From The Judiciary

Can playout services be taxable as Fees for Technical Services?

Planetcast International Pte TS-96-HC-2024(DEL)

Facts

Planetcast International Pte (assessee), a tax resident of Singapore, provides wide range of satellite-based telecommunication services to media and entertainment businesses. The assessee received consideration from the following activities in India: (i) Uplinking services and (ii) Playout services. Revenue held that the uplinking services as Royalty under Section 9(1)(vi) as well as the India- Singapore Double Taxation Avoidance Agreement (DTAA). Furthermore, Revenue also held that the playout services are managerial and technical in nature and covered within the ambit of Fees for Technical Services (FTS) as per Explanation 2 to Section 9(1)(vi).

The asseesee was in appeal before the Delhi Income Tax Appellate Tribunal (Delhi ITAT) wherein Delhi ITAT laid down that assessee’s customers were neither in possession of any equipment nor had any control over the equipment used by the assessee for providing uplinking and playout services to its customers. Furthermore, there is no ‘know how’ or ‘intellectual property’ involved in the provision of such services by the assessee. Accordingly, it is held that the amount received by the assessee from its customers in India as consideration for the provision of a service cannot be characterized as Royalty for the use or right to use of a process under Section 9(1)(vi) or Article 12 of India-Singapore DTAA and further holds that the playout services are not managerial in nature, thus cannot be termed as FTS.

Pursuant to the above, the Revenue was in appeal before the Delhi High Court (Delhi HC) to question the correctness of the view expressed by Delhi ITAT.

Held

Delhi HC held that the ITAT, in its examination of this matter, has determined that the service being provided does not fit into the managerial, technical, or consultancy services categories.

After carefully considering the details and the framework of playout services, the Delhi HC noted that Delhi ITAT has concluded that these services are an essential component of broadcasting and channel transmission and do not entail decision-making processes, therefore, cannot be termed as FTS.

Delhi HC opined that once Delhi ITAT concluded that the service in question does not meet the criteria of being categorized as "managerial," "technical," or "consultancy," there is likely no need to explore this aspect further. Delhi HC decided the matter in the light of ‘make available clause’ under Article 12(4) (b) of India-Singapore DTAA and left the question of interpretation on ‘make available clause’ open for an appropriate case and appeal filed by Revenue did not have a substantial question of law. Hence, the Revenue’s appeal was dismissed.

Our Comments

In determining whether a specific service qualifies as FTS, the assessment often revolves around its nature, specifically whether it is of a technical, managerial, or consultancy nature. Additionally, the consideration extends to whether the service involves the provision of knowledge or not.

How does the chargeability to tax impact Section 195 (TDS on purchases), and what role does the non-discrimination clause play in relation to Section 40(a)(i)?

Mitsubishi Corporation India Pvt. Ltd TS-106-HC-2024(DEL)

Facts

Mitsubishi Corporation India Pvt. Ltd (Assessee) made payment for the purchase of goods to seven of it’s overseas group companies in Japan, USA, Singapore and Thailand without deduction of tax at source.

The assessing officer ordered disallowance under Section 40(a) (i), on the ground that they were chargeable to tax in India. It was based on the rationale that one of the group companies had a liaison office in India, which constituted a Permanent Establishment (PE), whilst the other entities, being identical in terms of business model, would also constitute having a PE in India.

The assessee proceeded to appeal the matter before the Income Tax Appellate Tribunal (ITAT), challenging the proposed disallowance.

Accordingly, the ITAT ruled in favor of the assessee, pursuant to which the Revenue preferred to appeal before the Delhi HC.

Held

Delhi HC held that the ITAT was correct in its examination of the matter, which determined that the payment made to overseas group entities as purchase consideration was not liable to be disallowed under Section 40(a)(i) since the assessee was not liable for TDS under Section 195(1) where the sum paid was not chargeable to tax in India in the hands of the payee.

For AY 2006-07, HC opines that the equal treatment/non-discrimination Clause obtained in Articles 24(3)/26(3) of the India-Japan/India-USA DTAAs would apply with regard to the payment for purchases made by the assessee concerning group companies in Japan and the USA since the DTAAs are more beneficial, the assessee is entitled to avail the benefit.

The HC notes that the amendment to Section 40(a) of the Income-tax Act, 1961 (ITA) was made via the Finance Act, 2004 (w.e.f 1 April 2005), which widened its ambit to bring sub-clauses (i) and (ia) at par on certain payments, yet clause (ia) failed to apply to payments towards purchases. This disparity was removed by the Finance Act, 2014 (w.e.f. 01/04/2015), when the ambit of disallowance was enlarged by bringing any sum payable to a resident within the ambit of sub-clause (ia).

Since the period in issue is AY 2006- 07, the amendment brought about in Section 40(a) by virtue of the Finance Act 2014 would have no relevance. As regards the transactions with the other group entities in Thailand and Singapore, the chargeability of tax in India is not attracted as these entities do not have a PE in India.

Lastly, the HC observes that the business connection test is not relevant when it is established that payees of Thailand and Singapore had no PE in India.

Our Comments

This case underscores the imperative nature of deducting taxes when a payment is taxable, serving as a preventive measure against disallowances. The existence of a PE is also relevant in determining whether the payment is subject to taxation. In the case of business profits, no tax is required to be deducted in the absence of any PE.

Business restructuring an international transaction, consideration in any form should be examined separately

Dimexon Diamonds Ltd TS-24-ITAT-2024(Mum)

Facts

In AY 2017-18, the assessee (engaged in the business of manufacturing/ distribution of diamonds) had entered into the scheme of amalgamation with its wholly owned subsidiary. Post-merger, the assessee became a subsidiary of the ultimate holding company situated in the Netherlands. The purchase consideration for the merger to ultimate holding were in the form of shares on fair value, Compulsory Convertible Debentures (CCDs) and cash. The Transfer Pricing Officer (TPO) made an upward adjustment by considering cash consideration as deemed loan and computed interest thereon, and that Arm’s length Price (ALP) of interest paid on CCDs as NIL, as not at arm’s length. The assessee appealed before the Dispute Resolution Panel (DRP), which confirmed the upward adjustment by the TPO. Aggrieved by the order, the assessee appealed before the ITAT.

Held by the ITAT

The Hon’ble ITAT finds no infirmity in upward additions made by the TPO and DRP, based on the following:

• In the present case, business restructuring is an organizational change relying on OECD guidelines and concluded that it falls under the definition of international transaction as defined in Section 92B of the Act.
• The purchase consideration should be examined thoroughly and independently, irrespective of whether it is in multiple modes (cash, CCD, and equity), to comply with the arm’s length principle.
• Despite an order passed by the Hon’ble NCLT, the department does not waive its right to examine tax issues arising out of the Scheme of Amalgamation.
• The approval by RBI cannot override the requirement to compute the ALP under the provisions of the Act.
• The valuation reports were rightly rejected as they were not prepared on any scientific basis, though purchase consideration specified to be determined by applying the Net Asset Method was pre-determined by the management and “other method” as adopted in the TP report placing reliance on such valuation report, was being issued without any independence.
• The entire merger transaction is a mere restatement of accounts without any erosion in the ultimate holding company's function, asset and risk profile.

Our Comments

The MNEs conduct cross-border restructuring transactions to streamline their business model or to grow or re-align their primary activities. Though compliance with other laws and regulations would have been adhered to, MNEs fail to consider TP aspects, resulting in high exit tax or penalties. Therefore, TP aspects of restricting should be considered at an early stage, including but not limited to maintaining appropriate documentation, conducting independent valuation analysis, justification of economic impact, detailed FAR analysis, adherence to the law of each country, etc.

Economic adjustments towards excess depreciation capacity, under-utilization to adhere to provisions of the Act

Schott Glass India Pvt. Ltd TS-43-ITAT-2024(Mum)-TP

Facts

The taxpayer is a 100% subsidiary of Schott Glass Werke Beitilunga GmbH, Germany, having two divisions, turbing and trading. It had entered into international transactions with the Associated Enterprises (AEs). In its TP report, the assessee adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and made economic adjustments on account of excess depreciation, foreign exchange fluctuation and under-utilized capacity. Only one comparable, “Triveni Glass Ltd,” was identified as the comparable company under the TNMM.

Held by the TPO

The assessee had made an economic adjustment of depreciation claimed on the set-up of a new tank and because of the under-utilization of the new tank. The assessee made the second adjustment because of the underutilization of capacity, and the third adjustment was made on account of the loss of foreign exchange fluctuation. The TPO rejected the economic adjustment of excess depreciation, stating that the assessee had already availed of the tax benefit in its income tax computation. The TPO also observed that as per the annual report of the assessee, it utilized 87% capacity in 2006 as against its installed capacity and made the economic adjustment on under-utilization of capacity was merely an estimated adjustment and not factual. The learned CIT(A) dismissed the appeal filed by the assessee. Aggrieved by the order, the assessee appealed before the ITAT.

Held by the ITAT

The Hon’ble ITAT, after giving due consideration to the facts, Section 10B of the Act and judicial pronouncements, redirected the AO to consider the economic adjustments and working as below:

• Relying on Bangalore ITAT¹ ruling, it directed the learned assessing Officer (AO) that instead of allowing adjustment, AO to compute assessee and comparable margins, excluding depreciation from its cost.
• Relying on Delhi ITAT² and Hon’ble HC³ ruling held that in terms of Rule 10B(1)( e)(iii) of the Income-tax rules, capacity utilization adjustment is required to be made to the profit margin of the comparable companies.

Our Comments

To avoid disputes with tax authorities and ensure compliance with TP regulations, MNCs often engage in TP studies, documentation, and advance pricing agreements with tax authorities to establish acceptable TP methodologies. These measures can help minimize the risk of economic adjustments and provide certainty regarding TP arrangements.

Whether the Business Transfer Agreement (BTA) having a noncompete clause can be classified as Declared Service of “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” under Section 66E(e) of the Finance Act, 1994?

Sicon Design Technologies Pvt. Ltd. & Ors. vs. Commissioner of Central Tax, Bengaluru 2024 (2) TMI 964 - CESTAT BANGLORE

Facts

• The appellant had entered into a BTA wherein it had agreed to sell, transfer, grant, assign and deliver all its rights, title and interest with respect to the business as a going concern.
• The BTA also included a noncompete clause, imposing restrictions on the appellant’s engagement in specified activities for a period of two years.
• The appellant claimed service tax exemption under mega exemption Notification No. 25/2012-ST dated 20 June 2012 towards the services by way of transfer of a going concern, as a whole or independent part thereof.
• However, pursuant to the Directorate General of GST Intelligence (DGGI) investigation, service tax demand was confirmed on the ground that the non-compete and non-solicit clauses in the BTA amounted to ‘Declared Services’ as there was an obligation to refrain from an act, or to tolerate an act or a situation or to do an act.
• As per the Revenue, the value of the assets was negligible and the entire amount involved in the transactions was towards the non-compete clause, which was the essence of the contract.
• Challenging the demand, the appellant submitted that the value offered by the buyer was towards the market value of the business and not for the indemnity clause.

Ruling

• From the evidence on record, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) could not find that a substantial portion of the BTA referred to the conditions/ obligations to be followed by the appellant, like non-compete clauses, performance guarantees for two years, etc., for which it had received the consideration.
• Referring to the Ahmedabad bench’s decision in Universal Medicare Pvt. Ltd. vs. CCE & ST, Daman [2019 (6) TMI 166 – CESTAT AHMEDABAD], CESTAT observed that such a clause is normal in the transfer of business and the condition of a non-compete cannot be separated from the contract entered between the parties to bring the transaction under the ambit of service tax.
• In this regard, it relied on Apex Court’s decision in Ishikawajma Harima Heavy Industries Ltd vs. Director of Income Tax, Mumbai [2007 (3) SCC 481] wherein it was held, “in construing a contract, the terms and conditions thereof are to be read as a whole. A contract must be construed keeping in view the intention of the parties. No doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions.”
• CESTAT further referred to the clarification issued by the Central Board of Indirect Taxes and Customs (CBIC) in the context of the GST law vide Circular No. 178/10/2022- GST dated 3 August 2022. In the said Circular, it has inter alia been clarified that unless payment has been made for an independent activity of tolerating an act under an independent arrangement, the same will not constitute ‘consideration’ and hence, such activities do not constitute “supply” within the meaning of the CGST Act.
• Resultantly, the CESTAT allowed the appeal by setting the impugned order with consequential relief.

Our Comments

This ruling fortifies the position that a contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. Such a contractual arrangement must be an independent arrangement in its own right. There must be a necessary and sufficient nexus between the supply (i.e., agreement to do or to abstain from doing something) and the consideration.

In addition to the GST Circular dated 3 August 2022, the CBIC has clarified the leviability of service tax on such declared service under Section 66E(e) of the Finance Act, 1994, vide Circular No. 214/1/2023-Service Tax dated 28 February 2023. It has been clarified inter alia that the activities contemplated under the said provision are the activities where the agreement specifically refers to such an activity and there is a flow of consideration thereof.

Given the above, the clauses of the contracts/agreements should be carefully drafted with the intention of the parties in mind. Assignment of specific value(s) toward non-compete/ non-solicit or liquidated damages could attract GST.

Delhi ITAT - Consideration for transfer of shares set aside in an Escrow account (which is unlikely to be received) is excludible for computation of capital gains

Modi Rubber Ltd. v. DCIT-2 I.T.A. No.6866/DEL/2018 (Delhi-Tribunal)

In AY 2012-13, the assessee sold its shareholding in its subsidiary to an Indian entity for a total agreed consideration of INR 1.1761 billion. Out of the said agreed consideration, an amount of INR 254.8 million was kept aside in an Escrow Account (EA) by the purchaser to meet any future contingent liabilities. The assessee filed its return of income, offering the entire agreed sales consideration of INR 1.1762 billion to tax. However, subsequently, in the course of the assessment proceedings, the assessee sought a revision of sale consideration to the INR 921.4 million (i.e., reduced the amount set aside in EA) as the same was neither received nor likely to be received in view of claims of INR 789.4 million raised by the purchaser to meet liabilities associated to the transaction. The AO however found the revised claim as untenable. The CIT(A) also upheld the order of the AO.

The Hon’ble ITAT decided the case in favor of the assessee and held as under:

• The assessee was well within its right to seek a reduction of sales consideration during the course of assessment proceedings based on a settled position of law as laid down by the Apex court in Goetze (India) Ltd⁴.
• Found a similarity of the case with the decision in the case of Dinesh Vazirani vs. Pr. CIT (2022) 445 ITR 110 (Bom), wherein it was held that capital gains were to be computed only on the net amount actually received and that the assessee was entitled to a refund of the excess taxes paid on the returned capital gains.
• Distinguished the ruling in the case of Carborundum Universal Ltd. Vs. ACIT 130 taxmann.com 133 (Mad) on facts, wherein the amount placed in EA was eventually returned to the assessee without any deduction or reduction of sale consideration.
• The amount recovered out of EA by the assessee in the later years shall be liable to taxation in the respective years of receipt or accrual.

Our Comments

The decision reiterates the importance of charging only real income to tax vis-àvis notional income (i.e., not received or receivable). The ruling also fortifies the settled rule of law to raise a claim for reduction/ revision of taxable income during the course of assessment proceedings. The ruling also highlights the significance of conditions attached to EA (i.e., contingent or otherwise) to determine the taxability of such consideration.

Kolkata ITAT: Addition on account of deemed dividend held to be applicable in the hands of Beneficial Owner (exercising control & influence on lender as well as borrower) and not in the hands of borrower

Apeejay Surrendra Management Services Pvt. Ltd TS-130-ITAT-2024(Kol)

In the given case, the assessee, involved in Brand Owning and Consultancy, declared a loss in the return for AY 2014-15. The assessee received a loan of INR 55 million from another group company. The AO noted that there was a common shareholding by Kathua Steel Works Pvt. Ltd. (KSWPL) in both companies (KSWPL held substantial interest in both the assessee (99.96%) and the lender company (57.86%)). Considering the same, the AO invoked the provisions of Section 2(22)(e) and added the borrowing as a deemed dividend in the hands of the assessee (i.e., the borrower). The decision of the AO's was upheld by the CIT(A).

In its appeal before the ITAT, the assessee emphasized the fact that it was not a shareholder having substantial interest in the lending entity and hence the provisions of Section 2(22)(e) cannot be invoked in its hands. On the other hand, the departmental representative strongly placed reliance on the decision of the Supreme Court in the case of National Travel Services⁵ to canvas the proposition that it is not necessary that one has to be a registered shareholder in order to attract the provisions of Section 2(22) (e).

The ITAT took due cognizance of the observations of the Supreme Court in the case of National Travel Services that the shareholder in the context of Section 2(22)(e) has only to be a person who is the beneficial owner of shares and he need not necessarily be the registered shareholder.

Considering the facts of the present case, the ITAT observed that the assessee was in no way in a position to compel KSWPL to exercise its voting rights in a particular way. Accordingly, the ITAT ruled in favor of the assessee, overturning the addition of the deemed dividend. ITAT held that provisions of Section 2(22)(e) can be invoked in the hands of the beneficial owner (KSWPL) holding a substantial interest in both companies and not in the hands of the assessee (being the borrower).

Our Comments

The ruling re-emphasizes the position that it is not necessary for one to be a registered shareholder to attract the provisions of Section 2(22)e. The Section can trigger only in the hands of the shareholder, who is the beneficial owner of shares.

MCA introduces Form Change Request Form (CRF) for simplifying Company Masterdata corrections

The MCA had vide a General Circular No. 02/2024 dated 19 February 2024, introduced the Change Request Form (CRF) on the V3 portal of the Ministry of Corporate Affairs.

Form CRF is a web-based form introduced by the MCA to take care of the exceptional issues faced by the stakeholders that could not be addressed through any existing form, services or functionality.

The following are the key points to be noted:

• Form CRF can be used to make exceptional requests to the Registrar of Companies (RoC), like making corrections in the Master Data and to comply with certain directions of Courts/Tribunals, which ordinarily cannot be complied with through the existing functionality of forms or services on the MCA-21 system.
• However, Form CRF is not to be considered as a substitute for any reporting, application, and registry requirements as per the Companies Act, 2013, and LLP Act, 2008.
• As per the mandate, the Form CRF will have to be processed by RoCs within three days of its filing, after which it should be forwarded to the Joint Director (e-governance cell), who shall process and decide the matter within a maximum time of seven days.

Our Comments

This form offers a welcome solution for companies facing inaccuracies in their MCA master data. For instance, a company dissolved by order of the National Company Law Tribunal (NCLT) but still showing as "ACTIVE" on the MCA portal can leverage this Form to rectify the inaccuracy. Other common issues like discrepancies in capital or director details can also be addressed through this streamlined process, eliminating the need for repeated visits to RoC offices for resolutions.