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Direct Tax

Whether the draft assessment order passed in the name of a nonexisting company can be rectified in the final order, or the order stands to be Void ab initio?

Whether reimbursement of the salary of the seconded employees is subject to withholding under Section 195?

Boeing India Pvt. Ltd. (ITA No. 9765/DEL/2019)


As a part of the business combination, BICIPL was merged in the taxpayer company. Despite being informed by the taxpayer, the Assessing Officer (AO) passed a draft assessment order in the name of a non-existing company, i.e., BICIPL. The taxpayer raised an objection to the DRP but was of no avail. Instead, the DRP directed the AO to rectify the mistake in the final order.

The AO in the draft assessment order made a TP adjustment and also disallowed reimbursement of salary expense of expatriate employees on the ground of failure to deduct tax at source. The AO placed reliance on the High Court's decision in the case of Centrica India Offshore Pvt. Ltd.. The taxpayer, before the DRP, had clarified that it had borne the salary expenses of the expatriates, and appropriate taxes were duly deducted and deposited u/s 192 of the Act. The DRP upheld the actions of the AO.

Aggrieved by the final assessment order, the taxpayer filed an appeal with the Delhi Tribunal.


Ruling in favor of the taxpayer, the Delhi tribunal held that the draft assessment order has legal connotations as it lays the foundation of any prospective reduction in the income of the taxpayer or creates a tax liability over and above the returned income. Thus, in that sense, it is not merely a procedural step in the assessment proceedings. Rather it is a core component of assessment. Failure to pass a valid draft assessment order amounts to a jurisdictional defect, which cannot be cured under Section 292B of the Act or corrected by passing the final assessment order in the correct name as canvassed by the Ld. DR. Thus, the draft assessment order in the name of non-existent assessee was considered to void ab initio

For the sake of completeness, the tribunal has decided on the other grievance. With respect to the reimbursement of the salary cost, the tribunal noticed that the facts of the case were different from the Centrica India Offshore Pvt. Ltd.. It was observed from the reimbursement agreement that the secondees shall be working for the taxpayer and will be under the supervision, control, and management of the taxpayer as an employee of its company. Further, since due taxes were deducted and deposited u/s 192, Section 195 would not apply.

Our Comments

With the ongoing debate on taxation of salary reimbursement of the seconded employees, the Delhi tribunal has again backed the fact that the subject matter cannot be standardized. A deep dive into the case and a close examination fo the facts is a must to arrive at a just ruling.

Can an agent, performing all or substantial activities of film production in India, under the direct supervision of the non-resident principal constitute a Permanent Establishment (PE) of the nonresident principal?

Next Gen Films Private Ltd. (ITA No. 3782/Mum/2016 and ITA No. 3783/Mum/2016)


The taxpayer is a resident corporate entity. It entered into a commissioning agreement with another UK based nonresident corporate entity, namely M/s Desi Boyz Production Ltd (M/s DBPL).

As per the terms of the agreement, the taxpayer is a commissioning party engaged M/s DBPL to produce and deliver a fully complete feature film provisionally named Desi Boyz based on a certain storyline. M/s DBPL was to undertake filming primarily in the UK as well as India and procure the services of all necessary creative and technical service providers and engage all personnel for the shooting of the film. M/s DBPL was to consult and take consent of the assessee over important aspects like the identity of all key cast, budget, production schedule, etc. Every agreement entered into by M/s DBPL with any principal contributor or other cast and crew would require the approval of the taxpayer, but the same was to be entered into by M/s DBPL in his own name. For this activity, M/s DBPL was entitled to 100% of the budget less an amount equal to the UK Tax Credit Advance as full and sufficient consideration. All the rights, title, and interest in and to the film, all underlying literary material relating thereto, all original music, lyrics, physical material of any kind, etc. would be owned and solely and exclusively by the taxpayer and would vest in the taxpayer.

M/s DBPL engaged Eros International Films Pvt. Ltd. (M/s EIFPL) to avail certain production services for the film. M/s EIFPL was to provide production services, which would, inter alia, include identifying and negotiating with the appropriate lead cast, the appointment of contributors (crew members) for the shooting of the film in the UK, travel arrangement for contributors, complete co-ordination and arrangement for producer's India shoot, making payments for India shoot, production co-ordination, etc. The AO alleged that the entire film production of film Desi Boyz was being managed and carried on by M/s EIFPL. In the notice, attention was drawn to the fact that another Indian entity, namely Eros International Media Ltd. (EIML), was the co-producer of the film in association with the taxpayer. M/s EIFPL & M/s EIML were subsidiaries of M/s Eros International PLC and hence, sister concerns.

Therefore, all these three entities, as well as M/s DBPL, would be Associated Enterprises (AE) within the meaning of Article-10 of India-UK Double Taxation Avoidance Agreement (DTAA/Treaty). Since M/s EIFPL was carrying on the entire film production activities of the film in India and UK locations, M/s EIFPL would be Permanent Establishment (PE) of M/s DBPL in India. Further, since the taxpayer has control over the management and budgeting of the film production activities of M/s DBPL and being its AE, the taxpayer becomes PE of M/s DBPL in India.

The CIT(A) upheld the order of the AO. Aggrieved by the same, the taxpayer has approached the Mumbai Tribunal.


After considering the facts on record and contentions of both the parties, the tribunal held that the agreement between the taxpayer and M/s DBPL was primarily on principal to principal basis. The entire responsibility to produce the film was on M/s DBPL against a certain lump sum consideration. M/s DBPL acted as an independent service provider having the entire responsibility to produce the film. It was free to take its own decisions for the same and could enter into independent contracts. Thus, the taxpayer could not be said as a PE of that entity in India.

Further, the contract between M/s DBPL and M/s EIFPL was primarily that of a principal and agent. M/s EIFPL, acting on behalf of the producer, was required to provide limited production services against a lump sum fee of INR 300 Lakhs. The said services were to be provided under the control, supervision as well as the direction of the producer. However, the tribunal highlighted the fact that the proportion of fees vis-àvis total turnover would be quite minuscule. On the basis of the same, it could be said that the status of M/s EIFPL would be that of an independent agent. Therefore, The taxpayer could not be treated as PE of M/s DBPL in India.

Our Comments

The tribunal has appreciated the fact that merely because the activities of an agent are supervised by the principal, it would not make the agent dependent on constituting a PE. This decision affirms the fact that where the contract between the parties is on a principal to principal basis, DAPE should not be triggered.

Transfer Pricing

Whether APA has persuasive value for years not covered under APA?

FIS Global Business Solutions India - ITA No.422 and 423 of Del/2019 and ITA No. 3087 and 579 of Del/2019 – AY 2010-11


The taxpayer is engaged in the business of providing software development and Business Process Outsourcing (BPO) services to its Associated Enterprises (AEs).

The taxpayer benchmarked both the transactions by adopting the Transactional Net Margin Method (TNMM) and compared the margin with comparable companies. The taxpayer has earned a margin of 21.20% is the software development segment and 18.39% in the BPO segment, with a consolidated margin of 19.26%. TPO modified the comparable list in both the segments and made Transfer Pricing adjustments.

For future years, the taxpayer has entered into the Advance Pricing Agreement (APA) with the Central Board of Direct Tax for the covered years FY 2020-11 to FY 2018-19 with an agreed mark-up of 16.60% in both international transactions, mentioned above.

CIT(A) has granted partial relief to the taxpayer (for the comparable issue), and for the remaining adjustment, the taxpayer filed an appeal before ITAT.

ITAT held as under

  • The taxpayer has demonstrated that FAR of the year under consideration is similar to that agreed in APA for covered years.
  • While APA is not applicable to the year under consideration, it has persuasive value for another year if the facts remain the same.
  • ITAT has relied on the Delhi High court ruling of Ameriprise India Private Ltd (ITA 206/ 2016), ITAT ruling of Spencer Stuart (India) Pvt Ltd (ITA 7117/Mum/2012), and 3I India Private Ltd (ITA 581/Mum/2015) on a similar matter.
  • Since the taxpayer has earned a higher margin as compared to the margin agreed in APA (16.60%), ITAT accepted the arm's length price of international transactions for the year under consideration.

Therefore, ITAT deleted the adjustment.

Our Comments

The APA program of India has been very successful since its introduction in 2015.

With the completion of more than five years of the APA regime, many of them applied for the renewal of APA, whereas few taxpayers continue to adopt a similar pricing policy/methodology without a new agreement in place.

This ruling emphasized that the APA agreement has persuasive value for future or past years not covered under APA if the fact pattern of intra-group transactions remained the same.

Whether Berry Ratio can be adopted as PLI for benchmarking logistics/ freight services.

M/s. DHL Logistics Pvt. Ltd.- ITA No. 1923, 159 and 1385/ Mum/ 2016 – AY 2011-12


The taxpayer is engaged in the business of logistics services and offering a comprehensive portfolio of international, domestic, and specialized freight handling services. During FY 2010-11, the taxpayer has entered in international transactions of freight receipt and freight expenses with its related parties.

The taxpayer adopted TNMM with PLI as Operating Profit/Value Added Expenses (OP/VAE) – often referred to as the Berry ratio. Since the margin of the taxpayer (41.64%) was higher as compared to the average margin of comparables (31.46%), transactions were considered at arm's length.

During the course of assessment, TPO has

a. Rejected OP/VAE as PLI and instead adopted operating profit/ Total cost (OP/TC) as appropriate PLI for determining arm's length price and also accepted/ rejected certain comparables while making adjustment of INR 154 crores;

b. Challenged the pass-through cost claimed by the taxpayer and made an addition of INR 486 crore for recovery of freight on inbound shipments and INR 115 crores for recovery of back to back third party charges.

Aggrieved, the taxpayer filed an objection before DRP.

While DRP rejected the contention of the taxpayer for adopting OP/VAE as the PLI, it granted partial relief to the extent of accepting the pass-through costs such as the recovery of freight costs and third party charges.

Aggrieved, the taxpayer filed an appeal before ITAT.

ITAT held as under

  • It is observed that costs pertaining to services availed by the taxpayer from third parties such as shippers/ airliners, clearing and forwarding agent, transport service providers neither involved any service element of the taxpayer nor the taxpayer carried any risk or employed assets for the same
  • ITAT concluded that net margins earned by the taxpayer are to be determined only with respect to the cost incurred directly by the taxpayer in its international transactions with AEs. Profit margin cannot be computed basis of the total costs, which include third party costs.
  • ITAT relied on preceding year order of taxpayer (ITA 1030/Mum/2015), FedEx Express Transportation and Supply Chain Services India Pvt Ltd (ITA No 435/Mum/2014) and upheld the Berry Ratio

Therefore, ITAT deleted the adjustment.

Our Comments

While the Indian Transfer Pricing Regulation does not provide much guidance on the Berry Ratio, it has been recognized in OECD guidelines for certain scenarios.

We have often witnessed that many Indian logistics/ freight service providers have adopted the Berry Ratio.

This ruling could set a much-needed precedent on the issue of using Berry Ratio.

Can future year profitability of the taxpayer be relied upon by the TPO to determine arm's length price for the current year?

Powernetics Equipments India Pvt Ltd (ITA No. 3078/Mum/2016) – AY 2011-12


The taxpayer is engaged in the business of UPS manufacture, primarily for Indian railways. He has sold UPS and also provided related services to its AE, based in the UK. The taxpayer has determined cost plus 10% for these transactions and concluded the same at arm's length.

During the course of assessment proceedings, TPO relied on the future year (AY 2012-13) profitability of the taxpayer, which worked out to 15% and thereby made the transfer pricing adjustment.

ITAT held as under

  • Principally, ITAT disregarded the action of TPO for relying on the future profitability of the taxpayer and held that only the current year's profitability needs to be tested, having regard to the arm's length principle.
  • ITAT also noted that future year profitability computed by TPO include certain non-operating income element and in fact, by removing such element, the taxpayer has incurred losses in the future.
  • Therefore, ITAT accepted the contention of the taxpayer and remitted the matter back to TPO to decide the issue afresh.

Our Comments

This ruling emphasizes that the arm's length principle needs to be adopted every year on an independent basis. Future profitability cannot be taken as a base to apply the arm's length principle for the current year.

Indirect Tax

Whether services like installation and commissioning rendered in conjunction with the supply of equipment in relation to setting up a data center shall be treated as 'works contract' in the purview of GST?

Prasa Infocom & Power Solutions Private Limited - Authority for Advance Rulings (AAR), Maharashtra [2020 (8) TMI 54]


  • The applicant is appointed by its clients to undertake installation, testing, commissioning, the supply of equipment as well as services in the course of setting up the data center.
  • The supply of goods constituted a major portion of the contract, and the services rendered were in conjunction with them.
  • The data center constructed by the applicant cannot be shifted to another location by dismantling and then re-erecting at another site without damaging it.

Based on the above, the AAR ruled as follows:

  • On reviewing the details of the contract, there was a clear demarcation of the value of goods from the value of services.
  • The major portion of the contract involves the supply of equipment.
  • Further, the machine/equipment are all replaceable and hence cannot be said to be of 'immovable' nature.
  • Hence, the activities undertaken by the applicant did not constitute a works contract.

Our Comments

The AAR relied heavily on the contractual agreement between the parties and noted that the value of equipment formed a substantial part of the total contract value, and the value of civil construction was considerably less.

Interestingly, activity in relation to setting up a data center was ruled to be a works contract by AAR, Karnataka in the case of Hewlett Packard Enterprise India Private Limited [2019 (11) TMI 1145].

The divergent rulings on the issue are bound to create confusion in the industry.

Whether Rule 89(5) of the CGST Rules, 2017 is ultra vires the GST law, and therefore can an applicant be allowed refund of Input Tax Credit (ITC) on input services in case of supplies under inverted duty structure?

[Background: As per Rule 89(5) of CGST Rules, 2017, refund on account of inverted duty structure is available only for ITC on inputs and not for input services.]

VKC Footsteps India Pvt. Ltd. Vs. Union of India [2020 (7) TMI 726 – Gujarat HC]


  • The petitioner claims refund of ITC on account of inverted duty structure as per Section 54(3) of the CGST Act, 2017.
  • Notification No. 21/2018-CT dated 18 April 2018 amended the said Rule to deny refund on the ITC availed on input services and allowed relief of refund of ITC availed on inputs alone.
  • This amendment was later given a retrospective effect from 1 July 2017.

Based on the above facts, the Hon'ble Gujarat HC ruled as follows:

  • From the conjoint reading of the provisions of Act and Rules, it appears that prescribing the formula in Rule 89(5) to exclude refund of tax paid on 'input service' is contrary to the provisions of Section 54(3).
  • The intent of the government by framing the Rule restricting the statutory provision cannot be the intent of the law.
  • The said Explanation (a) of Rule 89(5) is held to be contrary to the provisions of Section 54(3). In fact, the Net ITC should mean 'input tax credit' availed on 'inputs' and 'input services' as defined under the Act.

Our Comments

This is yet another landmark judgment under the GST regime, and given the importance of the issue, the government will surely want to prefer an appeal before the Supreme Court. Therefore, we may have to wait for the Supreme Court to rule on the matter before it can attain finality.

It's a welcome judgment. The judgment, in this case, confirms the view that inverted duty structure refunds will also include refunds related to input services, thereby resulting in substantial cash flow benefit in situations where input service credits have been accumulated but there is no immediate utilization window. Another important aspect is that this is a judgment of the Hon'ble Gujarat High Court, although applicable to the whole of India, it remains to be seen how the jurisprudence evolves when the issue is put forth for consideration before the High Courts of other states.

Mr. Jaideep Tak
GM Commercial and Indirect Taxes,
Serum Institute