From The Judiciary

Whether profits can be attributable to Indian PE when there is a global net loss?

HITACHI LTD Vs ACIT TS-398-ITAT-2023(DEL)

Facts

The taxpayer Hitachi Ltd. was a Japanese multinational engineering and electronics conglomerate company. For the year under consideration, the taxpayer entered into a contract with DFCCIL, including offshore manufacture of goods and supply from Japan. The supply of goods from Japan was not offered to tax in India as no part of the activity was attributable to the operations of the Permanent Establishment (PE) in India. However, the Revenue did not agree with this stand and attributed profits to the India PE based on a global profit rate.

Held

The Delhi Tribunal observed that the Revenue did not challenge the taxpayer's contention on the activities being undertaken offshore and not in India. Furthermore, the taxpayer had also relied on Delhi's Tribunal's prior ruling in the case of Nokia Solutions¹, where it was observed that where an assessee has a global net loss as per its audited accounts, no profit or income could be attributed to the assessee in India.

In the present case as well, the taxpayer was incurring losses on a global level. The Delhi Tribunal thus held that since no activities were conducted in India and a loss was incurred at a global level, the department was not right in attributing profits to the PE in India.

Our Comments

Delhi Tribunal holds that profits cannot be attributed to the Indian PE if the entity is incurring a Global Net Loss.

Is it necessary for a separate notification to be available in order to invoke MFN clause under a tax treaty?

TDK PVT LTD .Vs ACIT TDK India Private Limited TS-393-ITAT-2023(Kol)

Facts

The taxpayer is an Indian entity engaged in the manufacture and supply of capacitors and soft ferrite cores. The taxpayer received certain services from one of its Spanish group companies in relation to procurement, quality management, HR, etc. In this regard, the taxpayer deducted 10% tax on such payments against 20% under the India-Spain tax treaty, in light of the Most Favoured Nation (MFN) clause under the Spain treaty. The taxpayer relied on the India-Portugal tax treaty, which was entered after the one with Spain and, wherein the tax rate for FTS was provided as 10%. The Revenue rejected this contention and treated the taxpayer as an assessee in default for the withholding taxes. The Revenue contended that the assessee cannot invoke the MFN clause in the absence of a separate notification under Section 90 in light of the CBDT Circular No. 3/2022, which is binding on Revenue and has a retrospective effect.

Held

The Kolkata Tribunal has observed that the protocol of a treaty is an integral and indispensable part of the same, and the benefit of a lower tax rate in light of MFN cannot be dependent on any further unilateral action or issuance of a notification by the respective governments to make it applicable.

The Tribunal also opined that in light of the Pune Tribunal's ruling in the case of GRI Renewable, the CBDT Circular No. 3/2022 does not have a retrospective application.

Thus, the benefit of the MFN clause was granted to the taxpayer, and withholding taxes were applied at 10% only.

Our Comments

The Tribunal has relied on certain past coordinate bench decisions and opined that issuance of a separate notification is not mandatory for placing reliance on the MFN clause.

Reliance placed on subsequent year Advance Pricing Agreement to confirm Most Appropriate Method

Springer India Private Limited² TS-403-HC-2023(Del)-TP

Facts

The taxpayer was engaged in the publication and distribution of scientific books and also provided marketing and sales support services to its Associated Enterprises (AE). For the covered year, the taxpayer had benchmarked its various international transactions using the Other Method (OM) as compared to the use of the Transactional Net Margin Method (TNMM) in the earlier years, as OM was not introduced in the statute prior to AY 12-13.

The Transfer Pricing Officer (TPO)

Rejected the use of OM for AY 12-13 and made an upward adjustment by aggregating all the transactions using the TNMM method. The Dispute Resolution Panel (DRP) upheld the addition made by the TPO.

The Income Tax Appellate Tribunal (ITAT)

Noted that the taxpayer had entered into an Advance Pricing Agreement (APA) for the period AY 2013–14 to AY 2020–21. The APA included 16 out of 18 transactions that were benchmarked using OM. The ITAT opined that if APA does not cover the year under dispute. However, if the FAR profile is the same, the methodology under APA can be adopted for the year under dispute. Hence, ITAT directed taxpayers to submit all the relevant documents in compliance with APA.

Delhi High Court Order

The Hon'ble Delhi High Court concurred with the approach adopted by the ITAT and held that no substantial question of law arose when the methodology agreed under an APA was used for benchmarking transactions entered in prior years when the FAR profile of the taxpayer was similar.

Our Comments

The taxpayers may be recommended to document their FAR profile year on year, which may help to establish similarity in TP methodology, especially if agreed in an APA period.

Tested Party – not relevant in price-based methodology and mere reliance on arm's length basis of Indian counterpart not sufficient for Foreign taxpayers in India

Crayon Group AS³ TS-417-ITAT-2023(Mum)-TP

Facts

The taxpayer, a foreign company incorporated in Norway, was receiving 6.5% interest on Compulsory Convertible Debentures (CCD) issued by its AE, Crayon India. The taxpayer had benchmarked the transaction by using CUP by taking the rate of Trade Financing availed by the AE from a third party (i.e., 11%) and the State Bank of India Prime Lending Rate (i.e. 14%). It was held that since the Indian AE had paid less than the CUP, the transaction was considered to be the ALP. The TPO rejected the taxpayer's contentions and considered interest at 11% to be at ALP, which the DRP upheld.

However, ITAT rejected both taxpayer and TPO's contentions on the following grounds:

• Tested Party is the first step only in margin-based methods and not in price based method;
• The taxpayer cannot take shelter under the assessment proceedings conducted for its AE to conclude its transactions at ALP.
• Rates under trade finance) cannot be compared with interest on CCD.

Based on the above, the ITAT remitted the matter back to TPO for fresh determination by adopting the most appropriate method based on FAR.

Our Comments

Foreign taxpayers in India need to evaluate the TP compliance and documentation requirements carefully and merely placing reliance on the Indian AE would not be deemed to be sufficient. The decision clearly elucidates that a multitude of legal grounds, though logical, are no substitute for the requisite FAR analysis and nuanced understanding required while selecting an appropriate method for benchmarking.

Constitutionality of the time limit for claiming ITC under Section 16(4) of CGST Act, and whether fulfillment of conditions of Section 16(2) would prevail over such time limit

Thirumalakonda Plywoods vs. The Asst. Commissioner W.P. No. 24235 of 2022

Facts

The petitioner is a sole proprietor engaged in the business of hardware and plywood under the trademark 'Thirumalakonda Plywoods.'

In the wake of COVID-19 pandemic, the GSTR-3B of March 2020 was filed by 27 November 2020, along with a late fee of INR 10,000.

However, the Revenue disallowed the Input Tax Credit (ITC) claim in the said return on the ground that it was beyond the time limit prescribed under Section 16(4) of the CGST Act r/w Andhra Pradesh GST Act.

Hence, the petitioner assailed the Revenue's action while also questioning the validity of Section 16(4) before the Andhra Pradesh HC.

Petitioner further argued that the non-obstante clause in Section 16(2) would prevail over Section 16(4).

Ruling

Ruminating on the cardinal principle of interpretation, HC observed that both Section 16(2), which subjects the entitlement of ITC to certain conditions, and Section 16(4), which prescribes a time limit to avail credit, are two different restricting provisions. Both operate independently and have no inconsistency between them.

As per the Court, the mere filing of the return with a delay fee would not act as a springboard for claiming ITC. Collection of late fees is only for the purpose of admitting the returns for verification of taxable turnover, not for consideration of ITC.

HC further reiterated that ITC is a mere concession/rebate/benefit and not a statutory or constitutional right and therefore, imposing conditions including time limitation for availing the said concession will not amount to a violation of Articles 14, 19(1)(g) and 300-A of the Constitution or any statute.

Our Comments

The HC has explicitly held that ITC is only a concession/benefit, not a statutory right. As the validity of the timeline has been upheld, the taxpayers must ensure timely availment of credits. Currently, the ITC can be claimed until 30 November after the end of the financial year or furnishing of the Annual Return, whichever is earlier.

However, it may be pertinent to note that the question of applicability of said timeline to import transactions, viz. RCM invoices and bills of entry still remain open.

Whether a refund of differential ITC not claimed earlier for a particular tax period is permissible under the GST law?

Shree Renuka Sugars Ltd vs. State of Gujarat Special Civil Application No. 22339 of 2022

Facts

The petitioner is engaged in the manufacturing and trading of sugar, including exports. Since the export is undertaken without payment of IGST under a Letter of Undertaking (LUT), the petitioner claims a refund of unutilized ITC as per the formula prescribed in Rule 89(4) of CGST Rules r/w Section 54 of CGST Act.

The refund applications were filed for FY 2020-21 and FY 2021-22. However, at a lower amount due to an inadvertent arithmetical error. These claims were sanctioned by the GST authorities post-verification.

Upon realizing such an error, the petitioner lodged supplementary refund claims for the differential ITC. But the Revenue rejected the same on the grounds that the applications were filed under the 'Any Other' category, which was invalid.

Aggrieved thereby, the petitioner approached Gujarat HC.

Ruling

A perusal of Section 16 of IGST Act r/w, Section 54 of CGST Act and Rule 89(4) of CGST Rules would reveal that the "refund amount" means the maximum refund that is admissible.

In the present case, the supplementary applications have been made within the statutory period laid down in Section 54.

The petitioner was left with no option but to upload another application under the category 'Any Other.' This is nothing but a technical error for which the claim of the petitioner cannot be rejected without examination by the Revenue on its merits and in accordance with the law.

It is settled law that the benefit that a person is entitled to once the substantive conditions are satisfied cannot be denied due to technical error or lacunae in the electronic system.

In VKC Footsteps India Pvt Ltd., the SC had an occasion to deal with the issue whether the HC had expanded the provision for a refund beyond what the legislature had provided. Therefore, the same would not apply to the present case.

Our Comments

This decision clarifies that taxpayers can claim supplementary refunds for the same tax period despite the approval of the first application. However, the taxpayer should be mindful of meeting all other conditions of claiming a refund, including the eligibility of ITC and the time limit.

Listed Companies will now have to make all business deals public

The Securities and Exchange Board of India (SEBI) has recently amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations), pursuant to which listed companies are now required to disclose certain key events/information to the Stock Exchanges without any application of materiality guidelines. One such amendment pertained to the disclosure of all information on business deals and arrangements that have a bearing on their prospects to the public. Listed companies are now mandated to reveal all contracts and arrangements pertaining to strategic, technical, manufacturing, and marketing tie-ups to boost transparency. Till now, companies enjoyed the discretion of determining whether a piece of information or event would be 'material' enough to be disclosed to the public. The changes aim to ensure that key criteria relevant to the market and investors are disclosed within specified timelines rather than a discretion-based approach.

Another noteworthy change brought in by the SEBI amendment is the implication on existing events or continuing events, which become material due to the inclusion of new objective parameters. Companies will now need to retrospectively look back at all those events to check if disclosure is needed.

Our Comments

To ensure more accurate public disclosures, SEBI has added certain key events/information to the existing list of events that require mandatory disclosures without any application of materiality guidelines. The amendments, effective 15 July, will require companies to disclose all business deals without exception to shareholders.

Companies also need to check whether any past deals/events that have become material are adequately disclosed before 13 August 2023.