Direct Tax

Whether the sale of software and provision of software maintenance services can be Royalty or Fees for Technical Services (FTS)?

M/s Microstrategy Singapore Pte Ltd. Vs ACIT ITA No.2686/Del/2018


The taxpayer is a foreign company and tax resident of Singapore. It is engaged in the business of distribution and maintenance of software to customers in the Asian market. The taxpayer also provided consultancy, system integration and training services to its customers for the sale of software products. The taxpayer offered the revenue pertaining to training-related services to tax and the balance income from the sale of software, and other maintenance services were claimed to be neither FTS nor Royalty. Thus the taxpayer adopted a view that such income is non-taxable business income under the India-Singapore Double Tax Avoidance Agreement (DTAA) in the absence of its PE in India.

The tax officer concluded that the income from the sale of software products was in the nature of Royalty both under Indian Domestic Tax law (IDTL) and under India-Singapore DTAA, relying on the Karnataka High Court ruling in the case of Samsung Electronics9. Furthermore, the tax officer held that income from the provision of software-related services was in the nature of FTS under IDTL as well as under India-Singapore DTAA. This was upheld by the first appellate authority.


The Tribunal stated that the factual matrix clearly reveals that the taxpayer has sold a copyrighted article and not the copyright. The Tribunal has placed reliance on the Hon’ble Supreme Court’s judgment in the case of Supreme Court in the case of Engineering Analysis10, wherein it was held that payments made by resident Indian end-users/ distributors to non-resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through End User License Agreements(EULAs)/ distribution agreements, does not constitute Royalty as it does not amount to parting with copyright.

On the issue of classification of income from software-related services as FTS, the Tribunal held that there was no material evidence to demonstrate that while providing the softwarerelated service, the taxpayer has made available any technical knowledge, know-how, skill, etc. to enable the recipient of such service to use it independently. The Tribunal stated that since the make available condition of Article 12(4)(b) under the India- Singapore DTAA is not satisfied, the amount received will not be treated as FTS.

Our Comments

The Tribunal re-confirmed that the sale of software being a copyrighted article would not constitute Royalty.

The Tribunal has also appraised the fact that the "make available test" is a pre-requisite for qualification of a transaction to be FTS where the definition of FTS is restrictive.

Whether TDS under Royalty provisions is applicable on payment made for the Purchase of Advertising space outside India?

M/s. ESPN Digital Media (India) Pvt. Ltd Vs DCIT ITA Nos. 1070, 1071, 1072 & 1073/ CHNY/2018


The taxpayer is an Indian Company who entered into a Re-seller agreement with its UK counterpart for resale of advertisement space on websites owned by the UK counterpart. Under the said agreement, the taxpayer purchased advertising space on websites owned and hosted by the UK entity on servers outside India. Thereafter, the taxpayer sold the advertisement space to advertisers. The taxpayer adopted a view that the UK entity’s website or server was placed under its control, and hence such payment was not taxable as Royalty for AY 2010-11 to AY 2013-14.

The Assessing Officer (AO) opined that the payments made by the taxpayer to the UK entity should be considered as Royalty, and hence taxpayer was liable for withholding tax on the said amount. The Commissioner of Income- Tax (Appeals) [CIT(A)] also held that the taxpayer was liable to deduct tax at source on the payments made as it qualified as Royalty. Aggrieved by the order, the taxpayer filed an appeal before the Chennai Tribunal.


The Tribunal observed that the agreement did not provide the taxpayer any right to use any industrial, commercial, or scientific equipment as the website or the server was not under the control of the taxpayer. The Tribunal noted that no right, property, information or scientific experience was transferred to the taxpayer. The Tribunal also emphasized the earlier judicial precedents, which have held that no amendment to the Incometax Act (ITA), whether retrospective and prospective, can be read in a manner so as to the extent in operation to the terms of an international treaty. The Tribunal also noted that the Finance Act, 2016 recognizes providing advertising space as a ‘specified service,’ which is subject to the Equalisation levy. Therefore, the contention that the sale of advertising space was Royalty under the ITA would be contrary to the legislative intent, the objects and purpose of the provisions of Equalization levy, as well as result in absurdity and double taxation.

Our Comments

The Tribunal has re-confirmed that unilateral amendments under the Act would not extend to the definition of Royalty under existing DTAA. Thus, the fee for advertising space was not qualified as Royalty and, therefore, was not taxable during the relevant AY, i.e., AY’s before the provisions of Equalization levy came into force.

9. Samsung Electronics [TS-733-HC-2011(KAR)]
10. Engineering Analysis Centre of Excellence Private Limited [TS-106-SC-2021]

Transfer Pricing

Can excessive Advertisement, Marketing and Promotion (AMP) expenses be regarded as an international transaction in the absence of any understanding or agreement between the taxpayer and AE?

Olympus Medical Systems India Pvt Ltd [ITA No. 838/DEL/2021


The taxpayer is engaged in the business of import and resale of medical equipment and installation, repair and maintenance of this equipment.

The taxpayer had entered into international transactions with its AE and benchmarked the same using Transactional Net Margin Method (TNMM). The case was selected for TP audit by Transfer Pricing Officer (TPO).

TPO benchmarked the AMP expenses incurred over and above the expenses incurred by comparable entities by applying the Bright Line Test (BLT) and using the Cost Plus Method (CPM) on a substantive basis and proposed TP adjustment in the draft assessment order. The Dispute Resolution Panel (DRP) upheld the adjustment made by TPO. Thus, aggrieved with DRP’s order, the taxpayer filed an appeal before the ITAT.

Taxpayer’s Contentions

During the course of appeal proceedings, the TPO submitted that no distribution agreement exists between the taxpayer and AE and the name of the Brand was displayed in all workshops and conferences organized. Accordingly, the AE benefitted from such brand-building exercises by the taxpayer. Revenue further submitted that there is an arrangement or understanding or action in concert between the AE and the taxpayer, which is formal in nature, for incurring AMP expenses.


On perusal of the relevant information and hearing submission from both sides, the ITAT noted that the taxpayer is not only the exclusive distributor of the AE, but also the customers can buy directly from the AE. Furthermore, as per the taxpayer’s website, the group’s brand value is the core object of the taxpayer’s group. The ITAT observed that an identical issue relating to benchmarking of AMP expenses had come up for consideration before the Co-ordinate Bench in the taxpayer’s own case for an earlier year, wherein the Tribunal clarified that in order to characterize a transaction as an international transaction, it has to be demonstrated that transaction arose in pursuant to an arrangement, understanding or action in concert. The ITAT also stated the product manufactured by the AE were exclusively displayed in various seminars/conferences along with the display of the brand name, which is owned by the AE and not by the assessee. Thus, by way of incurring AMP expenses, the AE has benefited. ITAT noticed that the taxpayer was working under the guidance of the AE and the representatives of the AE were monitoring the promotion activities. Thus, it is evident that there is an understanding or action in concert between the taxpayer and the AE for carrying out the AMP expenses. The ITAT also took recourse to the case of Vodafone India Services Ltd., wherein the expression ‘acting in concert’ was elaborated, for which reliance was placed on the decisions of Hon’ble Supreme Court in the case of Jubilee Mills Ltd. and Raghuvanshi Mills Ltd., thereby it was held that the transaction of AMP expenses was an international transaction. Regarding the method to be used for benchmarking such AMP expenses, the ITAT restored the issue to the TPO on whether Profit Split Method (PSM) adopted by the Revenue was appropriate.

Our Comments

Issue of AMP/marketing intangible in India has been widely debated in Indian courts as well as various forums overseas. In the above ruling, the Tribunal emphasized the principle of substance over form, which appears to be more logical.

Entity level benchmarking vs Segment level benchmarking?

Steer Engineering Pvt Ltd [ITA No.2071/Bang/2018


The taxpayer is engaged in the business of manufacturing extruders and their parts and elements for extruders. The said products manufactured by the taxpayers were sold to its AEs, who act as distributors of the said products manufactured by the taxpayer, for which the taxpayer paid commission to its AEs as a part of its business promotion expenses.

The taxpayer aggregated the international transactions at an entity level by combining the AE purchases along with AE sales and non-AE sales as a single business segment and adopted TNMM as the most appropriate method. The taxpayer identified two companies that were engaged in the sale of identical products compared to that of the taxpayer for benchmarking.

The transactions pertaining to the purchase and sale of extruders and parts and elements of extruders, purchase of fixed assets, payment of commission on sales, and availing of services were considered as closely linked transactions by the taxpayer.

However, the TPO, during the course of assessment proceedings, did not consider the benchmarking approach adopted by the taxpayer. The TPO proceeded to perform a fresh TP analysis with respect to manufacturing activity based on segmental analysis, i.e., bifurcation of the financial statement into international and domestic segments. The TPO held that the taxpayer’s transactions with foreign subsidiaries are in the international segment and therefore considered the international sales segment for benchmarking purposes.

Thereafter the TPO drew international and domestic segments by allocating expenditure between international and domestic sales in the ratio of turnover. In respect of "Business promotion" and "Marketing exhibition" expenses, the TPO allocated them on the basis of actual. Furthermore, the TPO also applied the export revenue filter of 25% and held that the apportionment of cost based on revenue is valid. The TPO held that since the segmental information of comparable companies was not available, the entity-level margin could not be adopted.

In relation to the contentions of the TPO, the taxpayer relied on the coordinate bench ruling M/s. Toyota Kirloskar Motors (P.) Ltd, wherein it was held that segregating trading and manufacturing segments held no meaning if the taxpayer and the comparable companies were at par with regard to the nature and scale of combined activities. The taxpayer held that segmentation would disturb the functional integrity and, therefore, comparison at the entity level would be more appropriate. Furthermore, the taxpayer also contended that turnover could not be adopted for allocating all costs and that if the international segment of the taxpayer is to be benchmarked, then the comparables should pass the 75% export turnover filter. The view of the TPO was upheld by the CIT(A) as well.

Furthermore, the taxpayer had given a corporate guarantee to one of its AE for availing certain cash credit facilities for which no fees were charged from the said AE. However, the lower tax authorities disregarded this approach and arrived at a rate of 0.925% as the appropriate rate at which the taxpayer ought to have charged a guarantee commission from the AE.


Benchmarking at entity level vs segmental level

  • The ITAT held that on perusal of the TP Report of the taxpayer, it was not apparent as to how the international transactions of purchase, as well as the sale of extruders and parts, payment of a commission, purchase of assets, etc., were interlinked and interdependent.
  • The terms and conditions, along with the economic circumstances with respect to the intercompany transactions, were different from the third party transactions undertaken by the taxpayer, hence profit margins of the taxpayer at the entity level could not be considered.
  • The revenue from the international segment included sales from AE as well as third parties. Furthermore, the sales and related expenses pertaining to AE sales should be considered to arrive at the profit margin of the taxpayer for comparability purposes.

Apportionment of expenses

The taxpayer has not given substantial reasons/manner with respect to the rejection of the approach of the TPO with respect to the apportionment of expenses.

Export Sales filter

The ITAT upheld the approach of the lower tax authorities with respect to the adoption of the export turnover filter at 25% of the turnover.

Corporate Guarantee

The ITAT directed the ALP to be determined at 0.5% of the credit limit utilized and not the amount that was sanctioned to the AE.

Our Comments

The aggregation of transactions is a common approach followed by the taxpayer wherein we have observed that while doing the same, certain key principles of Transfer Pricing are not taken into consideration and the tax authorities have been rejecting the use of the said approach. For the taxpayer to aggregate inter-company transactions, it is critical that the taxpayer demonstrates and maintains robust documentation to show the interlinkage and interdependency with respect to the inter-company transactions before proceeding to aggregate them for the purpose of benchmarking.

Indirect Tax

Whether the deemed 1/3rd deduction with respect to land or undivided share of land in case of construction contracts involving an element of land is ultra vires the provisions of GST law and/ or violative of Article 14 of the Constitution?

Munjaal Manishbhai Bhatt vs. Union of India & Ors. [TS-214- HC(GUJ)-2022-GST]

Gujarat AAAR, in the case of Karma Buildcon [TS-582-AAAR(GUJ)-2021- GST] had affirmed the ruling of AAR [TS-771-AAR-2020-NT] to hold that value of supply for the transaction of sale of residential/commercial property with undivided rights of land is to be arrived in terms of the deeming provision of para 2 of Notification No. 11/2017-Central Tax (Rate)


  • One of the writ applicants, a practicing advocate, had entered into an agreement with the landowner/ developer for the purchase of a plot of land along with the construction of a bungalow thereon. The consideration, therefore, was separate and distinct.
  • The landowner/developer relied on Sr No. 2 of Notification No. 11/2017-Central Tax (Rate) to collect GST at 18% on the entire consideration payable for land and the construction of bungalow, after deducting 1/3rd of the value towards land.
  • In such circumstances, the writ applicant approached the High Court assailing the imposition of tax on consideration towards the sale of developed land by virtue of delegated legislation as ultra vires the provisions of Sections 7 and 9 of the CGST Act, 2017 read with Entry No. 5 of Schedule III thereto, and Article 14 of the Constitution.


  • Perusing the legislative and judicial history of taxation of construction activities, High Court observed that when the statutory provision (viz., Section 15 of the CGST Act, 2017) requires valuation in accordance with the actual price paid and payable for the service and where such actual price is available, then tax must be imposed on such actual value. Deeming fiction can be applied only where the actual value is not ascertainable.
  • In this regard, reliance was placed on the second Gannon Dunkerley11 case, where the question of deducting the actual value of labor had been considered by the Apex Court, as well as the judgment in Wipro Ltd12 rendered in the context of Customs valuation.
  • Since the deeming fiction is uniformly applied irrespective of the size of the plot of land and construction therein, the same leads to arbitrary and discriminatory consequences, which are clearly violative of Article 14 of the Constitution. This has led to a situation whereby the measure of tax imposed has no nexus with the charge of tax, which is the supply of construction services.
  • To allay the concern raised by Revenue regarding the plausible arbitrary valuation of land to save tax, the High Court clarified, if it is established that such value was not the sole consideration for the service, then the value can be derived by applying the cost-plus profit method or a reasonable value consistent with the principles and provisions of the statute.
  • Consequently, paragraph 2 of Notification No. 11/2017-Central Tax (Rate) and the parallel State Tax Notification was read down by the High Court.
  • Accordingly, it directed the refund of excess tax deposited with the government treasury directly to the writ applicant as he had borne the burden of tax as a recipient. The High Court also quashed the advance ruling appellate order, which was based on the impugned Notification.

Our Comments

This is a welcome verdict for all the stakeholders in the real estate sector. The deduction of the actual cost of land, wherever it is ascertainable, will help reduce the effective cost of acquisition of property for the buyers, particularly in Tier I and II cities where the value of land is on the higher side. This, in turn, could help boost the demand for real estate during the present inflationary times.

Subject to the possibility of an appeal before the Supreme Court and/ or retrospective amendment to the legislation, the industry could act upon the ratio of the judgment by reviewing the past, existing, or future agreements to take abatement basis the actual value of land/ undivided share of land from the total consideration where the same can be established, and/or seeking a refund of GST already paid proportionate to the actual value.

Whether the levy of GST under the reverse charge mechanism on ocean freight in case of CIF imports, is constitutionally valid?

Union of India & Anr. vs. Mohit Minerals Pvt. Ltd [Civil Appeal No. 1390 of 2022]


  • The levy imposed on the ‘service’ aspect of the transaction violates the principle of ‘composite supply’ under Section 2(30), read with Section 8 of the CGST Act.
  • The impugned levy has a two-fold connection: first, the destination of the goods is in India, and thus, a clear territorial nexus is established with the event occurring outside the territory; and second, the services are rendered for the benefit of the Indian importer.
  • The fact that a foreign exporter pays consideration to the foreign shipping line would not stand in the way of it being considered as a “supply of service” in the course of inter-state trade or commerce.
  • The amended Section 5(4) of the IGST Act enables the government to create a deeming fiction of declaring a class of registered persons “as the recipients.” In deploying the language “as the” and not “by the” recipient, the applicability of the definition of the recipient under Section 2(93) of the CGST Act is no longer necessary for determining the validity of the Notification.
  • Neither Section 2(107) nor Section 24 of the CGST Act qualify the imposition of reverse charge on a “recipient of service” and broadly impose it on “the persons who are required to pay tax under reverse charge.” Since the impugned Notification No. 10/2017-IGST identifies the importer as the recipient liable to pay tax on a reverse charge basis under Section 5(3) of the IGST Act, the argument for the failure to identify a specific person who is liable to pay tax does not stand.
  • Notification No. 8/2017-IGST prescribing deeming value for the imposition of tax on reverse charge basis cannot be struck down for excessive delegation.

Our Comments

Pursuant to the said judgment, the importers who have already paid GST on ocean freight and have not claimed input tax credit could seek a refund on the grounds that tax was collected without the authority of law.

However, it may be pertinent to note that the levy has been struck down only on the ground of violation of principles of ‘composite supply,’ as the Indian importers are liable to pay GST on goods, including freight portion in a CIF contract and hence, cannot be asked to pay GST on supply of transportation service. On the other hand, the Apex Court has upheld the validity of the impugned Notifications on various counts.

The decision also widens the scope of the term “recipient.” Such an interpretation may allow the government to shift the burden of GST payment on the beneficiaries of supply instead of the actual recipient who pays the consideration. This could lead to prolonged disputes with the Department.

11. [(1993) 1 SCC 364]
12. [(2015) 14 SCC 161]

Merger & Acquisition Tax

Telangana High Court admits writ petition by the taxpayer against the decision of the GAAR panel for invoking GAAR provisions

EKGE Retail LLP [writ petition no:21210 of 2022] (High Court of Telangana)

Telangana High Court has recently admitted a writ petition by the taxpayer against an order of the General Antiavoidance Rule (GAAR) panel in relation to a matter wherein tax authorities sought to invoke GAAR provisions for certain transactions undertaken by the taxpayer.

The High Court admitted the writ petition relying on the decision of the Supreme Court in the case of Walfort Share & Stock Brokers, wherein it was held that tax planning is a taxpayer’s prerogative.

Our Comments

While the GAAR provisions have been effective 1 April 2017, it was only in this year that the GAAR panel got constituted. Post constitution of the panel, this is the first reported matter on invoking the provisions. It would be worthwhile to closely examine the facts of the case and the principles that would emanate from the High Court's decision on the writ petition filed by the taxpayer.

NCLT approves the Scheme by brushing aside the tax avoidance allegation of the tax authorities and consequent application of GAAR provisions

In the matter of Scheme of amalgamation of Panasonic India Private Limited and Panasonic Life Solutions India Private Limited [CP (CAA) No.8/Chd/Hry/2021 (2nd Motion)]

The Chandigarh bench of the NCLT recently approved the Scheme of amalgamation for Panasonic India Pvt. Ltd. (Transferor - a lossmaking company) with Panasonic Life Solutions India Private Limited (Transferee - profit-making company). It junked the tax avoidance allegation of the tax department and the consequent application of GAAR provisions.

NCLT overruled the tax authority’s argument that the merger is nothing but a vehicle to transfer accumulated losses eligible for set off from Transferor to Transferee Company, stating that the tax authority is at liberty to invoke the GAAR provisions during the course of assessment or reassessment proceedings by analyzing the Scheme and taking the decision basis the provisions of ITA. NCLT highlighted that the provisions of Section 72A r.w. Rules as also Section 79 relating to carrying forward and set off of losses are sufficient to protect the interest of revenue in any case of amalgamation or demerger, etc.

NCLT further dismissed tax authority’s objection that the shareholders of the amalgamating company stood to benefit from an exemption of capital gains taxation while noting that the said shareholders would anyway have had no obligation to pay capital gain taxes based on India’s Tax Treaty with the Netherlands and Singapore on the transfer of shares of the Transferor Company if the transaction had not taken place.

Observing that the Scheme is for business consolidation and the tax arrangements are merely a consequential fall out of the implementation of the Scheme, NCLT distinguished on facts tax authority’s reliance on decisions referred by them, holding that in the present case, the petitioner companies have clearly made out a case of operational synergy between the amalgamating companies and that the rationale of the Scheme justifies the same.

In conclusion, NCLT asserted that there’s not enough merit in the objections raised by the Income Tax Department to justify any adverse inference with regard to the proposed Scheme of Amalgamation and that the Scheme appeared to be prima facie in compliance with all the requirements stipulated under the relevant Sections of the Companies Act, 2013. In the absence of objections from any other authority, it sanctioned the Scheme of amalgamation.

Our Comments

This is certainly a welcome decision. The decision takes due cognizance of the commercial rationale and objectives in undertaking a merger and the fact that the specific provisions of ITA and valuation norms have been duly complied with. It emphasizes that the schemes should be internally scrutinized by the GAAR test and should be able to establish the commercial substance of the transaction.

Regulatory Updates

Ministry of Corporate Affairs (MCA)

Extension for holding General Meetings through VC or OAVM

In continuation to a series of general circulars issued previously since the onset of the COVID-19 pandemic, the Ministry of Corporate Affairs (MCA) vide its General Circular no. 2 and 3/2022 dated 5 May 2022 has allowed all the Companies to conduct Annual General Meetings (AGMs) and Extraordinary General Meetings (EGMs) to be held on or before 31 December 2022 through Video Conferencing (VC) or Other Audio Visual Means (OAVM) or pass special and ordinary resolutions or transact items through the postal ballot in accordance with the framework provided in the aforesaid circulars.

The MCA has further clarified that the said relaxation shall not be construed as an extension of time for holding AGMs under the Companies, 2013 (the Act) and the timelines provided under the Act will have to be strictly adhered to.

Our Comments

Relaxations brought in by the Ministry during the pandemic like conducting general meetings through virtual or hybrid mode, have been accepted as the new normal by the industry because of its convenience and costeffectiveness for the Companies as well as the members attending the meetings. This extension of the video conference facility for holding general meetings even in the year 2022 has been welcomed with open arms.

Securities and Exchange Board of India (SEBI) Regulations

Relaxation from compliance with certain provisions of the SEBI (LODR) Regulations, 2015

For Equity Listed Entities

SEBI has provided the relaxation up to 31 December 2022, from Regulation 36 (1) (b) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), which requires sending a hard copy of the annual report containing salient features of all the documents prescribed in Section 136 of the Companies Act, 2013 to the shareholders who have not registered their email addresses. Furthermore, the notice of the Annual General Meeting published by advertisement in terms of Regulation 47 of LODR Regulations shall contain a link to the annual report so as to enable shareholders to have access to the full annual report. Furthermore, provided that the requirement of sending proxy forms under Regulation 44 (4) of the LODR Regulations is dispensed with upto 31 December 2022, in case of general meetings held through electronic mode only.

For entities with listed non-convertible securities

SEBI has provided relaxation up to 31 December 2022, from the requirements of Regulation 58 (1)(b) of the LODR Regulations, which prescribes that an entity with listed non-convertible securities shall send a hard copy of a statement containing the salient features of all the documents, as specified in Section 136 of Companies Act, 2013 and rules made thereunder to those holders of non-convertible securities who have not registered their email address(es) either with the listed entity or with any depository.

Our Comments

LODR regulations mandate listed entities to send hard copies of certain important documents to those shareholders who have not registered their email addresses either with the listed entity or with any depository. However, relaxations were given by SEBI during COVID times from the requirement of sending hard copies of annual reports, statements, proxy forms, etc., to such shareholders. These relaxations have now been extended up to 31 December 2022, which is a welcome step.

Simplification of procedure and standardization of formats of documents for issuance of duplicate securities certificates

With a view to making the issuance of duplicate securities more efficient and investor-friendly, SEBI has simplified the procedure and documentation requirements for the issuance of duplicate securities. Regarding documents required to be submitted by a security holder while requesting the issuance of duplicate securities certificates, a copy of the FIR, including e-FIR, necessarily has details of the securities, folio number, distinctive number range, and certificate numbers will be required. In addition, issuing advertisements regarding loss of securities in a widely circulated newspaper and submitting Affidavit and Indemnity bond in a prescribed format will also be required. Furthermore, provided that duplicate securities shall be issued in dematerialized mode only as mandated vide SEBI Circular dated 25 January 2022.

Our Comments

SEBI has now simplified the procedure and documentation requirements for the issuance of duplicate securities. Notification of these uniform documentation and procedural guidelines will help to streamline the procedural formalities for the issuance of duplicate securities.