From The Judiciary

Whether payment made for IT support services can be construed as Royalty?

M/s. Bekaert Industries Private Limited vs DCIT ITA No.1003/PUN/2017

Facts

The taxpayer is an Indian company engaged in the business of manufacturing and dealing in Steel Tyre Cord, Hose Reinforcement Wire. It had paid its share of allocation for the group IT support services received from its group company, N.V. Bekaert SA. The IT support service included an integrated SAP system, its platform, V-server and its connectivity. The taxpayer did not deduct any tax on the said payment. The tax officer treated the payment as both Royalty and Fees for Technical Service (FTS) and disallowed the expenses.

The Dispute Resolution Panel (DRP) upheld the taxpayer’s draft order, and the taxpayer filed an appeal before the Pune Tribunal.

Held

On considering the material on record, the Tribunal was of the opinion that N.V Bekaert SA is not rendering any service. Instead, it has created a fullfledged IT Infrastructure facility in the nature of equipment with the help of ERP system (SAP), SAP platforms, hardware, software, servers, network, domain structures and security. The payment was regarded as consideration for the use of or right to use industrial, commercial or scientific equipment, and accordingly, it would qualify as Royalty under the Income Tax Act (the Act) and India-France Tax Treaty.

The Tribunal was of the view that the ratio of the decision in Engineering Analysis Centre of Excellence has application only on copyright Royalty cases and not on industrial Royalty cases as the Hon’ble Apex Court dealt only with copyright Royalty on the software payment and ratio of the said decision is not applicable in the given case.

Our Comments

The discussion over Royalty has always been controversial. One needs to thoroughly go through the various aspects of the payment for classifying any payment as Royalty. One should not apply the Apex court decision on software payment for all IT-related payments.

Whether consideration for the database would be considered as Royalty?

M/s Dow Jones & Company Inc. Vs. ACIT ITA No. 7364/DEL/2018 [A.Y 2015- 16]

Facts

The taxpayer is a company incorporated in the USA and engaged in the business of providing information products and services containing global business and financial news to organizations worldwide. It offers information via newspapers, newswires, websites, applications, newsletters, magazines, proprietary databases, conferences and radio.

The taxpayer company appointed Dow Jones Consulting India Pvt Ltd [DJCIPL] on a principal to principal basis for distributing its products in the Indian market. Accordingly, the taxpayer company receives a purchase price from DJCIPL at an arm’s length price (ALP).

The tax officer was of the opinion that the receipts from DJCIPL should be taxed in India as ‘Royalty Income’ under the provisions of the Act and the India- USA Tax Treaty. On the contrary, the taxpayer contended that no copyright was given for the database, and the same should not be tantamount to Royalty.

Held

After considering the submissions from both the parties, the Delhi Tribunal, concluded that as per Article 12 of the India-USA Tax Treaty, only those payments that allow a payer to use/ acquire a right to use copyright in a literary, artistic, or scientific work are covered within the definition of Royalty. In the current case, there is no transfer of legal title in the copyrighted article as the same rests with the applicant. All rights, title, and interest in the licensed software, which is being claimed to be a copyrighted article, are the exclusive property of the applicant. Thus, the payment cannot be classified as Royalty.

Our Comments

This is a welcome decision, clarifying that access to the database shall not be Royalty unless copyright of such data is provided to the recipient. However, the said decision did not discuss why such payment shall not fall within the ambit of information concerning the industrial, commercial or scientific experience. Accordingly, one will also have to consider the other contrary rulings while relying on this decision.

Under the Faceless Scheme, whether the objections filed before the DRP shall be separately communicated to the AO?

Sulzer Pumps India Private Limited [WRIT PETITION (L) NO. 15811 OF 2021]

Facts

The taxpayer had filed objections before the DRP within 30 days from receipt of the draft Assessment Order for AY 2017-18 under Section 144C(2) of the Income Tax Act, 1961 (the Act). Since the objections were filed electronically under the Faceless Appeal Scheme, the taxpayer presumed that the reference filed before DRP would be automatically communicated to the AO by DRP. However, the AO, being unaware of objections filed by the taxpayer before DRP, proceeded to pass the Final Assessment Order under Section 144C(4) of the Act, after the expiry of the 30 days from the end of the month in which the period of filing of objections before DRP and AO expired.

Aggrieved, the taxpayer filed a writ petition before the Bombay High Court HC against the impugned final assessment order passed by the AO and the consequential notice of demand and show cause notice for the penalty.

Held by HC

Section 144C (2) (b) of the Act, specifically requires the taxpayer to file his objections to the draft order with (i) the DRP and (ii) the AO.

Furthermore, it was not disputed that the taxpayer had a reasonable belief that with the assessments being faceless and completely electronic, the reference filed by it would be automatically communicated by the DRP to AO.

The reference before DRP was still pending and in such case, Section 144C (4) of the Act requires the AO to pass the final order, including the directions of the DRP.

While stating that the AO cannot be faulted for passing the impugned order, HC set aside the impugned order and directed AO to pass a fresh one after considering the views of the DRP and allowed the writ petition in favor of the taxpayer.

Our Comments

The CBDT vide Notification No. 6 and 7 of 2021 dated 17 February 2021 integrated faceless assessment proceedings under Faceless Scheme with DRP proceedings. Under the Faceless Scheme, taxpayers can file objections before the DRP, and the AO shall pass the final assessment order in a faceless manner through the National Faceless Assessment Centre post completion of the proceedings before the DRP in conformity with the directions of the DRP.

The Scheme does not specifically mention that the taxpayer needs to inform the AO separately. However, in light of the above ruling, it would be necessary for the taxpayers to file a copy of the objections filed with the DRP under the Faceless Scheme. The AO has jurisdiction over the said case.

Whether subsidy/grant received from the government be treated as a revenue receipt and included as an operating item while computing the operating margins?

Hyundai Construction Equipment India Pvt Ltd [ITA No.1766/ PUN/2018]

Facts

The taxpayer is a wholly-owned subsidiary of Hyundai Korea and is engaged in the manufacturing and trading of excavators and spares. International transactions pertaining to the manufacturing and trading segment were reported in Form 3CEB, of which transactions pertaining to the manufacturing segment were under appeal for AY 14-15. The taxpayer considered the subsidy received¹ as an operating revenue to compute the operating margin in order to benchmark the international transactions under Transactional Net Margin Method (TNMM). The taxpayer also offered for taxation by treating it as a revenue receipt for the year under consideration.

The Transfer Pricing Officer (TPO) treated the subsidy as an extraordinary item and excluded it from the operating income and reworked the operating margin of the taxpayer. The taxpayer contended before the DRP that the subsidy received by it ought to have been considered as operating revenue. At the same time, it was also submitted that the subsidy should be considered as a capital receipt not liable to tax. The DRP rejected the taxpayer's contentions on the ground that it was received after setting up of the unit and was in the form of VAT refund and Central Sales Tax (CST) and treated the subsidy as a revenue receipt and also upheld its exclusion from the operating revenue. Aggrieved by the action of the AO, TPO, and DRP, the taxpayer preferred an appeal before the Tribunal.

Ruling by the Tribunal

The Tribunal was of the opinion that the decisive factor for considering the nature of subsidy as a capital or revenue receipt is the ‘purpose’ for which the subsidy has been granted and not the manner of its disbursal. Simply because the subsidy has been disbursed in the form of a refund of VAT and CST, it will not alter the purpose of granting the subsidy, which is nothing but the establishment of new industrial units in less developed areas of the State.

• The Tribunal observed that the purpose of the subsidy is industrial growth, linked to the setting up of industrial units; and the amount of subsidy depends on the amount of investment made in the eligible unit. Testing the factual panorama, the Tribunal considered the subsidy as a capital receipt not chargeable to tax and also held that it can not form part of the operating revenue for the determination of ALP under TNMM.
• Reference was also made to the newly inserted clause (xviii) to Section 2(24) in Finance Act, 2015 w.e.f. 1 April 2016, providing that the assistance in the form of subsidy or grant of cash incentives, etc., other than the subsidy which has been taken into consideration in determining the actual cost of the asset in terms of Explanation 10 to Section 43(1) of the Act, shall be considered as an item of income chargeable to tax. However, the Tribunal held that, since the amended provision of Section 2 (24) (xviii) of the Act was not applicable to the year under consideration, the conclusion of the inference was that the subsidy received by the taxpayer would not form part of its total income.

Our Comments

With the introduction of clause (xviii) to Section 2(24) of the Act w.e.f. 1 April 2016, it is a settled law that the assistance in the form of subsidy or grant of cash incentives, etc., other than the subsidy which has been taken into consideration in determining the actual cost of the asset shall be considered as an item of income chargeable to tax. It is paramount to evaluate the ‘purpose’ of the grants received. The focus should not only be on the source or mode of payment of the subsidy but determining the treatment of the subsidy in computing the operating margins for determining the ALP. While post amendment, the subsidy would be considered as a taxable receipt. However, there is ambiguity on treating the same as operating income, and clarity on the same would be welcome.

Whether the appellant is entitled to CENVAT credit and consequential refund of service tax paid under reverse charge mechanism (RCM) pursuant to audit objection, postimplementation of GST regime?

Note: The Hon’ble Delhi CESTAT has adopted a similar view in the case of Jagannath Polymers Pvt Ltd vs. Commissioner, CGST – Jaipur 1 [2021 (12) TMI 736 – CESTAT Delhi].

Terex India Pvt Ltd vs. Commissioner of GST & CE, Salem [2021 (10) TMI 531 – CESTAT Chennai]

Facts

• The appellant is engaged in the manufacture and export of mining machinery. They also provide business support services on which service tax was being duly paid.
• During the audit, it was noticed that the appellant had received services from their foreign parent entity, which was liable to service tax on a reverse charge basis.
• The appellant agreed and deposited the service tax amount along with interest.
• Though the appellant was eligible for credit, they could not follow the procedure to carry forward the CENVAT credit to the GST regime since the time limit for the same had expired on 27 December 2017. Consequently, they applied for a refund thereof.
• However, resorting to Section 142(8) (a) of the CGST Act, the refund was rejected by holding that input tax credit was not eligible as the amount was paid as the recovery of arrears. Such rejection was upheld by the Commissioner(Appeals).

Decision

• Perusing the ingredients of Section 142(8)(a), Tribunal remarked, “The sub-section states that input tax credit will not be available under GST Act. It does not say that credit is not eligible under existing law (erstwhile law).”
• The provision only means that after assessment or adjudication proceedings, if an assessee pays the tax so determined, he cannot claim the benefit of credit under the CGST Act.
• In the present case, there is no assessment/adjudication as contemplated under the provisions of erstwhile law. The payment made by the appellant (when pointed out by Audit officers) does not fall under recovery of tax arrears by an assessment or adjudication proceedings.
• Section 142(3) is the transitional provision for the claim of refund after introducing the CGST Act, which says that any amount paid under erstwhile law must be disposed of according to the provisions of erstwhile law, and the amount has to be paid in cash.
• Since the appellant has paid tax under erstwhile law, only sub-section (3) of Section 142 would be attracted.
• Accordingly, the appeal was allowed and the order of Commissioner(Appeals) was set aside.

Our Comments

The distinction brought out by the Hon’ble Tribunal between the tax paid pursuant to audit objection vis-a-vis recovery of arrears of tax pursuant to an assessment or adjudication proceedings would certainly provide relief to the taxpayers who are contesting the rejection of claims for refund of taxes paid under erstwhile provisions, before various forums.

Whether GST is applicable on recovery from employees towards -

a. notice pay;
b. the premium of Group Medical Insurance Policy of nondependent parents/retired employees;
c. nominal amount for availing canteen facility at the refinery;
d. telephone charges over and above the fixed rental charges payable to BSNL;

Whether free-of-cost canteen services to all the employees would fall under para 1 of Schedule III of CGST Act and not be subjected to GST?

In Re: Bharat Oman Refineries Limited [2021 (12) TMI 999 – Appellate Authority for Advance Ruling, Madhya Pradesh]

Facts

• The appellant is a deemed Public Sector Undertaking, with M/s Bharat Petroleum Corporation Limited holding 51% paid-up capital in the company.
• The appellant carries on the business of refining crude oil in the refinery located in Madhya Pradesh.

Ruling

• Notice pay:
  Applying the ratio of Hon’ble Madras HC in GE T&D India Ltd vs. Deputy Commissioner of Central Excise, LTU, Chennai [W.P. Nos. 35728 to 35734 of 2016], it was held that merely because the employer is being compensated does not mean that he has provided any services or has ‘tolerated’ any employee's act for a premature exit. Hence, GST is not applicable under clause 5(e) of Schedule II to CGST Act.
• Premium paid towards Group Medical Insurance Policy and Telephone charges: The activities undertaken by the appellant, like providing medi-claim policy for the employees' nondependent parents/retired employees through the insurance company and providing telephone facility to employees through BSNL, neither satisfy the conditions of Section 7 to be held as “supply of service” nor are they covered under the term “business” of Section 2(17) of CGST Act.
• Nominal amount for availing canteen facility at the refinery: The appellant, who is mandated to run a canteen under the Factories Act, is collecting the portion of employees' share and paying to Canteen Service Provider, a third party, which is nothing but the facility provided to employees without making any profit, and working as a mediator between employees and the contractor/ canteen service provider. Under these circumstances, GST is not applicable on the collection of employees' portion of the amount without making any supply of goods or services to the employees.
• Free of cost canteen services to all employees: This is not a case where the employee has provided some services to the employer. Also, nothing on record shows that said facility provided to employees is part of the wage structure.

Therefore, canteen facilities would not fall under paragraph 1 of Schedule III to CGST Act. However, they would not be leviable to GST at the hands of the appellant-employer inasmuch as they are merely a facilitator between the canteen service provider and the employees.

Our Comments

This ruling reinforces the stand that mere recovery of amounts/receipt of payments without a quid pro quo service would per se not qualify as a ‘supply.’

While the advance rulings are binding only to the parties therein, businesses can resort to the same to defend their positions before the GST authorities, who have already started questioning the taxability of such recoveries.

Mumbai ITAT: Gift of Brand to a private irrevocable trust held to be a non-taxable capital receipt

Balaji Trust [TS-1092-ITAT- 2021(Mum)]

During the AY 2013-14, Balaji Trust (assessee), a private and irrevocable discretionary trust, was settled by Shri Shashikant Ruia for the sole and exclusive benefit of the members of the Ruia family. Essar Investments Limited (EIL) voluntarily gifted the ‘Essar’ brand to the corpus of the assessee on the same day without any consideration. Thereafter, the assessee entered into brand licensing agreements with Essar group entities and granted a nonexclusive license to use the brand in India for license fees which were duly offered to tax. The AO held that the receipt of brand would be a taxable event citing that the definition of ‘income’ under Section 2(24) of the Act is wide enough to include the receipt of trademark and copyright and held it taxable as under the head ‘Income from Other Sources’ under Section 56(1). On appeal, CIT(A) decided in favor of the assessee by holding the receipt to be a capital receipt.

The Tribunal upheld the CIT(A)’s decision and held the receipt to be a non-taxable capital receipt laying down the below observations:

• The assessee has received the brand as a gift which constituted its profitmaking apparatus and thus was in the nature of fixed asset/capital.
• The brand received by the assessee neither carries any element of profit, nor falls under any category of income specified under Section 2(24), 56(1) or 56(2) of the Act.
• The brand ‘Essar’ does not fall within the scope of “any work of art” as contemplated in Sec. 56(2)(vii) of the Act. Merely because it was registered under the Copyright Act, 1957 as “an artistic work” it could not be held to be in the nature of “a work of art.”

Our Comments

This is a very interesting ruling where the gift of a brand by a Corporate entity to a Trust has been held non-taxable transaction. It appears that the validity of corporate gifting was not an issue under consideration which aspect has otherwise also been a matter of litigation. It will be interesting to see the courts' stand in such transactions post the General Anti-Avoidance Rule (GAAR) regime.

Mumbai ITAT allows a deduction under Section 80-IA to the amalgamated entity holding that sub-section 12A is not a disentitling provision

Ultratech Cement Ltd [TS-1133- ITAT-2021(Mum)]

Grasim Industries Limited is the holding company of Ultratech Ltd. (assessee, amalgamated company). During the FY 2010-11, Samruddhi Cement Ltd. (SCL), a wholly-owned subsidiary of Grasim Industries, amalgamated with Ultratech Ltd. on 1 July 2010 under the scheme of amalgamation sanctioned by the Bombay and Gujrat HC. Upon amalgamation of SCL and vesting of its Railway undertakings and its powergenerating eligible undertakings into the assessee, the assessee claimed a deduction under Section 80IA of INR 1.0153 billion. The Ld. AO disallowed the claim of deduction by the assessee invoking the provisions of sub-section (12A) of Section 80-IA. The CIT(A) approved the order of the AO.

On further appeal the ITAT ruled in favor of the assessee by observing as under:

CIT(A) confirmed the disallowance made by the AO. On further appeal by the assessee, the ITAT observed as under:

• ITAT relied on the below and held that the benefit of deduction was attached to an enterprise or undertaking and not to the owner:
  • Madras HC ruling in case of Madras Machines Tools Manufacturers (1975) (98 ITR 119).
  • Delhi HC ruling in case of Tata Communications Internet Services (2012) (251 CTR 290).
• ITAT further observed that prior to the insertion of sub-section (12), the deduction was allowed by courts to the successor entity to which the undertaking was transferred.
• ITAT thus did not agree with the Revenue’s contention that 80-IA(12) is enabling the provision that entitles the successor entity to claim the benefit relating to undertaking transferred in the scheme of amalgamation/ demerger and observed that deduction was available to the successor even prior to insertion of sub-section (12).
• ITAT observed that Section 80-IA(12) only made explicit that was implicit in the provision and therefore, withdrawal of sub-section 12 by subsection 12A cannot withdraw what was already implicitly available to the assesse.
• ITAT observed that if the legislature intended to curtail the rights of the new owner of the undertaking to claim the tax holiday for a residual period, it could have simply stated that benefit u/s 80IA will not be available to the successor.
• With respect to CBDT Circular No. 3/ 2008, relied upon by the Revenue, ITAT observes that the CBDT tried to clarify something which is nowhere stated either in the language of newly inserted sub-section (12A) or in the Memorandum to Finance Bill, 2007. Furthermore, if the intention of tax holiday u/s 80-IA was to provide an incentive to only original investors, the legislature would have never inserted sub-section (12) in the statute.
• ITAT further observed that Grasim made an initial investment and the eligible undertakings were demerged by Grasim to its whollyowned subsidiary SCL, which got amalgamated with the assessee. Thus, there was no change in the entity making the initial investment and the conditions prescribed by the CBDT in the aforesaid Circular for denial of the deduction are not fulfilled in the present case.

Our Comments

The ruling lays an important precedent for business re-organizations extending the benefit of deduction of section 80-IA for the residual period of tax holiday to the amalgamated entity.