Direct Tax

Whether substantial business activities carried out by a team in India constitute Fixed Place PE or DAPE?

Redington Distribution Pte. Ltd. Vs DCIT IT (TP) A Nos. 14 /Chny/2020


The taxpayer is a Singapore entity which is a subsidiary of M/s. Redington (India) Ltd. (REDIL) is engaged in providing end-to-end supply chain solutions for IT products, Consumer & Lifestyle products, etc. During the course of a TDS survey, it was observed that a ‘Dollar Team’ consisting of employees of REDIL was responsible for managing the USD business for the taxpayer (i.e., the Singapore entity).

The Assessing Officer(AO) concluded that except for the shipping of equipment from Singapore, all other operations were handled by the Dollar Team in India, and thus, it constitutes a fixed place PE of the taxpayer in India.

The AO also concluded that the work performed by the Dollar Team would result in the constitution of a Dependent Agent Permanent Establishment (DAPE) in India. The taxpayer contended that the ‘Dollar Team’ is performing only back office support services like billing, follow-up action and collection of receivables from the customers. On appeal to Dispute Resolution Panel (DRP), they opined that the entire sales functions are habitually performed in India through ‘Dollar Team’; thus, all PE conditions are satisfied. Aggrieved by the AO’s above order, the assessee filed an appeal before the Chennai Tribunal.


The Tribunal observed that the ‘Dollar Team’ exclusively works on various activities for taxpayers right from identifying the customers, negotiating the price, follow-up of outstanding receivables, etc. But, the taxpayer in Singapore has prepared shipping documents like a packing list and airway bill. Thus it was considered that there is a fixed place of PE of the taxpayer in India and thus, the income of the taxpayer is liable to tax in India. It was held that the argument of ‘Dollar Team’ just providing back office support is devoid of merit because the activities performed by it are the backbone of the assessee’s business model.

On the matter of DAPE, the Tribunal holds that ‘Dollar Team’ of REDIL acts as taxpayer’s agent for Indian customers with authority to conclude contracts and such authority has been habitually exercised by them, thus, upholding the department’s findings.

Our Comments

The Chennai Tribunal explains that when services rendered are neither preparatory nor auxiliary but are the main functions of a business entity, it can constitute Fixed Place PE. It was held that as the employees worked as agents with authority to conclude a contract and habitually exercised such authority, it will constitute DAPE.

Whether capital gains on the sale of Indian company shares by a Mauritian tax resident exempt under pre-amended DTAA?

M/s. MIH India (Mauritius) Ltd.Vs ACIT ITA Nos. 138/Del/2022


The taxpayer is a Mauritius-based company and during AY 2017-18, it derived capital gains on the sale of certain shares of an Indian company. The taxpayer’s holding company was based in the Netherlands. The shares of the Indian company were sold to PayU India, in which the taxpayer held 82.94% of the share capital. The taxpayer is a tax resident of Mauritius holding a valid Tax Residency Certificate (TRC).

The Revenue contended that the beneficial owner of the shares of the Indian company is the taxpayer’s Dutch holding company and therefore invoking substance over form, the Revenue alleged that the taxpayer is a conduit company and DTAA benefit should not be available. Revenue, thus, held that the entire share purchase arrangement was structured to claim treaty benefits and that the taxpayer had no economic or commercial substance. Aggrieved by Revenue’s decision, the taxpayer filed an appeal before the Delhi Tribunal.


The Tribunal observed that the transaction pertains to the period before 1 April 2017, which is the effective date for amendment of Article 13 of the DTAA and thus, the taxpayer shall be eligible for the treaty benefits. The Tribunal stated that the “Assessing Officer has made a desperate and unacceptable attempt to overcome the ratio laid down by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan by anticipating a futuristic event of ratification of MLI providing an amendment to the preamble of India-Mauritius Tax Treaty by Mauritius Government, which is yet to see the light of the day.”

The Tribunal highlights that the company still holds the shares sold to PayU India as on date, which clearly establishes that the assessee is not a fly-by-night operator or mere conduit company. The Tribunal reiterated the legal position that as per the Central Board of Direct Taxes (CBDT) Circular No. 789 dated 13 April 2000 where the Mauritian Tax Authorities issue a Tax Residency Certificate, it will constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for treaty benefits.

Our Comments

The Jaipur Tribunal held that the equalization levy should not get attracted since the intention of the levy is the targeted audience and the person paying for the online advertisement, both of which are situated outside India.

Transfer Pricing

ITAT Accepts OP/VAE over OP/OC as Profit Level Indicator

DHL Logistics Pvt Ltd1 TS-721-ITAT-2022(Mum)-TP


The taxpayer is engaged in rendering freight forwarding services to its AE. The taxpayer entered into international transactions of providing and availing freight services. It benchmarked its transaction using Transactional Net Margin Method (TNMM) method and using Operating Profit/Value Added Expenses (OP/VAE) as Profit Level Indicator (PLI).

TPO’s Contention

During the course of assessment proceedings, the Transfer Pricing Officer (TPO) rejected OP/VAE as PLI and applied Operating Profit/ Operating Cost (OP/OC). Furthermore, the TPO included one additional company viz., Om Logistics Ltd and held the said company to be functionally comparable to the taxpayer and proceeded to make an adjustment to the Arm’s Length Price (ALP).

DRP’s Contention

The DRP upheld the order passed by the TPO.

ITAT’s Contention

Aggrieved by the same, the taxpayer filed an appeal before the Income Tax Appellate Tribunal (ITAT). The ITAT observed that the lower tax authorities rejected OP/VAE for the following reasons:

  • The handling charges charged to customers varied because the taxpayer depended on “markup” on freight obtained from them basis the negotiations.
  • Furthermore, the operating profit included handling charges and the differential freight, i.e., excess of freight charged from customers as against that paid to the shipping line.

The ITAT then deliberated on the business model of the taxpayer and noted the following:

  • Payment made by the taxpayer to a third party for and on behalf of AE was reimbursed by the AE to the taxpayer.
  • The costs pertaining to services obtained by the taxpayer from third parties neither involved any service element nor involved any risks assumed or assets employed by the taxpayer, and therefore it can be concluded that the taxpayer does not undertake any activity in relation to such costs.
  • From the perusal of agreements, it was evident that the taxpayer merely acted as an agent.

Taking note of the above, ITAT held that the inclusion of the freight cost in the total cost base of the taxpayer by the TPO was not permissible. It also referred to Rule 10B(1)(e) and certain relevant rulings.2

Accordingly, the ITAT accepted taxpayer’s claim of using OP/VAE as PLI and restored the matter to TPO for the purpose of benchmarking the intercompany transactions by adopting the PLI of OP/VAE.

Furthermore, regarding the comparable company included by DRP, ITAT noted that the said comparable was excluded in previous assessment years as well and that Om Logistics Ltd owned 5000 trucks, whereas the taxpayer was a low asset-based company. Accordingly, ITAT directed TPO to exclude the said company from the final set of comparables.

Our Comments

The above ruling follows the principle of taking cognizance of the fact that while adopting the PLI as OP/VAE it is integral to consider only those costs in the cost base in relation to which the taxpayer has carried out some sort of function, assumed any risks or employed any assets. The adoption of Operating Profit /Total Costs as the PLI in a scenario wherein the taxpayer does not carry out any function, assume any risks or employ any assets in case of third-party carrier costs might not give correct results for the purpose of comparability.

1. TS-752-ITAT-2022(Mum)-TP
2. [ITA No. 435/Mum/2014; dated 10.12.2014] and Hon’ble Delhi High Court - LI and Fung India Pvt. Ltd. Vs. CIT (2014) 361 ITR 85 (Del)

Indirect Tax

Whether BPO services provided to a foreign entity can be treated as ‘intermediary services’ under the provisions of the IGST Act, 2017?

Genpact India Pvt. Ltd. vs. UOI & Ors. [TS-587-HC(P&H)-2022-GST]


  • Genpact India Pvt. Ltd provides inter alia a host of services, collectively referred to as business process outsourcing (BPO) services, to Genpact International Inc. (GI Inc.) under a Master Service Sub- Contracting Agreement.
  • An illustrative list of services rendered is as under:
    • Maintaining vendor/customer master data, scanning and processing vendor invoices, bookkeeping, preparing/finalizing books of accounts, generating ledger reconciliations, managing customer receivables, etc.
    • Developing, licensing, and maintaining software as per clients’ needs.
    • Technical IT support, i.e., troubleshooting services.
    • Data analysis and providing solutions to clients in respect of forecasting demand for their offerings and management of inventory, supporting various business functions like sourcing and supply chain management.
  • The arrangement with GI Inc. requires the petitioner to complete the assigned processes/ scope of work directly with 3rd parties located outside India.
  • The dispute regarding the taxability of said services arose pursuant to the refund application filed by the petitioner.
  • The Revenue took the view that the services provided by Genpact India were in the nature of “intermediary services” as per Section 2(13) of the IGST Act and hence, did not qualify as “export of services” in terms of Section 2(6) of the IGST Act.
  • Resultantly, the petitioner’s refund claims were rejected, including the refunds previously sanctioned, at the appellate stage.
  • Hence, a writ petition was filed by Genpact India before the Punjab & Haryana High Court, assailing the rejection orders.


  • High Court observed that the scope of an “intermediary” is to mediate between two parties, i.e., the principal service provider and the beneficiary who receives the main service, and expressly excludes any person who provides such main service “on his own account”.
  • A bare perusal of the recitals and the relevant clauses of the MSA indicates that such an arrangement is clearly for the purpose of subcontracting services to the petitioner. These are the very services that GI Inc. was contractually supposed to provide to its own customers.
  • As a sub-contractor, the petitioner receives fees/charges from GI Inc. for its services. The main contractor, i.e., GI Inc., in turn, receives a commission from its clients for the main services that are rendered by the petitioner pursuant to the subcontracting arrangement.
  • In fact, the said clauses are in relation to the modalities of how the actual work would be carried out and do not in any manner establish that the petitioner was required to arrange/facilitate a 3rd party to render the main service, which the petitioner has actually rendered.
  • There was nothing on record to show that the petitioner had a direct contract with the customers of GI Inc.
  • Hence, the petitioner does not act as an “intermediary” so as to fall within the scope and ambit of Section 2(13) of the IGST Act, 2017, held by the Court.
  • Furthermore, it found the Revenue’s deviation from the view taken earlier on the ostensible basis that there has been a change in the law with the onset of the GST regime to be “wholly misconceived”.
  • The High Court observed the definition has remained similar and even as per the Central Board of Indirect Taxes and Customs (CBIC) Circular dated 20 September 2021, there is broadly no change in the scope of “intermediary” services in the GST regime vis-à-vis the Service Tax regime, except the addition of supply of securities in the GST law.
  • Relying on the Supreme Court judgment in Bharat Sanchar Nigam Ltd vs. Union of India [(2006) 3 SCC 1], where the Apex Court had reiterated that no quasi-judicial or judicial authority could generally be permitted to take a different view where facts and law in subsequent assessment year are the same, the High Court applied the principle of consistency to the present case.
  • It also rejected Revenue’s attempt to justify the impugned order on grounds which were not even part thereof, stating that it was clearly impermissible in law as held by the Apex Court in Mohinder Singh Gill and another vs. The Chief Election Commissioner, New Delhi and others [(1978) 1 SCC 405].

Our Comments

The issue of ‘intermediary’ has been at the forefront of disputes between the taxpayers and Revenue. Several GST refund claims have been rejected on the ground that there has been a change in law w.e.f. July 2017.

This judgment should assist similarly placed taxpayers to substantiate their position of zero-rating their services, although we could see this matter traveling to the Supreme Court in the near future.

Given this, it may be expedient to revisit/ draft the Agreement clauses in such a manner that there is no principal-agency relationship between the parties.

Merger & Acquisition Tax

Long-term capital loss brought forward from amalgamating company is eligible for set off in an amalgamated company

Capgemini Technology Services India Limited [TS-918-ITAT-2022(Pune)]

  • The Pune Tribunal has recently upheld the eligibility of an amalgamated company for set-off of long-term capital loss brought forward by amalgamating company even though Section 72A of the Act specifically does not provide for the same. Section 72A of the Act provides for set-off and carry forward of brought forward business loss and unabsorbed depreciation from amalgamating company to amalgamated company.
  • The Tribunal held that Section 72A is not a panacea for all the tax-related issues of amalgamation, to have application in so far as the other tax entitlements, privileges, or benefits in the hands of the amalgamating company, are concerned.
  • Furthermore, even otherwise, the law of succession puts the successor in the shoes of the predecessor, because of which all the assets and liabilities of the predecessor vest in the successor subject to the specific stipulations under the relevant statutes.
  • The Tribunal, on analysis, held that any loss which was available to amalgamating company shall become available to the amalgamated company for necessary set-off, including longterm capital loss.

Our Comments

The Tribunal has considered substance over form while rendering the above decision in order to ensure that the amalgamated company gets all the benefits, tax entitlements of amalgamating company since, in amalgamation, only the entity carrying on the business either ceases to exist or is divested of its business, but the business continues in the hands of another entity.

It is pertinent to note that this decision is in contradiction to the earlier Mumbai Tribunal decision in case of Clariant Chemicals (I) Ltd. v. ACIT (ITA no. 4281/Mum./2011) wherein the Tribunal held that in absence of a specific provision, the capital loss cannot be carried forward by the amalgamated company. Notably, the present decision has not referred to the Mumbai Tribunal decision. This decision is expected to add to the prevailing ambiguity on the carry forward and set-off of the capital losses in amalgamation scenario.

No separate disclosure of undertaking in return of income not decisive for passing demerging muster

Grasim Industries Ltd [TS-926-ITAT-2022(Mum)]

  • In a recent decision in the case of demerger where the provisions under Section 2(19AA) of the Act were complied with, Mumbai Tribunal held that merely because the demerged entity has not disclosed the business/undertaking separately, demerger criteria would still stand met.
  • The tax authorities sought to consider the transfer of business under the demerger route as the distribution of assets for the purpose of deemed dividend applicability. Thus, on the basis of the contention that demerger criteria are not met, the tax authorities were not applying the exception available for demerger from deemed dividend applicability under Section 2(22)(a) of the Act.

Our Comments

This is a welcome decision that has rightly brushed aside the attempt of the tax authorities to hold the business transfer to be not demerger merely basis disclosure or not in the return of income. Having said that, it is pertinent for taxpayers to duly make the necessary disclosures in all possible tax filings and communications to ensure such litigation can be avoided.

On a side note, while rendering the above decision, the Tribunal has made an observation that approval of NCLT for a scheme of arrangement does not preclude the Revenue from examining the scheme of arrangement from a taxability standpoint. This is in line with the recent decisions which have upheld this view.

Regulatory Updates

SEBI Regulations

SEBI introduces an additional option for the appointment/removal of independent directors during their first term (not for reappointments/ second term)

As per the erstwhile provisions of LODR regulations, all appointments, reappointments, or removal of Independent Directors were to be made through a special resolution. Hence, the appointment/removal of Independent Directors could be influenced by promoters as they usually have substantial voting powers.

Accordingly, to fill this gap, SEBI, vide its notification dated 14 November 2022, amended the LODR regulations by introducing a new additional option for the appointment and removal of Independent Directors (during their first term) in cases where the special resolution fails.

Post this amendment, in case the special resolution fails, Independent Directors could still be appointed with the approval of a simple majority of all shareholders (ordinary resolution) and a simple majority of public shareholders (non-promoter shareholders). The same threshold will also be applicable for the removal of an Independent Director appointed under this alternate mechanism.

Our Comments

This alternate mechanism for appointment and/or removal of Independent Directors in addition to the existing mechanism is a positive step towards the empowerment of minority shareholders. It will also benefit listed entities having multiple promoter groups, as the appointment of an Independent Director in such companies may be opposed by one set of promoters due to internal disagreements with others, thereby rendering the proposed special resolution infructuous. However, it is pertinent to note that this new alternate mechanism is available only for appointments/removal of Independent Director during the first term and not for second term/reappointments.