86POEM of a company (“the Guidelines”). These

guidelines provide that, in case of a company

engaged in active business outside India (“ABOI”),

the POEM would be considered to be outside India if

majority of meetings of its board of directors (“Board”)

are held outside India. However, the Guidelines note

further that if the Board is found to be standing aside

i.e. not exercising its powers of management which

are instead exercised either by the holding company

of the company under consideration or by any other

person(s), and such entity is resident in India, the

POEM of the company would be considered to be in

India.

Several concerns were expressed with respect to the

Guidelines especially by such multinational

companies (“MNCs”) that fol low a regional

headquarter structure i.e. establish headquarters for

group companies located in jurisdictions that fall in a

particular region. This was because the Guidelines

gave rise to the possibility of the POEM of such MNCs

as being considered to be in India merely because

some of their employees, having multi-country

responsibility or oversight over operations in other

countries of the region, work from India on account of

regional headquarters being located in India.

To address these concerns, CBDT vide its Circular No.

25 of 2017 dated October 23, 2017, claried that such

regional headquarters located in India would not be

considered as POEM of the respective MNCs, subject

to fulllment of certain other conditions (“the

Clarication”). In that regard, the CBDT noted that

paragraph 7 of the Guidelines claries, with respect to

companies that have ABOI, that the Board of a

company would not be considered as standing aside

merely because it follows certain general principles,

provided under the global group policy laid down by

the parent entity of such group, which may be in the

eld of payroll, accounting, human resources, IT

infrastructure and network platforms, supply chain,

routine banking operational procedures, but are not

specic to any entity or group of entities per se.

Applying the principle contained in the aforementioned

paragraph, CBDT claried that so long as Regional

Headquarters merely carry out their operations for

subsidiaries/ group companies in a region, in line with

general principles outlined in the global policy of the

group, in the eld of certain functions, which are not

specic to any entity or group of entities, the Board

would not be considered as standing aside i.e.

allowing Regional Headquarters in India to exercise

powers of management vested in the Board.

Therefore, activities of such a Regional Headquarter

on a standalone basis would not lead to its being

considered as the POEM of such subsidiaries/ group

companies.

It is pertinent to note that the relevant elds, in which

Regional Headquarters may operate without

triggering POEM for the purposes the IT Act, are as

follows:

85 F. No. 370142/2017-TPL dated October 17, 201786 CBDT Circular No. 6 of 2017 dated January 24, 2017.

62



l Payroll functions;

l Accounting functions;

l HR functions;

l IT infrastructure and network platforms;

l Supply chain functions;

l Routine banking operational procedures;

It may be of note that the Clarication provides an

exhaustive list of such elds in which Regional

Headquarters of MNCs may operate without being

considered the POEM thereof. Therefore, Regional

Headquarters that perform functions, not falling within

the ambit of such elds, may be contended by the IRA

to be POEM of such MNC.

Further, it should be noted that the CBDT has

expressly warned against the use of the Clarication

for abusive or aggressive tax planning, noting that the

same may trigger invocation of the General Anti-

Avoidance Rule (“GAAR”) under the IT Act.

Applicable from AY 2017-18, GAAR may be invoked

by the IRA when they are of the view that a taxpayer is

party to an “impermissible avoidance arrangement”,

i.e. an arrangement to obtain a tax benet. In such a

case, the IRA may, along the lines of “substance over

form” principle, amend, deny or re-characterize any

transaction or even deny it the benet under a DTAA,

if the transaction lacks commercial substance.

It is advisable, thus, for entities with regional

headquarter structure to exercise caution to avoid

exclusion from scope of relief provided by the

Clarication in case the IRA wish to scrutinize the

group structure. This is especially relevant because

India has recently notied provisions pertaining to the

ling of country-by-country report (“CbCR”). The

CbCR, which is required to be led by ultimate parent

entities of multinational enterprises in the jurisdiction

of their residence annually, would contain information

pertaining to business activities carried out by such

enterprises in each tax jurisdiction where they have

operations along with the justication for prots

retained therein. In certain cases, jurisdictions may

have access to CbCRs submitted in other jurisdictions.

While the IRA cannot propose adjustments to the

income of a taxpayer on the basis of the CbCR, they

may inquire into the operations of an entity more

deeply, aided by large amount of information

contained in the CbCR, at their disposal. Accordingly, it

would be prudent for MNCs to maintain detailed

documentation indicating that the activities of

Regional Headquarters fall within the ambit of such

elds as mentioned in the Clarication, and are in

accordance with the general principles of the global

policy of the group. Further, such MNCs should ensure

that these activities are not carried for certain specic

entities belonging to the group. Otherwise, the

activities of the Regional Headquarters may be

construed as giving rise to POEM of such entities in

India.

In any case, it must always be kept in mind that

activities carried out by an MNC in India would be

judged on a holistic basis. As the Clarication

indicates, certain activities of Regional Headquarters

of an MNC would not establish a POEM when

considered on a standalone basis; however, when

eva luated in to ta l i ty w i th o ther fac ts and

circumstances, such Regional Headquarters may be

found to establish a POEM in India.

Thus, the Clarication brings much-awaited relief to

MNCs, which engage in ABOI and have regional

headquarters located in India, by expressly clarifying

that certain activities of these headquarters would not

alone trigger establishment of POEM in India.

However, it is pertinent to note that the relief may only

be availed when certain conditions are fullled and

subject to application of GAAR provisions in the IT Act,

as discussed above.

63



NON-JUDICIAL UPDATES

- INDIRECT TAX



1. CBEC CLARIFIES APPLICABILITY OF IGST

ON SALE/TRANSFER OF GOODS WHILE

BEING DEPOSITED IN A WAREHOUSE.

CBEC vide Circular No. 46/2017-Customs dated

November 24, 2017 claried that where the

ownership of goods imported into India and deposited

in a warehouse is transferred by the importer to

another person, such a transaction shall be treated as

an inter-state supply of such goods under Section 7

(2) of IGST Act. Accordingly, the applicable IGST shall

be payable on the value of such goods as determined

under Section 15 of the CGST Act, read with Section

20 of IGST Act.

Further, the above transaction shall be considered as

an independent transaction from the transaction of

import of goods into India, which shall be exigible to

customs duty (i.e. Basic Customs Duty + IGST),

separately. The customs duty shall be payable by the

importer on record. The valuation of the same shall be

determined under Section 14 of Customs Act.

2. C B E C I S S U E S C L A R I F I C A T I O N S

REGARDING THE TRANSACTION VALUE

AND LEVY OF GST ON VARIOUS SERVICES

SUCH AS ACCOMMODATION SERVICES,

BETTING AND GAMBLING IN CASINOS,

HORSE RACING, ADMISSION TO CINEMA,

HOMESTAYS, PRINTING AND LEGAL

SERVICES.

CBEC vide Circular No. 27/01/2018-GST dated

January 4, 2018, claried the following aspects:

(a) Accommodation Services: The declared tariff and

not the actual tariff charged from the customer is

relevant for determination of tax rate slab. The

relevant declared tariff for a particular season

shall be the tariff at the time of supply. In a case,

where different tariffs are mentioned at several

places such as board at reception, websites,

business cards, etc., then the highest of such

declared tariff is considered for the determination

of the tax rate slab. Such declared tariff does not

include taxes. Further, where the accommodation

is upgraded, then the declared tariff of an

upgraded fac i l i ty shal l be re levant for

determination of tax rate slab. Once the tax rate is

determined, the same is levied on the entire

amount (including extra bed charges) charged

from the customer.

Additionally, it has been claried that room rent in

hospitals is exempted.

(b) Homestay services provided via Electronic

C o m m e r c e O p e r a t o r ( “ E C O ” ) : T h e

accommodation services provided in hotels, inns

guest houses, homestays and other commercial

places for residential and lodging purposes

through an ECO by a person having an aggregate

annual turnover of less than INR 20 Lakhs ( INR 10

Lakhs for special category states), are not

required to take registration mandatorily, under

the GST legislations. Where the said services are

provided through ECO, then such ECO shall be

responsible for payment of GST thereon.

(c) Casino and Gambling Services: The said circular

claries that the total transaction value of entry into

a casino shall be considered as taxable amount for

services supplied by way of admission to casinos

and the total transaction value of betting i.e. the

total bet value shall be taxable value for the levy of

GST on gambling services. Other services

provided by casinos such as services by way of

supply of foods/drinks etc. shall attract GST

separately at the applicable rate.

(d) Horse Racing: The tax base for the purpose of levy

of GST on betting services supplied in relation to

Horse Racing shall be the entire bet value, i.e. the

total of the face value of any or all bets paid into the

totalisator or placed with licensed book makers, as

the case may be.

(e) Bakery Services: A producer and supplier of

bakery products, who has opted for the payment of

GST under the composition scheme, in terms of

the GST legislations, shall be liable to discharge

tax at the rate of 5%.

(f) Supply of books: It has been claried the supply of

books where the books are printed/published/sold

on procuring copyright from the author or his/her

legal heir or against a specic brand name or on

paying copyright fees to a foreign publisher for

publishing an Indian Edition (same language) of

65



foreign book, shall be treated as a supply of goods

as long as the supplier owns the books and has

the legal right to sell those books on its own

account.

3. CBEC CLARIFIES REFUND/ CLAIM OF

C O U N T E R VA I L I N G D U T Y A S D U T Y

DRAWBACK

Circular No. 49/2017 dated December 12, 2017 has

claried that the benet of Duty Drawback, in terms of

Section 75 of the Customs Act, inter alia available for

anti-dumping duty and safeguard duty paid, shall also

be available with respect to countervailing duties, paid

under Section 9 of the Customs Tariff Act.

The benet of such Duty Drawback shall be available

in re la t ion to inputs which have suffered

countervailing duties and were actually used in goods

exported, conrmed by way of verication conducted

for xation of Brand Rate. The Duty Drawback of such

countervailing duties can be claimed upon the

application for Brand Rate under Rule 6 or Rule 7 of

the Customs, Central Excise Duties and Service Tax

Drawback Rules, 1995 and/or Customs and Central

Excise Duties Drawback Rules, 2017, as the case

may be.

Further, it is claried that where the imported goods

which are subjected to countervailing duties are

exported out of India, the Duty Drawback payable

under Section 74 of the Customs Act would include

incidence of countervailing duties as part of the total

duties paid, subject to the fulllment of other

prescribed conditions.

66



GST UPDATES



1. PROVISIONAL BENEFIT OF INPUT TAX CREDIT

87The Delhi HC in Gmmco Limited , has allowed the assessee to claim the input tax credit provisionally, without any restriction on the time limit of 1 year of the invoice date, till its nal order. The writ petition was led to challenge the discriminatory treatment between taxpayers having invoices and taxpayers not having invoices pertaining to the purchase of inputs. The CGST Act, provides for the benet of input tax credit to the taxpayers having invoices for their pre-GST stock only for goods purchased during the period of 1 year prior to the roll out of GST. However, where the taxpayers were not having invoices for such pre-GST stock, they were allowed deemed input tax credit in the prescribed range without any time limit.

2. RELIEF FOR LOGISTICS SECTOR

Post the implementation of GST, the logistics sector faced various difculties on account of detaining of goods during their inter-state movement. Such detention was made by the seizing ofcer/ detaining authority on the grounds of unavailability of prescribed documents such as transit declaration form, e-way bill, etc. Pursuant to the same, the following writ petitions, seeking relief, were led before the UP HC and the Kerala HC:

88(a) In Asics Trading Company , the Kerala HC held that the power to prescribe documents that were to be carried during the inter-state transport of goods is with the Central Government. The Central Government has not prescribed such documents, therefore, the detention of goods on account of the absence of documentation was not legally sustainable.

89(b) In Shankar Mohan , the Kerala HC ordered for the release of goods where the transporter executed a bond for the value of goods and security in the form of a Bank guarantee equivalent to the amount of tax, interest and penalty payable, in the manner prescribed.

90(c) In M/s M K Enterprises , the Allahabad HC set aside the order for seizure of goods on the ground that the petitioner was provided no opportunity to explain his conduct with respect to the discrepancy in tax invoices.

91(d) In Ramdev Trading Company , the goods in

transit from Rajasthan to Assam via UP, were

seized in UP and a seizure order was passed to

that effect, on the grounds of absence of transit

declaration form and mis-declaration of goods.

However, the adjudication order passed

subsequently imposed penalty on the said

grounds and stated for the rst time that the

assessee had an intention to evade payment of

tax by selling goods in State of UP. The Allahabad

HC observed that though, the absence of transit

declaration form was a breach of the GST Rules, it

was purely a technical breach. Further with

respect to mis-declaration of goods, it was held

that since the State of UP was a transit state, the

proper ofcer at the most should have made an

endorsement to the effect of such mis-declaration

and allowed the goods to pass through State of

UP. In addition, it was observed that no allegation

as to the intention of assessee to evade tax was

made in the seizure order. Therefore, the said

order was set aside and the penalty was held to be

unsustainable.

92(e) In M/s Sameer Mat Industries , the Kerala HC

permitted the release of goods on the execution of

bond without sureties, as expeditiously as

possible. In this case, the detaining ofcer had

alleged misclassication and undervaluation as

the grounds for detaining the goods. The Kerala

HC observed that the issue of misclassication

and under valuation has to be looked into by

assessing ofcer and not the detaining ofcer.

3. RELIEF TO ISSUES PERTAINING TO GSTN

PORTAL

The assessees were facing various difculties while

using the GSTN portal. Such issues were on account 93of allotment incorrect user id and password , 94erroneous nature of constitution of the tax payer , 95failure of the system to opt for composition scheme ,

etc. In this regard, several HCs have issued guidelines

to prevent any coercive actions against the assessees

and to seek instructions/ rectify mistakes for resolving

such kind of problem faced on the GSTN portal.

87 Gmmco Limited, Hafele India Private Limited v. Union of India and Anr. 2017 (12) TMI 1069.88 M/s Asics Trading Company v. Asst. State Tax Ofcer, the State of Kerala 2017 (10) TMI 831.89 Shankar Mohan v. Intelligence Ofcer, Commissioner of Goods and Service Tax Authority, State of Kerala, 2018 (1) TMI 179.90 M/s M.K. Enterprises v. State of U.P. and Ors. 2017 (12) TMI 34291 M/s Ramdev Trading Company and Ors. v. State of U.P. and Ors. 2017 (12) TMI 341; 92 M/s Sameer Mat Industries and Ors. v. State of Kerala, the Asst. State Tax ofcer and Ors. 2017 (12) TMI 202.93 Radhey Lal Jaiprakash Neadarganj Dadri v. State of U.P. 2017 (11) TMI 1022.94 M/s Modern Pipes Industries v. State of UP 2017 (10) TMI 1017; Sachdeva Overseas v. State of UP 2017 (1) TMI 252.95 Rajasthan Tax Consultants Association v. Union Of India and Ors. 2017 (10) TMI 254.



GLOSSARY

ABBREVIATION MEANING

AAR Hon’ble Authority for Advance Rulings

ACIT Learned Assistant Commissioner of Income Tax

AE Associated Enterprises

AO Learned Assessing Officer

AY Assessment Year

Customs Act Customs Act, 1962

CBDT Central Board of Direct Taxes

CBEC Central Board of Excise and Customs

CCR CENVAT Credit Rules, 2004

CEA Central Excise Act, 1944

CENVAT Central Value Added Tax

CESTAT Hon’ble Customs, Excise and Service Tax Appellate Tribunal

CETA Central Excise Tariff Act, 1985

CGST Central Goods and Service Tax

CGST Act Central Goods and Service Tax Act, 2017

CIT Learned Commissioner of Income Tax

CIT(A) Learned Commissioner of Income Tax (Appeal)

CRISIL Credit Rating Information Services of India Limited

CST Central Sales Tax

CST Act Central Sales Tax Act, 1956

CTA Custom Tariff Act, 1975

DCIT Learned Deputy Commissioner of Income Tax

DRP Dispute Resolution Panel

DTAA Double Taxation Avoidance Agreement

FA The Finance Act, 1994

FPI Foreign Portfolio Investor

FTS Fees for Technical Services

FY Financial Year

GAAR General Anti-Avoidance Rules

GST Goods and Service Tax

GST Compensation Act Goods and Services Tax (Compensation to States) Act, 2017

HC Hon’ble High Court

IGST Integrated Goods and Services Tax

IGST Act Integrated Goods and Services Tax Act, 2017

INR Indian Rupees



ABBREVIATION MEANING

IRA Indian Revenue Authorities

IT Act Income Tax Act, 1961

ITAT Hon’ble Income Tax Appellate Tribunal

ITC Input Tax Credit

IT Rules Income Tax Rules, 1962

LIBOR London Interbank Offered Rate

Ltd. Limited

MAT Minimum Alternate Tax

MLI Multilateral Convention to Implement Tax Treaty Related Measures to

Prevent Base Erosion and Profit Shifting.

OECD Organization for Economic Co-operation and Development

PE Permanent Establishment

Pvt. Private

R&D Research and Development

SC Hon’ble Supreme Court

SGST State Goods and Services Tax

SGST Act State Goods and Services Tax Act, 2017

ST Rules Service Tax Rules, 1994

TDS Tax Deducted at Source

TPO Transfer Pricing Officer

UK United Kingdom

USA United States of America

UTGST Union Territory Goods and Services Tax

UTGST Act Union Territory Goods and Services Tax Act, 2017

VAT Value Added Tax

VAT Tribunal Hon’ble VAT Tribunal



ACKNOWLEDGMENTSWe acknowledge the contributions received from S. R. Patnaik, Mekhla Anand, Anumeha Saxena, Thangadurai

V.P., Shweta Dutta, Bipluv Jhingan, Abhilasha Singh, Rupa Roy, Shiladitya Dash, Shivam Garg and Jyothi Anumolu

under the overall guidance of Mrs. Vandana Shroff.

We also acknowledge the efforts put in by Madhumita Paul to bring this publication to its current shape and form.

DISCLAIMER This Newsletter has been sent to you for informational purposes only and is intended merely to highlight issues.

The information and/or observations contained in this Newsletter do not constitute legal advice and should not be

acted upon in any specific situation without appropriate legal advice.

The views expressed in this Newsletter do not necessarily constitute the final opinion of Cyril Amarchand

Mangaldas on the issues reported herein and should you have any queries in relation to any of the issues reported

herein or on other areas of law, please feel free to contact us at the following co-ordinates:

Cyril Shroff

Managing Partner

Email: [email protected]

S. R. Patnaik

Partner


Mekhla Anand

Partner


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