From The Judiciary

Facts

The Assessee-company was incorporated in France and was a tax resident of France. During the period relevant to assessment year under appeal, the Assessee had entered into international transactions with Delhi Metro Rail Corporation (DMRC) and Bangalore Rail Corporation Ltd. (BMRCL) for design, manufacture, supply, installation, testing, commissioning of 'Train Control, Signaling and Telecommunication Systems'.

The Assessee along with other consortium partners had entered into contract with DMRC and BMRCL. The Assessee had received payments in respect of off-shore supply of equipment and spare parts and off-shore designing and other services. The Assessee claimed that receipts in respect of off-shore designing and other services were not taxable in India.

The role of the Assessee under the consortium was restricted to off-shore supply of equipment/spares and offshore design and engineering services. Invoices for offshore supply were raised on FOB basis, where the title and risk in goods were passed outside India. The activities of installation, erection and commissioning in India were carried out by Indian consortium members, who were paid separately in INR.

AO’s argument

• The Revenue contended that the Assessee had a PE in India on the ground that the Assessee was continuously involved in execution of metro rail projects in India.
• It was alleged that the off-shore supply of equipment and the off-shore design and engineering services were connected with activities carried out in India, income arising through it, is taxable in India.

Assessee’s Arguments

• The AO placed reliance on earlier directions issued by the Dispute Resolution Panel (DRP) and proceeded on the same basis, without undertaking an independent or fresh examination of the consortium agreements and contractual arrangements for the relevant assessment years.
• It was emphasized that the Assessee was not the consortium leader and did not have any fixed place or installation PE in India.
• The Assessee further submitted that the off-shore supply transactions were completed outside India, with transfer of title and risk-taking place on an FOB basis.
• It was also stated that the off-shore design and engineering services were inseparably linked to the offshore supply of equipment and therefore followed the same tax treatment.
• Additionally, the Assessee pointed out that the Assessing Officer had failed to comply with the earlier remand directions of the ITAT, which required a fresh and independent examination of the consortium contracts before drawing any conclusion on the existence of a PE.

Held

The Tribunal held that the Revenue failed to establish the existence of a PE in India for the relevant AY. It was observed that neither a Fixed Place PE nor an Installation PE was made out, and accordingly, the issue was decided in favor of the Assessee on the basis of the following reasons:

• The AO mechanically followed earlier assessment orders and DRP directions without carrying out a fresh and independent examination of the consortium agreements and contractual arrangements.
• The Assessee was not the consortium leader and did not exercise control over onshore installation activities carried out in India by Indian consortium members.
• Offshore supply transactions were completed outside India, with title and risk in the goods passing outside India on an FOB basis, negating any business connection in India.
• Installation, erection, and commissioning activities were undertaken exclusively by Indian consortium members, who were separately compensated for such activities.

Our Comments

The ruling highlights that offshore supplies executed on FOB basis and ancillary offshore services cannot be taxed in India in the absence of a year-specific PE in India and PE cannot be inferred merely from consortium participation or past assessments.

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Whether DDT paid by taxpayer is to be governed by DTAA or to be dealt with only in accordance with Section 115-O of the Act?

Colorcon Asia Pvt. Ltd [TS-1623-HC-2025(BOM)]

Facts

Colorcon Asia Pvt. Ltd. (Assessee) is a wholly owned subsidiary of Colorcon Limited, United Kingdom (Colorcon UK). Colorcon UK was a tax resident of UK with a valid Tax Residency Certificate. The tax-payer paid dividend to Colorcon UK during Assessment Years 2016- 17 to 2019-20.

The tax-payer consequently paid DDT thereon at the rate specified under Section 115-O of the Act. The tax-payer filed an application before the Board for Advance Ruling (“BFAR”) seeking an advance ruling on whether Colorcon India would be entitled to restrict the tax rate on dividends distributed to Colorcon UK at 10 per cent under Article 11 of the India-UK DTAA.

The BFAR held that the dividend tax rate prescribed under Article 11 of India-UK DTAA shall not restrict the tax rate of DDT. The BFAR observed that DDT does not fall within “Taxes covered” under Article 2 of India –UK DTAA and thus the same is outside the scope of DTAA between India and UK.

Aggrieved by this, the tax-payer filed an appeal before Bombay High Court (Bombay HC) against the BFAR ruling.

Assessee’s Arguments

• DDT is nothing but tax on dividend (which is income of the shareholder) whose incidence has been shifted to the distributing company as per the provisions of Section 115-O. There is no change in its substantive concept or definition, and the shifting has occurred for “administrative convenience” only. Reliance was placed on the Supreme Court’s decision of UOI v. Tata Tea[1] which held that DDT is tax paid on dividend itself.
• DDT is an “Additional tax” covered by the definition of “tax” as defined in Section 2(43) of the Act, which falls within the ambit of charging Section 4 of the Act. Section 4 of the Act operates subject to other provisions of the Act including Section 90. Consequently, the tax-payer argued that the provisions of the DTAA would operate even if inconsistent with the provision of the Act as per Section 90 supported by various jurisprudence.
• The tax-payer argued that being resident in India, it is eligible to seek relief under Article 1 of the India-UK DTAA. It was further argued that Article 2 of the DTAA has enlisted the taxes covered and it covers “Income Tax” including any surcharge thereon under the definition of “Tax” for the purpose of “Taxes covered in India”. Article 2 also provides that the DTAA to apply to any identical or substantially similar tax in addition to or in place of tax.
• Furthermore, the tax-payer also contended that it satisfies all the conditions provided in Article 11 for restricting the tax rate on dividend to 10%.
• Any unilateral change made in the Act over the years merely in relation to the incidence of tax cannot alter or overwrite the beneficial provision of the DTAA. Reliance was placed on the Supreme Court decision in the case of Engineering Analysis Centre of Excellence (P) Ltd. v. CIT. [2]
• The taxpayer also relied upon the decision of Delhi ITAT in Giesecke & Devrient (India) (P.) Ltd. v. ACIT.[3] in support of its contention that the DDT rate is subject to tax rate provided under the DTAA.

Revenue’s Arguments

• As per Section 115-O of the Act, it is evident that the incidence as well as charge in respect of DDT is only on the domestic company that declares, distributes, or has paid the dividend.
• DDT is an “additional income tax” on the domestic company and cannot be construed to mean as “tax” in the hands of non-resident shareholder earning dividend income. Reliance was placed on the Supreme court’s decision in the case of Godrej and Boyce Manufacturing Company Limited v. DCIT.[4]
• The India-UK DTAA is silent and does not contemplate DDT as a tax on shareholders, similar to Indo-Hungary DTAA which specifically provides in the protocol that tax on distributed profits shall be deemed to taxes in the hands of the shareholders.
• Since there are no further terms or mutual agreement settling the mode of application of the limitations imposed in Article 11 by the DTAA itself, it cannot be held that rate of tax provided under Article 11(2)(b) of DTAA will supersede rate provided by Section 115-O.
• Under the scheme of tax treaties, no tax credit is envisaged in the hands of shareholders in respect of DDT payable and thus it cannot be equated with a tax paid by or on behalf of the shareholder.

Held

• The DDT qualifies as an “additional tax” under Section 2(43) of the Act and thus falls within the ambit of the charging provision in Section 4, making it eligible for relief under Section 90 pursuant to the applicable DTAA. The Court further emphasized that a DTAA, being a mutual agreement between countries, must be given full effect, and unilateral domestic amendments cannot override or diminish the relief provided under the treaty.
• Since the Assessee satisfies all the conditions provided in Article 11 of the DTAA, DDT is specifically mentioned in Article 11 of the DTAA. Further, on a plain reading of Article 11, it is evident that the person on whom the tax on dividend is levied is an irrelevant and extraneous consideration for its application.
• Bombay HC distinguished the Supreme Court decision in the case of Godrej & Boyce (supra) by noting that the Supreme Court was dealing with disallowance under Section 14A of the Act, which is in a completely different context. The Bombay HC also observed that the decision of Total Oil India (P) Ltd. (supra) was also not well founded.
• Basis the above, the Bombay HC held that the DDT paid by Colorcon India would be governed by Article 11 of the India-UK DTAA and consequently, the dividend income shall be subject to a concessional tax rate of 10% in India.

Our Comments

The Bombay High Court has reaffirmed the principle that treaty provisions under Section 90(2) override domestic law where they are more beneficial to the Assessee. The Court has provided clarity on the interplay between domestic tax provisions and international treaties. This ruling sets a strong precedent for similar disputes involving cross-border dividend payments during the DDT regime.

Whether uploading of show cause notices or adjudication orders on GST common portal by itself amounts to effective ‘communication’ to trigger limitation?

Bambino Agro Industries Ltd. and Others vs. State of Uttar Pradesh and Another [TS-1033-HC(ALL)-2025-GST]

Facts

• In a batch of writ petitions, the Allahabad HC was called upon to delve into the complaints / grievances raised by petitioners that they had not been served or communicated the show cause notice and / or adjudication orders issued by the State revenue authorities.
• As per the State revenue authorities, they have disbanded the practice of service of physical notices (through process server and post) since Section 169(1) (c) and (d) permit the revenue authorities to serve notices and orders on the registered tax-payers through electronic mode, except where registration itself may have been cancelled.

Ruling

• Going through the provisions of Section 169, HC acknowledged that service of notice and orders via electronic means is permissible and valid. No priority exists among the five service methods outlined in Section 169(1), viz. direct tendering, service by registered post/speed post with acknowledgement due, email, publication in newspaper, or affixation.
• However, uploading documents on the common portal cannot be equated with these statutory modes, particularly in the absence of a clear legislative deeming fiction treating portal upload as service.
• The Court also rejected Revenue’s reliance on the Information Technology Act, 2000 to deem service completion upon electronic availability on the portal. It held that the IT Act would apply only to matters not squarely covered under the Central / State GST Acts and cannot override the specific service modes under Section 169.

• Moreover, HC held that to the extent there is no system-generated acknowledgement or confirmation that the addressee has retrieved or downloaded the notice / order dispatched through electronic mode, no inference may be drawn as to the actual date and time of such service for the purposes of limitation. Also, no useful purpose may ever be served in enquiring about the same as it would involve impractical and wasteful deep forensic investigation.
• Accordingly, it concluded that effective ‘communication’ of the show cause notices and adjudication orders may be governed by actual or constructive ‘communication’ to the Assessee – of the contents of such notices and orders, strictly in terms of Section 169 specifically for the purpose of filing appeal or raising other challenge to an adjudication order, etc.
• Wherever an Assessee files an appeal declaring that it is within time from the date of actual communication, a presumption may arise in their favor, and the burden to prove otherwise would lie on the Revenue.
• Further, the Court directed, “To avoid any conflict with respect to start point of limitation, it is provided - wherever the date of ‘communication’ may be determined or be claimed through electronic and physical mode, the date of communication through offline/physical mode may prevail over service through electronic mode, unless the contrary is proved, by either party.”
• In view of the above, the HC allowed the writ petitions by concluding that mere uploading of notice or order on the common portal does not by itself amount to effective communication to trigger limitation period.

Our Comments

This judgement attains significance as it seeks to address the widespread practical challenges being faced by taxpayers vis-à-vis communication of notices and orders issued by the GST authorities

The judgement underscores the importance of natural justice principles to protect the tax-payers’ rights and to mitigate instances of ex-parte orders or time-barred appeals or initiation of recovery.

In line with the aforesaid verdict, it is recommended that taxpayers should document the actual date of receipt / downloading of electronic communication so that the statutory remedies are not curtailed

Deletion of Transfer Pricing Adjustment for payment of royalty under aggregation approach

Hi-Lex India Private Limited. [ITA no. 4288 / DEL / 2024] for Assessment Year (AY) 2020-21

Background

The Assessee has been engaged in the business of manufacturing mechanical control cables and window regulators for automobile industries. The following international transactions of the Assessee were subject to Transfer Pricing (TP) assessment for AY 2020-21:

• Purchase of raw materials
• Purchase of spare parts
• Sale of goods
• Purchase of capital goods
• Payment of technical consultancy fee
• Payment of royalty

Considering the above transactions to be intrinsically linked, they were analysed by the Assessee by adopting aggregation approach using the Transactional Net Margin Method (TNMM) as the most appropriate method.

The Ld. Transfer Pricing Officer (TPO) during the course of the assessment proceedings rejected the economic analysis adopted by the Assessee and proposed a transfer pricing addition. The TPO also challenged the Assessee’s approach to benchmark the international transaction of payment of royalty based on aggregate approach.

On a without-prejudice basis, the Assessee submitted a CUP analysis to benchmark payment of royalty transaction using 3 independent agreements with an average royalty rate of 6.17% of net sales, as against 3% in the Assessee’s case. However, the Ld. TPO selected 5 comparables with an average royalty rate of 2.6% and proposed a transfer pricing adjustment for the differential royalty rate.

The Assessee filed an objection before Honorable Dispute Resolution Panel (DRP) wherein Hon’ble DRP upheld the adjustment made on account of the international transaction of payment of royalty by adopting transaction by transaction analysis.

Aggrieved by the Hon’ble DRP’s directions, the Assessee filed an appeal before the Hon’ble Income Tax Appellant Tribunal (ITAT).

Contention of the Assessee before the Honorable ITAT:

The Assessee contended that the operating profit margin earned by the Assessee has already been held to be at arm’s length by the Ld. TPO while passing the order based on Hon’ble DRP’s directions. The said margin includes payment of royalty for the year under consideration as an operating expense. The Assessee contended that since the Profit Level Indicator (PLI) under the combined benchmarking approach for all international transactions, including payment of royalty, was accepted by the Ld. TPO to be at arm’s length, no separate benchmarking for the royalty transaction was warranted. The Assessee placed its reliance on various judicial precedents to support its contention.

Revenue's contention before the ITAT:

The Revenue contented that payment of royalty being a separate international transaction is required to be benchmarked separately and hence the Ld. TPO has correctly benchmarked the said transaction.

Held by the Honorable ITAT:

The Hon’ble ITAT observed that the operating profit margins earned by the Assessee has already been held to be at arm’s length basis the final order passed by the Ld. which includes payment of royalty as an operating expense.

Hon’ble ITAT placing reliance on judicial precedent in the case of Hon’ble High Court (HC)[5], opined that a separate adjustment pertaining to the international transaction of payment of royalty is not warranted, since, the Ld. TPO has already determined the aggregated transaction to be at arm’s length which includes payment of royalty as an operating expense and thereby deleted the additions made in relation to the transaction relating to the payment of royalty.

Our Comments

Each method for determining the arm’s length price is a separate and complete test for evaluating an international transaction. While royalty transactions shall typically be analyzed on a transaction-by-transaction basis, particularly where they are independently identifiable and comparable data is available. However, an aggregation approach may be adopted where the royalty transaction is closely linked with other international transactions and cannot be reliably evaluated separately. The choice of approach depends on the facts, functional inter-linkage, and reliability of benchmarking.