From The Judiciary

Whether IGST and Cess can be additionally levied under the Customs legislation on re-imported goods sent outside India for repair and maintenance, when IGST has already been paid on the service imports?

Interglobe Aviation Ltd. vs. Principal Commissioner of Customs ACC [W.P. (C) 934/2023]

Facts

The petitioner had sent aircraft engines and parts outside India for maintenance, repair, and overhaul. However, upon re-import, such repaired goods were subjected to Customs duty on the value of repairs, insurance, and freight, in terms of Notification No. 45/2017-Customs.

As per the petitioner, the export of subject goods for repair outside India and their subsequent re-import fell within the category of “supply of services” by virtue of Schedule II to the CGST Act, 2017 and therefore, no further impost (levy of IGST and Cess) as envisaged under Section 3(7) of the Customs Tariff Act would stand attracted.

On the other hand, the Revenue relied on the ‘aspect theory’ to argue that the levy under Section 3(7) of the Customs Tariff Act stood attracted on the physical re-import of repaired goods, which is independent of the tax liability payable under Section 5(1) of the IGST Act on the repair services.

Given this, the petitioner approached Delhi HC challenging the amendment to Notification No. 45/2017-Customs vide Notification No. 36/2021-Customs followed by Circular No. 16/2021-Customs which justified the additional levy of IGST and Cess as clarificatory in nature.

Ruling

HC observed that the transaction of sending goods abroad for repairs/refurbishment and their subsequent re-import has been conferred the character of supply of services under Schedule II of the CGST Act. Once classified as a service, it cannot be recharacterized as a supply of goods for the purpose of imposing additional duties.

Referring to the SC judgement in Mohit Minerals [TS-246- SC-2022-GST], HC opined that the Revenue had failed to consider the indubitable fact of rendition of services being embedded in the reimported goods and thus, there being no dichotomy which could have been possibly introduced.

As regards the ‘aspect theory,’ HC clarified that the work expended by the MROs on the goods constituted the principal purpose of their movement/departure from the Indian shores and therefore, this was not a case where one could legitimately assume or perceive the existence of two separate or disconnected taxable events.

Further, discerning the intent of an ‘Explanation’, HC observed that Notification No. 45/2017-Customs as it originally stood, only spoke of duty of Customs which was referable to Section 12 of the Customs Act, i.e. Basic Customs Duty (BCD). Thus, the amendment sought to be introduced by Notification No. 36/2021-Customs could not be viewed as being either in the nature of an explanation, a removal of doubt clause, or clarificatory.

As per the Court, the amendments were clearly intended to expand the tax net and attempted to remove the basis on which Principal Bench of CESTAT had rendered its decision (in the petitioner’s own case) on a reading of Notification No. 45/2017-Customs. This amounted to a legislative overreach by an authority exercising the power of framing subordinate legislation, held the HC.

Consequently, HC held that Notification No. 36/2021-Customs insofar as it purports to impose an additional levy over and above the IGST imposed under Section 5(1) was ultra vires and unconstitutional. Accordingly, it quashed Circular No. 16/2021-Customs as well as the orders of Commissioner of Customs (Appeals) which had distinguished the CESTAT decision in light of the amendments.

Our Comments

The decision essentially holds that levy of IGST under Section 3(7) of the Customs Tariff Act would sustain only where the transaction qualifies as ‘supply of goods in the course of import into India’ under Section 5 of the IGST Act. This proposition could have wider ramifications and open a pandora’s box. For instance, could one argue that IGST levied on royalty and/or license fee qualifying as ‘import of service’ under Section 5(1) should not attract the levy under Section 3(7) vis-à-vis imported goods by virtue of Rule 10(1)(c) of the Customs Valuation Rules?

This judgment could lead to multiple scenarios prone to litigation, where dual IGST levy arises – as part of Customs duty, and as reverse charge IGST levy.

However, this begs the question as to how the Government would respond to the Delhi HC verdict.

Given that an appeal against CESTAT’s decision lies pending before the Supreme Court, this issue could attain finality only with the Apex Court’s decision

Whether capital gains from the sale of rights entitlement are akin to shares of Indian company under the India-Ireland DTAA?

Vanguard Emerging Markets Stock Index Fund a Series of VISPLC [TS-231-ITAT-2025(Mum)]

Facts

Vanguard Emerging Markets Stock Index Fund a Series of VISPLC C/o. (assessee), a tax resident of Ireland is registered under SEBI as a Foreign Portfolio Investor (FPI). In the relevant financial year, the assessee earned shortterm capital gains through the sale of rights entitlement (RE) in shares of an Indian company. The assessee had also incurred capital loss from transfer of Indian company shares which was carried forward to subsequent years. The Assessing Officer (AO) treated the rights entitlement as being similar to shares, thereby bringing the gains under the scope of Article 13(5), making them subject to taxation in India. Additionally, the AO offset the Short-Term Capital Gains (STCG) from the rights entitlement against the Short-Term Capital Loss (STCL) from shares, asserting that before granting relief under the DTAA, income must first be computed in accordance with the normal provisions of the ITA. The assessee made an appeal to the DRP, which held that RE and equity shares were closely related assets. Aggrieved by this, the assessee appealed to the Mumbai Tribunal.

Key areas of conflict:

• Whether RE is similar to shares.
• Whether the capital gains earned by the assessee from the sale of RE can be exempted under Article 13(6) of the India-Ireland DTAA
• Whether short-term capital gains from RE can be set off against short-term capital loss.

Held

The Tribunal upheld the assessee’s claim for exemption from tax in India, ruling that the RE should be treated as a separate asset, thus falling under the provisions of Article 13(6) of the India-Ireland DTAA. In light of the following findings, the Tribunal concluded that the capital gains from the sale of RE do not fall under Article 13(5) of the DTAA, which applies to shares, & instead fall under residual clause Article 13(6), making them taxable only in Ireland and thus cannot be set off against STCL:

• Section 2(84) and Section 62 of the Companies Act, 2013: Shares have a restrictive definition which does not include RE. RE is a right to subscribe the shares and not actual ownership.
• SEBI and NSE circulars: SEBI and the NSE recognize RE as a distinct security, assigned its own ISIN.
• Finance Act, 2004: By defining the option in securities, RE was held as an option to purchase security, not in line with shares. Trading in RE is subject to Securities Transaction Tax (STT) at a rate applicable to options in securities, rather than shares.
• ¹Ruling in Navin Jindal v. Asst. CIT: The Supreme Court stated that RE obtains the exercisable right to subscribe to shares which are different from shares.
• Section 2(42A) and Section 55(2) (aa) of the ITA: Right to subscribe to any financial asset is distinct from financial asset.
• DTAA includes 'comparable interests' under Article 13(4), but not under Article 13(5), implying an intentional exclusion of RE from taxation under Article 13(5). Article 13(4) specifically pertains to the taxation of shares whose value is derived from immovable property. A clarification issued in relation to the India-Mauritius tax treaty further emphasized that it was only shares in a company (and not derivatives or rights entitlements) that were meant to be taxed in the source country.

Our Comments

In conclusion, this ruling underscores the classification of rights entitlement as a derivative-like security for tax purposes and clarifies that capital gains from the sale of rights entitlement are exempt from tax in India under Article 13(6) of the India-Ireland DTAA.

Whether VoIP services can be classified as Fee for Technical Services (FTS) and are liable to TDS?

Novanet India Private Ltd [TS-203-ITAT-2025(Mum)]

Facts

Novanet India Pvt. Ltd., a company engaged in providing Voiceover Internet Protocol (VoIP) services to clients in India. VoIP allows users to make voice calls using the internet rather than traditional phone lines. The voice signals are converted into digital data and transmitted over the internet, resulting in lower costs and better quality.

The assessee had paid INR 34,482,784 to Novanet Singapore Pte. Ltd. (NSPL) towards communication charges (VoIP minutes) without deducting tax at source during Assessment Year (AY) 2018-19.

Consequently, the AO initiated proceedings under Section 148A. The AO argued that the payment to NSPL was for technical services and that the assessee should have deducted tax under Section 195. The AO further held that the assessee was a Permanent Establishment (PE) of NSPL and disallowed the entire amount of INR 34,482,784 under Section 40(a)(i) of the ITA. The CIT(A) upheld the AO's order, concluding that the payment to NSPL constituted a fee for technical services. Aggrieved, the assessee filed an appeal before Tribunal.

Held

The Tribunal noted that the payment to NSPL was for the purchase of VoIP minutes (network usage). NSPL acted as an intermediary to procure and sell the VoIP network to the assessee. The VoIP process was entirely automated without human intervention, where voice signals were converted into digital data, transmitted through the internet, and reconverted into voice at the receiving end. Relying on Delhi Tribunal ruling in Bharti Cellular Ltd.² , Vodafone Digilink Ltd.³ , and Mumbai Tribunal ruling in Atos Information Technology HK Ltd.⁴ , the Tribunal concluded that the payment made by the assessee to NSPL was not for FTS, and hence, the assessee was not required to deduct tax at source. As a result, the Tribunal directed the AO to delete the disallowance under Section 40(a)(ia) of the ITA.

AO is duty bound to point out default by the assessee in order to initiate penalty u/s 271AA of the ITA

Best Oasis Limited [ITA Nos. 633 to 640 / Ahd / 2024]

AY 2012-13 to 2019-20

Facts

The assessee (a non-resident entity) being a wholly owned subsidiary of Priya Blue Industries Pvt. Ltd had entered into various international transactions with its Associated Enterprises (AEs). The case of the assessee was referred by the AO to the Transfer Pricing Officer (TPO) for AY 2012-13 to AY 2019-20 pursuant to search operation under Section 132 of the ITA on Priya Blue Group.

TPO determined all the international transactions to the be at Arm’s Length Price (ALP), except receipt of services and corporate guarantee. However, revision of the ALP of the said international transaction would result in reducing the income of assessee. Accordingly, no adjustment towards international transactions was proposed by the TPO. However, AO initiated separate penalty proceedings under Section (u/s) 271AA of the ITA for non-maintenance of documents prescribed u/s 92D of the ITA read with Rule 10D of the Income Tax Rules, 1962 (the Rules).

Aggrieved by the orders of AO, assessee filed appeal before the Commissioner of Income Tax (Appeals) (CIT(A)) wherein the CIT(A) deleted the penalty for the years under consideration. The Revenue however appealed against the order of the CIT(A).

The contentions of the assessee before the Income Tax Appellate Tribunal (ITAT) were as follows -

The assessee contended that the TPO did not propose any TP adjustment or initiate penalty proceedings u/s 271AA of the ITA. The TPO after examining all the requisite documents had determined the underlying international transactions to be at ALP.

The final order of the AO as well had no specific mention of non-maintenance of any documents by the assessee as prescribed under the ITA. The AO while passing the final AO order-initiated penalty proceedings u/s 271AA of the ITA on the grounds that the assessee has failed to maintain the requisite documents as specified u/s 92D read with Rule 10D of the Rules. Thereafter, a separate penalty order u/s 271AA of the ITA was passed for all the assessment years.

Held by the ITAT

The ITAT observed that AO did not outline any specific default by the assessee for non-maintenance of the prescribed documents.

Further, every person entering into international transactions is required to maintain documents as prescribed in Section 92D of the ITA read with Rule 10D of the Rules. The documents to be kept and maintained in relation to the international transactions fall into thirteen categories as mentioned in Rule 10D of the Rules. The AO is duty bound to point out which specific document was not maintained by the assessee for initiating the penalty.

The AO had referred the case to TPO to determine the ALP of the international transactions. The TPO did not point out any default by the assessee.

ITAT placing reliance on various judicial precedents held that penalty u/s 271AA of the ITA cannot be levied without specifying the information/ documentation failed to be maintained by the assessee. Accordingly, the Revenue’s appeal was dismissed.

Our Comments

Various judicial precedents in line with the transfer pricing regulations have always highlighted the importance of maintenance of robust documentation in support of the ALP of the international transactions. Section 92D of the ITA read with Rule 10D of the Rules also prescribe voluminous documents and information to be maintained by the assessee.

It becomes pivotal for the assessee (both resident and non-resident in India) to place reliance on such rulings to argue for non-initiation of penalty proceedings by the AO u/s 271G and 271AA of the ITA especially in the cases wherein such international transactions have already been determined to be at ALP by the jurisdictional TPO.