From The Judiciary

Can group recharge be considered as Fees for Technical Services (FTS) in the absence of appropriate allocation keys to treat it as reimbursement of expenses?

Kraft Foods Group Brands LLC TS-577-ITAT-2023(Mum)

Facts

The taxpayer is an entity incorporated in the USA. The taxpayer had provided support services through various cost centers and recharged the group entities. The taxpayer did not offer this to tax, claiming it was a ‘Reimbursement of Expense’ since no mark-up was involved.

The tax officer rejected the taxpayer’s contention and argued that the mere mention of ‘0% mark-up’ on the costs incurred in the agreement entered by the parties does not sum up to reimbursement. Also, the taxpayer had raised a single invoice for all the costs incurred instead of determining the allocable cost by adopting an allocation factor. The tax officer also held that the support services provided satisfy the make available criteria.

Held

The Tribunal disregarded the taxpayer’s contention to treat the cost recharge as a ‘reimbursement of expenses’ since the taxpayer submitted no supporting evidence to substantiate the allocation keys, etc.

The Tribunal also noted that the taxpayer brought no basis on the record to justify the manner and way of allocation of various costs incurred.

Given the lack of evidence and supporting calculations to establish the incurrence of expenses and their allocation, the Tribunal concluded that the recharge could not be considered as a reimbursement of expense.

Our Comments

The Mumbai Tribunal held that there could be no presumption of reimbursement without the taxpayer first proving that the cost allocations fell under the category of reimbursement.

Can the provision of statistical and qualitative inputs be considered as FTS or business income?

McKinsey & Company Singapore Pte Ltd TS-622-ITAT-2023(Mum)

Facts

The taxpayer (McKinsey Singapore) is part of the Mckinsey group of entities, the primary business of which is to provide strategic consultancy services to their clients, which includes the analysis of performance, developments, strengths and weaknesses of their clients, improving their profitability and productivity and similar other parameters. In order to analyze these parameters, the entities in various countries, McKinsey India, in this case, make use of certain data, information and other support that the taxpayer provides.

The taxpayer contended that all these services have been performed outside India and rendered in the ordinary course of business. As it was considered business income and the taxpayer did not have a Permanent Establishment (PE) in India, it was not offered to tax in India.

The Assessing Officer (AO) dismissed the taxpayer’s claim and treated the income from the provision of borrowed services to its Indian counterpart as taxable as FTS and, therefore, made an addition to the taxpayer’s income.

Held

It was observed that under Article 12 of the India-USA Treaty FTS only includes technical and consultancy services. The borrowed services fees were not technical or consultancy services, so they cannot be considered FTS under Article 12 of the India-USA Treaty. Furthermore, the taxpayer also submitted that services do not make available any knowledge or skills as per Article 12 of the India-USA Treaty. In similar companies as that of the taxpayer, the Mumbai ITAT has held that the borrowed service fees were considered as business income and were a typical business activity for the industry in which the taxpayer was involved.

Given the above, it was concluded that the provision of such services was a part of the taxpayer’s business income and not FTS.

Our Comments

The Mumbai ITAT held that the borrowed service fees are not FTS as the same will be considered as business income and will not be taxable in India as per Article 7 of the India-Singapore DTAA in the absence of PE in India.

Whether the amendment to Rule 89(4) of the CGST Rules, 2017, introducing a comparison between values indicated in tax invoices and shipping bills for the purposes of GST refund, be treated as retrospective in nature?

Tata Steel Limited vs. Union of India 2023 (77) G.S.T.L. 350

Facts

• The petitioner had filed a refund claim of unutilized Input Tax Credit (ITC) on account of goods exported without payment of tax during the period January to February 2019.
• Since the price of the goods could not be determined with certainty at the time of clearance from the factory for export, the petitioner had reflected the ‘cost price’ of the goods as a “taxable value” in the invoices and in the GST returns. Subsequently, it amended the returns when it became aware of the final price/ commercial value (as reflected in the shipping bills) at the time of actual exports.
• However, the refund claim of the petitioner was partially rejected by the GST authorities on the basis of Rule 89(4) of the CGST Rules, 2017 r/w Para 47 of Circular No. 125/44/2019-GST dated 18 November 2019, considering the lower of values indicated in the tax invoices vis-à-vis the shipping bills.
• Since the Commissioner (Appeals) upheld such rejection, stating that Para 47 of the Circular was in the form of directions/instructions, the petitioner approached the Jharkhand HC by way of a writ petition.
• It inter alia contested that the amendment brought in the aforesaid Rule vide Notification No. 14/2022- CT dated 5 July 2022 should have a prospective effect since it did not specify a retrospective applicability.

Ruling

• HC noted that the 2022 Amendment Rules inserted a new stipulation for comparison between two values. Such an exercise was not contemplated prior to the amendment as the actual transaction value was taken into account.
• Therefore, by way of the amendment, a substantive change was brought about in the law and hence, the amendment ought to operate prospectively.
• The Court further remarked, “mere use of the term “explanation” will not be indicative of the fact that the amendment is clarificatory/ declaratory.”
• Furthermore, it noted that the explanation inserted in Rule 89(4) was not on similar lines as Para 47 of the Circular. Resultantly, it observed that a policy could be changed only by way of an amendment under the parent Act and not by a Circular and that such policy change will be effective from the date of amendment.
• Moreover, it found that the legislature had expressly indicated the date of application of respective rules and for Rule 89(4), no retrospective date had been indicated in the Notification itself.
• Thus, the HC held that since the period involved in the instant case was prior to the amendment of 2022, the impugned rejection deserved to be quashed and set aside.

Our Comments

This judgment can be referred to by similarly placed exporters inasmuch as it has clarified that the amendments to Rule 89(4) would be applicable only to the exports undertaken after the date of amendment and not retrospectively.

It may be pertinent to note that recently, the Delhi HC, in the case of Indian Herbal Store Pvt. Ltd. vs. Union of India & Ors. [TS-504-HC(DEL)-2023-GST] similarly accorded a prospective effect to the amendment to the definition of “Turnover of zero-rated supply of goods” under Rule 89(4)(C) of the CGST Rules, 2017, by holding that the right for a refund of accumulated ITC stands crystalized on the date when the goods are exported, which is also reflected in Section 54 of the CGST Act, 2017. The Court also noted that the Karnataka HC had struck down the said amendment in the case of Tonbo Imaging India Private Limited [TS-108-HC(KAR)-2023-GST].