From The Judiciary

Whether DTAA beneficial rate can be availed for Dividend Distribution Tax(DDT) payable by the domestic company?

Total Oil India Pvt. Ltd. & Others TS-197-ITAT-2023 (Mum)

Facts

The taxpayer, a domestic company, declared/paid dividends during FY 2015- 16 to its shareholders, one of whom was a French resident and a non-resident for Indian tax purposes.

The taxpayer was obligated to pay Dividend Distribution Tax (DDT) on the dividends payable by it to all of its shareholders as per the provisions of Section 115-O.

It was contented by the taxpayer that since its French shareholder was eligible for a beneficial rate of dividend under the India-French tax treaty, this beneficial rate ought to apply to the DDT payable by the taxpayer.

The Revenue did not agree with assessee’s contention and the matter reached the division bench of the Mumbai Tribunal. The division bench ruled in favor of Revenue, and the matter was put forth for consideration before the Special Bench of the Mumbai Tribunal.

Held

The Special Bench ruled the following:

• The tax rates for the purposes of DDT shall be at the rate mentioned under the Indian domestic tax laws and not under the relevant DTAA applicable to the non-resident shareholders as DDT is a tax levied on the profits of the company distributing dividend - being on that part of the profit which is declared, distributed or paid by way of dividend.
• DDT is not a tax paid by the domestic company on behalf of the shareholders receiving a dividend.
• As the domestic company does not enter the domain of DTAA at all, DDT rate is not subject to Treaty obligation.
• If a domestic company has to enter the domain of tax treaties, the countries should specifically agree to the Treaty to that effect. (The Special Bench cited the India-Hungary Treaty here).
• The Special Bench rebutted the reliance on various judicial precedents relied on by the taxpayer and the bench cited the Supreme Court’s decision in the case of Godrej & Boyce TS-176-SC-2017 to argue that DDT is a tax on the dividend (i.e., the profits of the company) and not on the shareholder.

Our Comments

Mumbai Tribunal held that the domestic resident companies cannot leverage the DTAA to mitigate their liability towards DDT.

Kindly note that from FY 2021, the DDT has been abolished, and dividends are now taxed in the hands of the shareholders. As a result, non-residents can choose beneficial rates under the Income tax act or the relevant DTAA.

Does a Permanent Establishment (PE) exist for all contracts conducted in a contracting state by virtue of a pre-existing PE for an unrelated contract?

Lahmeyer International GmbH [TS-181-ITAT-2023(DEL)]

Facts

The taxpayer is a non-resident company incorporated under the laws of Germany and is in the business of engineering consulting, offering plans, designs and consultancy in relation to complex infrastructure projects.

For the year under consideration, the taxpayer had undertaken contract work with certain government/semigovernment projects. For one of the projects, the taxpayer suo moto accepted the presence of a PE and paid taxes accordingly. For the other projects, the taxpayer paid taxes by claiming that the contract receipts were Fees for Technical Services (FTS).

The Revenue contended that since the taxpayer had a PE in India and since the office space in relation to one of the projects was being made available to the taxpayer, it also constituted a PE in India. For the 3rd project, the Revenue contended that by virtue of the force of attraction rules, this project too was liable to be taxed as PE.

Aggrieved by the order of the Assessing Officer (AO) and the Dispute Resolution Panel’s (DRP) directions, the taxpayer appealed to the Tribunal.

Held

The Delhi Tribunal observed that as per the contract between the taxpayer and government entity, the taxpayer was entrusted to provide services as a design review consultant related to the project undertaken by the government within a period of three months from the date of commencement of work, which was not contradicted by the Revenue. These services were in the nature of technical/consultancy services.

The Tribunal further held that the Force of Attraction Rule merely does not apply since the PE in relation to one project exists, where the activities are not related to such project.

Our Comments

The Delhi Tribunal deletes the addition under Section 44DA and directs the Revenue to compute the taxpayer’s Income under Article 12 (i.e., FTS) of India Germany DTAA.

Interest Savings Approach upheld to benchmark Corporate Guarantee Commission

Macrotech Developers Limited⁸ [TS-237-ITAT-2023(Mum)-TP]

Facts

The taxpayer was in the real estate and construction business and issued a corporate guarantee on behalf of its Associated Enterprise(AE) towards the issuance of bonds to be used for real estate projects. It did not charge any commission from the AE, claiming it to be a shareholders’ activity. During the assessment, the transaction was classified as an international transaction. The taxpayer carried out a benchmarking search on the DealScan database based on the credit rating of the AE’s as follows:

The taxpayer contended that the interest savings should be distributed equally and that the Arm’s Length Price (ALP) of the guarantee fee could not exceed 0.35%.

The Transfer Pricing Officer (TPO) rejected benchmarking done by the taxpayer and suggested the use of internal interest savings as follows:

The TPO contended that the interest savings should be distributed in an 80:20 ratio the ALP of the guarantee fee should be 1%. However, this was rejected by the DRP, as it relied on the 0.50% rate as per the decision by Hon'ble Bombay High Court in the case of CIT vs. Everest Kanto Cylinders Ltd (2015) 378 ITR 57 (Bom.)

Held by the ITAT

The Income Tax Appellate Tribunal (ITAT) observed that the DRP failed to look at transfer pricing as more of an economic concept than a judicial one. While judicial precedents may be applied provided they pertain to a similar assessment year and economic conditions and have a proper benchmarking methodology. The ITAT went on to suggest that corporate guarantee commission can be benchmarked by employing: (a) Comparable Uncontrolled Price (CUP) method (b) yield/interest savings method and (c) cost to guarantor with the yield and cost approach ostensibly providing the highest and lowest guarantee commission rates. In the instant case, it was noted that the taxpayer, as well as the TPO used the interest savings approach, with the only difference being tenor adjustment, currency swap and % attribution to the taxpayer of the interest saved.

The ITAT viewed that in light of the DRP’s directions, they could either uphold the benchmarking carried out by the taxpayer at 0.35% or the guarantee commission at 0.50%. It went ahead with the taxpayer's approach considering it was more scientific and derived after the proper credit rating on a database.

Our Comments

The provision of a corporate guarantee has been upheld as an international transaction. This judgment has dissuaded the ad-hoc use of judicial precedents to impose uniform rates without giving emphasis to the economic circumstances. The taxpayers should develop a scientific benchmarking approach for the transaction based on sound economic models and maintain adequate documentation for the same.

Advance to AE for a special purpose to be treated as separate and distinct from regular loans

Tata Chemicals Limited⁹ [TS-200-ITAT-2023(Mum)-TP]

Facts

The taxpayer was bidding to acquire an Egyptian Fertiliser Company through its AE. In order to fulfill the pre-bid condition, the taxpayer lent an interestfree amount of USD 110 million (special purpose loan) to its AE to show the availability of funds with them. The AE parked this amount as a short-term fixed deposit with a bank. Since the bid was unsuccessful, the amount, along with interest earned on it (which was at approx. 3%), was returned by the AE on the day of the bid result itself. However, in Form No. 3CEB, the taxpayer erroneously included this amount as a loan advanced to the AE and stated that all loans were benchmarked by applying an interest rate of LIBOR+200 bps.

TPO's order

The TPO concluded that LIBOR+200 bps, the interest rate charged for regular loans, can be considered as an available CUP. Basis this, the TPO applied this rate on the special purpose loan and adjusted accordingly, which the DRP upheld.

Held by ITAT

The ITAT observed that since the AE could not utilize the monies received for any purpose other than participating in the bid, this loan should be construed as a special purpose loan separate and distinct from loan simpliciter. The ITAT relies on the coordinate bench ruling in the case of Bennett Coleman and Co.¹⁰ where all the facts were identical except that the bid therein was successful.

It was held in this case that: (i) the transaction between the entity and a Special Purpose Vehicle (SPV) created by the entity for the aforementioned purpose is inherently incapable of taking place between independent enterprises since the entity and its SPV are inherently associated enterprises. Hence, for such transactions, the CUP method cannot be used. (ii) Since the borrower has no discretion of using the funds gainfully, commercial interest rates cannot be considered and therefore, the arm’s length interest would be ‘nil’. (iii) If there has to be an arm’s length consideration for such a transaction under the CUP method, other than interest, it would be the net effective gains to the SPV. In the case under consideration, there was no economic gain to the SPV in the relevant financial period and hence, the arm’s length price of lending funds to the SPV, under the CUP method, would again be ‘nil’. Accordingly, the ITAT directed the TPO/AO to delete the adjustment.

Our Comments

Transfer of Funds for a specific purpose must be given cognizance and should always be treated separately and distinct from routine loan transactions.

Ad-hoc price penetration adjustment not warranted without any cogent reasons

Mitsui Prime Advanced Composites India Pvt. Ltd¹¹ [TS-209-ITAT-2023(DEL)-TP]

Facts

The taxpayer was engaged in manufacturing polypropylene compound resins. Its international transactions with AE include the import of raw materials, availing services, etc., for which it used an aggregated approach by comparing the net margin earned from its manufacturing business with margins earned by comparable companies. In addition to the above, in the documentation, the taxpayer made a price penetration adjustment to its margins on account of the fact that the sales to unrelated parties were at reduced price. The TPO disputed the rationale behind making the ‘price penetration adjustment’ and proceeded to make an adjustment equivalent to the amount of ‘price penetration agreement.’ This was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

Held by ITAT

The ITAT observed that the TPO had not disputed the taxpayer's method or margin for benchmarking the international transaction. The ITAT referred to a table submitted by the taxpayer showing that the margin of the assessee is at Arm’s Length with or without the ‘Price Penetration Adjustment.’ Furthermore, the ITAT held that the adjustment made by the TPO appeared ad-hoc, which would be unsustainable in law and deleted the adjustment.

Our Comments

While the taxpayer explained the price penetration adjustment in its documentation, the onus was on the TPO to justify the adjustment to the taxpayer's income. Ad-hoc adjustments have consistently been struck down.

Whether ‘mens rea’ or ‘bona fide intention’ on the part of the assessee-dealer is significant while imposing penalty and interest for underpayment of tax, under Section 45(6) and Section 47(4A) of the Gujarat Sales Tax Act, 1969?

State of Gujarat and Anr. vs. Saw Pipes Ltd. [TS-158-SC-2023-VAT]

Facts

Revenue filed an appeal before the Supreme Court assailing the order of the Gujarat High Court, which had set aside the penalty and interest imposed under the Gujarat Sales Tax Act on the ground that the assesseedealer was under bona fide opinion that the indivisible works contract of coating of pipes would attract sales tax of 2% instead of 12%.

Revenue argued that the penalty and interest were statutorily mandated, and the Court could not fill in the gaps and purport the requirement of the assessee-dealer's intention or guilty mind for such imposition when the legislature did not prescribe the same.

Ruling

Accepting the stand of Revenue, SC observed that the language used in the statute is precise, plain, and unambiguous. The intention of the legislature is very clear that the moment any eventuality mentioned in the said provision occurs, the penalty shall be leviable.

No other word like mens rea and/or satisfaction of the Assessing Officer and/or other language is used, like in Section 11AC of the Central Excise Act.

Given the use of the phrase “shall be levied”, it is an integral part of the assessment/reassessment that the penalty be levied on the difference between the amount of tax paid and the amount of tax payable, and the same shall be automatic.

It is a well-settled principle in law that the Court cannot read anything into a statutory provision that is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent.

Under the circumstances, on strict interpretation of Sections 45 and 47, the only conclusion would be that the penalty and interest leviable are statutory and mandatory and there is no discretion vested in the Commissioner/AO to levy or not to levy the penalty and interest other than as mentioned therein.

Our Comments

In the context of GST, the legislature has been quite clear about the quantum of penalty leviable vis-à-vis short or nonpayment of tax or erroneous refund of tax or wrongful availment or utilization of ITC, depending on the presence of mens rea. However, interest is mandatory irrespective of mens rea.

Hence, it would be imperative for the taxpayers to prove their bona fides to mitigate the probability of attracting a higher penalty equivalent to 100% of tax amount.

Moreover, the GST authorities may rely on the said Supreme Court judgment to substantiate the levy of penalty.

Whether Section 13(8)(b) of the IGST Act, which prescribes the place of supply of intermediary services to be the service provider’s location, is constitutionally valid or not?

Dharmendra M. Jani & Anr. vs. UOI & Ors. [TS-138-HC(BOM)-2023-GST]

Facts

Pursuant to the difference of opinion in the Division Bench of the High Court, the matter was placed before the Chief Justice, who referred the proceedings to the 3rd Judge bench.

One of the Judges had struck down Section 13(8)(b) as ultra vires the IGST Act besides being unconstitutional, whereas the companion Judge upheld the validity on all counts.

Ruling

Noting that GST is a destinationbased tax, High Court observed that intermediary services provided in the present case qualify as “export of services” since the recipient is a foreign principal and consumption of said services takes place outside India.

As per the Court, such intermediary services would necessarily fall within the framework of the IGST Act only. It would be too far-fetched to consider that certain IGST Act provisions are not relevant to the IGST Act but to CGST Act and State GST Acts.

The CGST Act and State GST Act do not indicate any express incorporation of any provision regarding the “export of services” and/or place of supply where the supplier or the recipient is outside India.

In this context, High Court perused the Constitutional scheme as envisaged under Articles 246-A, 269-A and 286 and observed that the fiction created by Section 13(8)(b) cannot travel beyond the provisions of the IGST Act to the CGST and the SGST Acts, as neither the Constitution would permit taxing of export of service under the said enactments, nor these legislations would accept taxing such transaction.

Hence, Sections 13(8)(b) and 8(2) cannot be struck down as unconstitutional provided they are confined in their operation to the said Act only, concluded the High Court.

Our Comments

The dilemma in the scope and taxability of intermediary services under the GST law appears to have spiraled further as three judges have given divergent opinions.

While it is ruled that IGST shall be applicable to such intermediary supplies, it is worth noting that the Gujarat High Court had previously ruled that intermediary services are liable to CGST and SGST as intra-state supplies and not IGST.

Hence, a verdict by the Full Bench or the Supreme Court or a clarification by way of a Circular may be necessary to clarify the ambiguity surrounding the taxation of intermediary supplies.

Transfer of assets pursuant to a scheme of arrangement approved by the jurisdictional High Court held not to result in any benefit/ perquisite

Vodafone Idea Ltd. V. ACIT (Mumbai-Trib) [2023] 149 taxmann. com 169 (Mumbai - Trib.)

Mumbai Income Tax Appellate Tribunal (ITAT) held that a scheme of arrangement pursuant to initiatives issued by the Government of India (GOI) for the purpose of sharing economies of scale amongst telecom companies and which is duly approved by High Courts cannot be held as a colorable device to evade taxes.

In the given case, Vodafone Idea Ltd (taxpayer) transferred by way of demerger its Passive Infrastructure Assets (PIA), with a book value of INR 16.2277 billion, to ICTIL (100% subsidiary of ABTL, ATBL being 100% subsidiary of the taxpayer) at Nil value. Subsequently, ICTIL amalgamated in Indus Towers Ltd. (Indus), transferring PIAs to Indus. The investment of ABTL in shares of Indus (pursuant to amalgamation and demerger) was revalued at INR 73.3075 billion. The AO considered this as a transfer of PIA to an entity outside the Group and that ICTIL was only an intermediary through which the assets were being routed to avoid taxes that would otherwise be attracted. Hence, the entire transaction of arrangement was a colorable device offering difference in fair value of shares and the book value of PIA transferred to tax as benefit/perquisite under Section 28(iv) of the ITA.

ITAT noted that the Schemes of Arrangement had been duly sanctioned by the High Courts, wherein the rationale was duly explained. The Scheme, as approved, will have to be accepted. As the arrangement provides for transfer at nil consideration, the same cannot be substituted by any notional consideration. It accepted the taxpayer's contention that Indus is a separate independent entity assessable to tax, and no transaction was routed to avoid taxes.

Our Comments

In the decision, while deciding in favor of the taxpayer, due cognizance has been given to the fact that Court has approved the arrangements and the purpose behind these arrangements being in line with GOI initiatives.

While the General Anti-Avoidance Rule (GAAR) provisions are applicable at the stage of assessment, the tax officers are indirectly applying the principles of GAAR even at the stage when the National Company Law Tribunal (NCLT) seeks objections. Furthermore, during the course of the assessment proceedings, merely a scheme being approved by NCLT cannot be a sufficient defense and the tax officers can certainly examine the Scheme in depth. Thus, the Schemes must be closely scrutinized internally from the perspective of ensuring commercial rationale and appropriately detailing/ explaining the same in the Scheme and filings made from time to time.

Starting this FY 2023-24, companies must maintain an audit trail

Starting this FY 2023-24, all companies that use accounting software for maintaining their books of account must maintain an unbroken record of all edits in their books of accounts and not disable the audit trail feature in their accounting software, marking a significant change in accounting regulations. The Companies (Accounts) Amendment Rules, 2021, requires all companies to record an audit trail of all transactions in their accounting software and capture the edit log of all changes along with the date of the change. The Ministry of Corporate Affairs (MCA) has twice extended the applicability of these regulations, giving extra time for businesses to comply with this new requirement. The last extension required companies to comply with these regulations starting from the financial year commencing on or after the 1st day of April 2023. However, no fresh relaxation has been granted by MCA to date to defer this requirement any further.

Accordingly, all Companies using accounting software are advised to ensure compliance with the above requirements while maintaining books of account and other relevant books and papers maintained in electronic mode starting 1 April 2023.