Direct Tax

Whether general management expenses reimbursed to the UAE parent company can be classified as FTS or Business Income?

ITP Publishing India (P.) Ltd. Vs Mumbai ITAT ITA No. 4407/Mum/2019


The taxpayer is a company engaged in the business of magazine publishing and event management.

The taxpayer has entered into a general and administrative service agreement with its holding company,i.e., ITP Holdings Inc. Dubai (ITP Dubai). These services were in the nature of support services and the payment against these services was on a cost recharge basis without any markup.

While paying for these services, the taxpayer did not deduct withholding tax under Section 195, considering that the remittance is for cost recharges by the parent company and does not involve any income element. On the other hand, the Assessing Officer (AO) contended that payment was against the general and administrative services bifurcating it in the nature of fees for technical services and thus, withholding tax should have been deducted. The AO disallowed the expenses applying Section 40(a)(ib) of the Act.

Aggrieved by the above, an appeal was filed before the Income Tax Appellate Tribunal (ITAT).


The Mumbai Tribunal explained that support services received from the parent entity are not special, exclusive or customized services that the parent company renders. Technical services like managerial and consultancy services would denote seeking services to cater to the special needs of the consumer/user as may be felt necessary, which distinguish/identify a service provided from a facility offered. Thus, the services under consideration do not qualify as FTS under Section 9(1) (vii).

Furthermore, the Tribunal also held that if a non-resident earns any income from India by means of operations carried on outside India, that will not fall within the scope of Section 9(1)(i). Since the income cannot be described as deemed to accrue or arise in India nor received or deemed to be received, the taxability of such income fails.

It was concluded that payment remitted by the taxpayer neither falls under Section 9(1)(i) nor under Section 9(1)(vii) and the income cannot be described as deemed to accrue or arise in India. Thus, it was concluded that no disallowance under Section 40(a)(i) of the Act was warranted.

Our Comments

Mumbai Tribunal opined that reimbursement of general management expenses without markup to the parent company shall not be liable to withholding taxes.

Can the Revenue bypass SC Decision in ‘Engineering Analysis’ in lieu of Review Petition pending before SC?

Milestone Systems A/S TS-133-HC-2023(DEL)


The taxpayer, Milestones Systems A/S, is a non-resident company incorporated under the laws of Denmark. The taxpayer filed an application under Section 197 seeking ‘Nil' rate of withholding tax in respect of its receipts under the Distributor Agreement entered with respect to its video management software. In doing so, the taxpayer relied on the SC’s decision in the case of Engineering Analysis to claim that the Royalty earned by it was for a copyrighted article and not for the transfer of copyrights therein.

The Revenue rejected the taxpayer’s application without evaluating the facts of the case and without analyzing the actual nature of the transaction. The Revenue denied taxpayer’s reliance on the SC’s decisions on the ground that, in this case, a review petition had been filed and is pending with the Court.

Aggrieved by the same, the taxpayer filed a writ petition before Delhi HC.


The HC observed that as long as SC’s judgment in Engineering Analysis is in force, the concerned income tax authority could not have sidestepped the judgment on the ground that the Revenue Department has filed a review petition against the said judgment. It would have been a separate matter if the concerned officer had, on facts, distinguished the judgment of the SC in Engineering Analysis.

The HC remitted the matter back to the Revenue with a direction to examine the terms of the software agreement and the ratio laid down by the SC in the case of engineering analysis.

Our Comments

The Delhi Court set aside the Income Tax Department’s order rejecting the taxpayer’s application seeking a certificate for the “NIL” rate of withholding tax under Section 197 of the Act.

Transfer Pricing

ALP cannot be NIL in cases where the AE relationship has not been determined basis ownership and control

WeWork India Management Private Limited IT(TP)A No. 819/Bang/2022


The taxpayer is engaged in the business of leasing of network of fully/partly equipped shared workspaces. It had entered into Operations and Management Agreement (OMA) with WeWork Global, pursuant to which it paid management fees at the rate of 12.50% of gross revenue in respect to the right to use IP and software to perform its day-to-day functions. Furthermore, it also paid interest on Compulsory Convertible Debentures (CCD) at 6% per annum. Both transactions were benchmarked using Comparable Uncontrolled Price (CUP) as the Most Appropriate Method (MAM).

WeWork Global did not hold shares in the taxpayer and constituted as AE under Clause (g) of 92A(2) of the Act.

Outcome of TPO’s order

The TPO, ignoring the benchmarking analysis undertaken by the taxpayer, determined the ALP of the transaction pertaining to management fees at NIL. TPO alleged that there were no actual receipts of the services and that any independent enterprise having skilled and sufficiently trained manpower would not have been willing to pay any third party for the said services.

Furthermore, TPO re-characterized CCDs as equity and held ALP of interest as NIL, alleging that given the skewed financials of the taxpayer, an uncontrolled party would not have subscribed to the CCDs of the taxpayer.

DRP Instructions

The Dispute Resolution Panel (DRP) upheld the order of the TPO even though sample copies of email exchanges between the taxpayer and WeWork and details of the software application provided by WeWork were shared with the DRP to demonstrate that services were indeed received. DRP upheld TPO’s order with respect to the CCDs.

Held by ITAT

ITAT observed that the taxpayer is operating under a franchise model from WeWork Global, where the entire business model of the taxpayer is dependent on AE. The necessary support for designing and constructing the premises, selling the concept in the market and also operationalization of business (to attain a similar look and feel and connect by a common software) is dependent on the AE. Moreover, the taxpayer uses the trademark/ brand of WeWork.

ITAT further observed an increase in the trade and number of desks sold in each of the FY due to services received from WeWork in the nature of the digital, real estate, design, corporate, implementation, training, billing and access to WeWork brand/trademarks. Also, the scientific and reasonable formula has been adopted for the computation of management fees with its working maintained by the taxpayer.

ITAT held that the AE relationship was determined on the foundational condition of receipt of IT/ franchise on which the business of the taxpayer was wholly dependent. If the TPO alleges that the taxpayer has not received services, the AE relationship established would be nonexistent and consequently, the jurisdiction of the TPO itself would fail. It is a fact that the taxpayer’s business is wholly dependent on the know-how, patent, copyright, trademark, licenses, franchises and other services of WeWork Global and thus, the ALP of the transaction cannot be determined to be NIL.

Furthermore, placing reliance on the ruling of Summit Development Pvt. Ltd, the ITAT held that CCDs are in nature of debt and cannot be re-characterized as equity until its conversion. The taxpayer had made disallowance under Section 94B of the Act, in its Return of Income under thin capitalization and the same cannot be the basis for disallowance under TP provisions. The transaction should be tested for arm’s length compliance and held to be excessive basis the benchmarking exercise undertaken under TP provisions.

Our Comments

The Hon’ble Tribunal has made a very pertinent observation in this case by holding that the ALP cannot be determined as NIL as the AE relationship itself is based on the existence of the international transaction. It demonstrates that in TP, understanding of the business and the Group structure is of significant importance before determining the ALP of the international transaction.

Customs data being government notified are more reliable than market rates to determine the Uncontrolled Transaction Price

Louis Dreyfus Company India Private Limited ITA No 808/DEL/2021


The taxpayer had undertaken international transactions pertaining to the import and export of agrocommodities. It benchmarked the transactions using the CUP method, considering the rates/quotes offered by authenticated and independent market reports/third-party broker’s quotes.

Outcome of TPOs order

The TPO rejected the rates adopted by the taxpayer on the ground that they are unreliable and unauthenticated. It alleged that the quotations provided by third-party brokers are not real-time transactions and only projections. Furthermore, the third-party report includes the average price. TPO considered the values declared by the customs authorities as they are computed using a scientifically formulated method. It is a fair assessment and not an arbitrary exercise.

DRP directions

The order of the TPO was upheld by the DRP directing the TPO to compute arm’s length range, where a number of prices were available for the same specifications on the same date in the customs data.

Held by ITAT

ITAT observed that the Customs data serves as a more reliable CUP as it compares the value of identical or similar goods imported/ exported at or around the same time, even though there is a gap between the contract date and actual contract realization date. This approach is in line with the Organisation for Economic Co-operation and Development (OECD) TP Guidelines. Since custom data is inclusive of interest, insurance, freight costs, storage cost, foreign currency terms, country of origin charges, transportation charges, port charges, and customs clearing charges, etc., it is a more reliable indicator of the uncontrolled arm’s length transaction value.

ITAT held that even though import/export duty is not payable on these commodities and tariff rates are not notified, the customs data is reliable as it is based on the transaction of similar nature and items on the same date at the same port. In the absence of complete details of the differences arising out of contract terms and product quality, the customs data being government notified would be a reasonable basis for arriving at the uncontrolled transaction price.

Our Comments

While adopting the CUP method to determine ALP for international transactions, we rely on the available market rates/ quotes from independent parties. However, if government-notified rates are available (such as custom data), the same may also be considered to arrive at the uncontrolled transaction price. The reasons should be appropriately documented if the same is not considered appropriate.

Indirect Tax

Whether production of invoice and payment documents sufficient burden of proof to claim ITC?

The State of Karnataka vs. Ecom Gill Coffee Trading Private Limited and others TS-99-SC-2023-VAT


The Revenue had approached the SC challenging the orders of the HC and Tribunal, which had allowed the assessees, viz. the purchasing dealers, their claim of Input Tax Credit (ITC) against the production of invoices issued by respective suppliers and proof of payments to them through cheques.

The Revenue contended that for the purposes of ITC, the purchasing dealer has to prove that the actual payment of tax and actual transfer of goods and a mere paper transaction is not sufficient.


Perusing the provisions of Section 70 of Karnataka VAT Act, SC observed that the burden of proving the correctness of ITC lies on the purchasing dealer. Mere production of invoices or payment through cheques is not enough. Also, a mere claim by the dealer that he is a bona fide purchaser is not sufficient.

SC further held that the purchasing dealer has to prove beyond doubt the actual transaction by furnishing the name and address of the seller, details of the vehicle which has delivered the goods, payment of freight charges, acknowledgment of taking delivery of goods, tax invoices and payment particulars, etc.

As per the Court, if the purchasing dealer fails to establish and prove an important aspect of the physical movement of goods on which ITC has been claimed, the AO is absolutely justified in rejecting such a claim.

Accordingly, SC confirmed the decision of the First Appellate Authority and quashed the judgment and order passed by the HC and the Tribunal, respectively.

Our Comments

Although delivered in the context of State VAT law, this judgment would also have significance under the GST law, considering similar provisions of the burden of proof in the GST legislation [Section 155].

Along with the requirements of Section 16 of the CGST Act for availment of ITC, the buyers should maintain an extensive documentation trail to prove the genuineness of the actual transaction.

For FY 2017-18 and 2018-19 particularly, the Revenue could defend its stand by taking recourse to this judgment in cases where the buyers were relying on the Apex Court’s decision in case of Arise India Limited4 and Madras HC ruling in the case of DY Beathel Enterprises5, wherein the disallowance of ITC was quashed due to default of selling dealer in depositing tax or reporting of supplies.

Whether the amendment to Rule 89(4)(c) of CGST Rules w.e.f. 23 March 2020, restricting the GST refund against the supply of goods, was constitutionally valid?

Tonbo Imaging India Pvt Ltd vs. Union of India and others TS-108-HC(KAR)-2023-GST

Note: By the said amendment6, the phrase “turnover of zero-rated supply of goods” came to be defined. Accordingly, the refund would be lesser than: (a) value of the zero-rated supply of goods; or (b) value which is 1.5 times the value of like goods domestically supplied by the same or similarly placed supplier, as declared by the supplier.


The petitioner had claimed a refund of unutilized ITC under Section 54 of CGST Act r/w Rule 89 of CGST Rules against the export of various customized/unique products during the period of May 2018 to March 2019.

However, based on the amendment to Rule 89(4)(c) w.e.f. 23 March 2020, the Revenue rejected the said claim disregarding the petitioner’s contention that the amended Rule could not apply to prior exports.

Hence, the petitioner approached the Karnataka HC assailing the rejection order as well as the validity of the amended Rule.


HC opined that the impugned amendment to Rule 89(4)(c) of CGST Rules is arbitrary and ultra vires Section 16 of IGST Act and Section 54 of CGST Act. The very intention of zero-rating is to make the entire “export” supply chain tax-free.

The amendment in whittling down such refund is ultra vires in view of the well-settled principle of law that Rules cannot override the parent legislation.

The impugned Rule is violative of Articles 14 and 19(1)(g) of the Constitution, inasmuch as there is hostile discrimination between two classes of persons, viz. (i) the exporters who opt for a refund of unutilized ITC, and (ii) the exporters who obtain a refund after payment of tax.

HC further observed that the said amendment suffers from the vice of vagueness since the phrases “like goods” and “similarly placed supplier” have not been defined anywhere in the GST law. The Rule also fails to provide the consequences if there are no local supplies of like goods or the pricing policy is different.

It is well settled that if the government perceives that there could be a possibility of abuse of a provision, it should adopt measures to keep a check on the same; however, the law cannot be amended on the premise of distrust.

Our Comments

This judgment should provide relief to genuine exporters of goods claiming refunds of unutilized ITC, given the challenge of ascertaining the value of similar supplies, particularly in cases of customized products and/or in cases where there are no domestic sales.

However, similar to VKC Footsteps, we could see yet another GST refund issue being finally settled by the Apex Court.

4. W.P.(MD) Nos. 2127 of 2021
5. TS-2-SC-2018-VAT
6. Notification No. 16/2020-Central Tax dated 23 March 2020

Regulatory Updates

Company Law Regulations

Establishment of Centre for Processing Accelerated Corporate Exit (C-PACE)

The Ministry of Corporate Affairs (MCA) issued a notification on 17 March 2023 for establishing a Centre for Processing Accelerated Corporate Exit (also called C-Pace).

The C-PACE shall be located at the Indian Institute of Corporate Affairs (IICA), Plot No. 6, 7, 8, Sector 5, IMT Manesar, District Gurgaon (Haryana), Pin Code – 122050.

This notification shall come into force on 1 April 2023.

Our Comments

This concept of C-PACE was introduced by our Hon’ble Finance Minister Nirmala Sitharaman in her Union Budget 2022- 23. She has stated that the C-PACE shall re-engineer the process of corporate exit and speed up the voluntary windingup of companies from the currently required two years to less than six months. The regulations as to how this Centre would function and what role it would play in the voluntary winding-up process are yet to be released by MCA. However, this move has been welcomed by the corporates as it will simplify and shorten the process of closure of companies in India and will contribute towards ease of doing business, adding to India’s growth story.