M/s SQS India BFSI Ltd vs the DCIT ITA Nos. 223 and 224/Chny/2019
The taxpayer is an India-based company dealing in software development and services. The taxpayer entered into an agreement with foreign agents based in the UAE and Bahrain for sourcing orders on a commission basis.
The Assessing Officer (AO) claimed that the services rendered by the agent involve sourcing of orders from customers for assessee's products and include rendering specialized technical services as updating the assessee of changes, and market trends, etc. Accordingly, the payment made for the export commission was considered to be FTS.
After a detailed evaluation of the agreements, the Chennai Tribunal held that the general coordination work as given in the agreement and pointed by the AO were ordinary things that any agent or broker would undertake incidental to brokerage services. However, the agreements executed with a foreign agent do not speak of any technical services for which the assessee was liable to pay the commission. Arranging meetings, publicity through media, etc., were incidental to the brokerage services. Accordingly, in the absence of a Permanent Establishment (PE) of a nonresident in India, there would not be any income chargeable to tax in India in the hands of the agents.
Whether salary payment to deputed employees working full time under the direct supervision of the Indian Associated Enterprise (AE) be attributed to Supervisory PE?
Lubrizol Advanced Materials Inc. vs ACIT ITA No 2455/AHD/2018
The taxpayer is a US-based company with an AE in India, which was in the process of establishing a new manufacturing plant. The companies entered into an inter-company agreement with the taxpayer for providing engineering, technology, design and project supervisory services. As per the agreement, the AE was to pay the actual cost plus markup at 10% to the taxpayer. The taxpayer had sent its personnel to India for supervisory of the project and paid taxes attributable to the supervisory PE.
The taxpayer had also seconded two employees to the AE independent of the supervisory activities. The employees worked full-time and received a salary from the Indian AE. However, the administrative convenience part of the salary was paid by the taxpayer in the USA, but the same was reimbursed to it on a cost-to-cost basis by the AE. The AO alleged that the salary reimbursement for the said employees should also be attributable to the Indian PE of the taxpayer.
After analyzing the relevant agreements and facts of the case, the Tribunal decided that the employees worked under the supervision and guidance of the Indian AE. After complying with the applicable withholding tax provisions, the salary was paid to these employees, and the employees filed their return of income in India. Furthermore, the employees worked exclusively for the Indian AE. Thus, no element of the salary can be attributable to the supervisory PE of the assessee.
Open Text Corporation India Private Limited (formerly known as Cordys Software India Private Limited) [I.T.A. No. 152/HYD/2017]
For AY 2012-13, the taxpayer is engaged in the business of providing software development and consultancy services and had overdue receivables on which the Transfer Pricing Officer (TPO) proposed an interest adjustment which was upheld by the Dispute Resolution Panel (DRP).
- Instead of SBI PLR , short-term SBI deposit rates over the period of 7-554 days having interest rates of 4% to 9.25% should be considered while computing the notional interest.
- While benchmarking overdue receivables denominated in foreign currency, the LIBOR rate should be the preferred benchmark rate for computing the notional interest.
The interest on overdue receivables is often computed considering the domestic benchmark rate disregarding the functional currency of overdue receivables. The ruling lays emphasis on the selection of appropriate benchmark rates while computing interest on overdue receivables.
Adient India Private Limited [TS- 226-ITAT-2021(PUN)-TP]
The taxpayer had rendered administrative services to its AE and benchmarked the specified domestic transaction applying the Comparable Uncontrolled Price (CUP) method by comparing 13 marketing service agreements from foreign databases with the average fee paid at 5.43% as against its payment for the services at 1% only. During the TP assessment, the Transfer Pricing Officer (TPO) observed that the taxpayer failed to exhibit any benefit derived from the services and determined "Nil" Arm's Length Price (ALP) for the transaction on the ground that no independent party would have paid anything for such services. Accordingly, a TP adjustment of INR 59.5 million was proposed and upheld by the Dispute Resolution Panel (DRP). Aggrieved, the taxpayer appealed before the Tribunal.
- Application of the benefit test is not warranted. An inquiry in this regard should come to an end as soon as the factum of availing the services for the business purpose is established.
- The CUP method cannot be applied with truncated data lacking functional comparability (i.e., bunch of administrative services vis-à-vis only marketing services). Foreign comparables cannot be used under the CUP method for benchmarking domestic transactions between domestic parties.
- Intra-group services cannot be clubbed with the manufacturing or trading transactions undertaken by the taxpayer justifying aggregation.
The Indian TP regulations don't contain any specific rules regarding the use of benefit test for determining the ALP of services availed. However, during audits, taxpayers are required to particularly demonstrate the needs/purpose and benefits of availing services from AE. The said judgment is relevant and shall carry a persuasive value in case intragroup service charges are questioned for benefit test.
Whether IGST paid under Reverse Charge Mechanism (RCM) on import ocean freight can be claimed as a refund after the expiry of the time limit under the GST law, given that the Court had held such levy of RCM as unconstitutional?
[Background: Earlier, the Gujarat High Court in Mohit Minerals (Pvt) Ltd. vs Union of India had held that levy of IGST under RCM on ocean freight lacked legislative competency, and the same was declared as unconstitutional.]
Comsol Energy Private Limited vs State of Gujarat [R/Special Civil Application No. 11905 of 2020 - Gujarat High Court]
- The applicant in the present case was also one of the writ petitioners in the Mohit Minerals case.
- Based on the decision in the said case, the applicant filed refund claims of IGST paid on import ocean freight under RCM.
- However, the Department denied the claims on the ground that they were not filed within the time limit prescribed under Section 54 of the CGST Act.
Based on the above, the High Court held as follows:
- Article 265 of the Constitution of India provides that no tax shall be levied or collected except by authority of law
- Since the amount of IGST collected by the Central Government is without the authority of law, the Revenue is obliged to refund the amount erroneously collected.
- The amount collected by the Revenue without the authority of law is not considered as tax collected by them and, therefore, Section 54 is not applicable.
- In such circumstances, Section 17 of the Limitation Act is the appropriate provision for claiming the refund of the amount paid to the Revenue under the mistake of law.
- In view of the aforesaid, the writapplication was allowed.
This is a crucial judgment and can pave the way for many such refund claims filed not only by taxpayers, who have paid IGST under RCM on import ocean freight but also other taxpayers who have paid any excess tax by mistake.
Whether Section 13(8)(b) of the IGST Act, whereby the place of intermediary services is the location of the supplier, unconstitutional?
Dharmendra Jani vs Union of India [2021 (6) TMI 563 – Bombay High Court]
[The 2-judge Bench of the High Court has a difference of opinion on the matter and has given separate decisions. Therefore, the matter has now been placed before the Hon'ble Chief Justice of the Bombay High Court for further action.]
Judgement - Section 13(8)(b) is unconstitutional
- The Constitution does not empower imposition of tax on the export of services out of Indian territory by treating the same as a local supply.
- By artificially creating a deeming provision in the form of Section 13(8) (b), the place of supply has been treated as the location of the supplier, i.e., in India.
- The extra-territorial effect given by the said Section has no real connection or nexus with the taxing regime in India introduced by the GST system; rather, it runs completely counter to the very fundamental principle on which GST is based, i.e., it is a destination-based consumption tax as against the principle of origin-based taxation.
- Thus, the said Section is ultra vires the said Act, besides being unconstitutional.
Judgment – Section 13(8)(b) is constitutional
- If the Parliament, pursuant to powers vested in it by the Constitution, has in its wisdom dealt with intermediary services as those rendered by the petitioner, that is a matter within the Parliament's domain.
- There is no conflict between Article 246A, Article 269A or Article 286, which clearly empower the Parliament to formulate laws for determining the place of supply and when a supply of goods or of services or both takes place in the course of inter-state trade or commerce or as to when the supply of goods or services or both take place outside a State or in the course of import into or export out of the territory of India.
- Once the Parliament has in its wisdom stipulated the place of supply in case of Intermediary Services to be the location of the supplier of service, no fault can be found with the provision by artificially attempting to link it with another provision to demonstrate constitutional or legislative infraction.
- In any event, Section 8(2) is not applicable to the case of petitioner as location of supplier and place of supply is not within same State (in India) but in taxable territory viz. India.
- Therefore, to say that the Parliament has sought to impose tax on export of services out of the territory of India by treating the same as local supply in violation of Articles 246A and 269 is completely fallacious and untenable.
- The levy on account of the said Section is neither arbitrary nor unreasonable nor discriminatory.
- Therefore, Section 13(8)(b) of the IGST Act is constitutionally valid and operative for all purposes.
Section 13(8)(b) was earlier held constitutional in Material Recycling Association of India vs. Union of India [2020 (8) TMI 11 - Gujarat High Court].
The taxation of intermediary services has been a vexed issue given the challenges to its constitutionality as well as the ambiguity in the interpretation of the term 'intermediary.'
It appears that the matter could attain finality only at the Apex Court level or by way of a clarificatory Circular/legislative amendment by the Parliament.
Merger & Acquisition Tax
Mumbai ITAT allows the investments write-off made in lossmaking foreign subsidiaries as a business loss
Citation: Maneesh Pharmaceuticals Ltd [TS-462-ITAT-2021(Mum)]
Maneesh Pharmaceuticals Ltd (assessee) made an investment in two overseas subsidiary entities – (i) M/s Svizera Holdings B.V. Netherlands (SHBV); & (ii) M/s Lasa Industria Farmaceutica, Brazil (LASA). During FY 2011-12, the assessee wrote-off these investments as 'business loss' as the subsidiary had accumulated heavy losses, which ultimately wiped off their respective net worth. The Ld. AO denied the deduction, Commissioner of Income-tax (Appeals) [CIT(A)] allowed a write-off of the investment in the Dutch company but disallowed it for the Brazilian company, as it was only engaged in packing of assessees products.
The Income-tax Appellate Tribunal (ITAT) confirmed the stand of Ld. CIT(A) with respect to the investment made in M/s SHBV and reversed the disallowance of investment loss of M/s LASA by observing as under:
- Investments, where in furtherance of business objectives and with a view to earn more revenue;
- Investment was guided by commercial expediency to push the sales in international markets and gain access to foreign markets;
- The main purpose of such investments was not to acquire manufacturing/infrastructural capacity but to boost sales, and that the investments could not be said to be in the capital field since it was meant to improve the top line of the business;
- Placing reliance on the ruling of the Apex Court in the case of Patnaik & Co. Ltd. (161 ITR 365) and jurisdictional ruling of Bombay High Court in CIT vs Colgate Palmolive India Ltd. (370 ITR 728), the ITAT held that loss in investment, out of commercial expediency and in furtherance of business objects, is an allowable loss.
A welcome ruling from the perspective of allowability of loss on write-off of investments in subsidiary incorporated for the furtherance of business. This also extends support to the fact that investments by themselves could qualify as an undertaking from an M&A perspective.
Chennai ITAT upholds the genuineness of the transaction and rejects AO's contention of corporate restructuring being a colorable device
Citation: The Investment Trust of India Ltd [ITA 80/CHNY/2008]
HCFL Infotel Limited (HCFL Old), having substantial accumulated losses and unabsorbed depreciation amalgamated with M/s Investment Trust of India Limited (ITI Old), engaged in the business of Finance, Investments, etc. with effect from 1 September 2002. Further, under the scheme, ITI Old hived off its finance business to its 100% subsidiary under a slump sale arrangement which continued the finance business of ITI Old.
Prior to the amalgamation, ITI Old sold certain of its investments resulting in capital gains of INR 903.5 million, which was sett-off against the loss and depreciation of HCFL old acquired later during the year. The tax authorities held that amalgamation was a colorable device intended for evading capital gains tax - reliance was placed Supreme Court (SC) 's ruling in the case of McDowell (154 ITR 148).
The ITAT upheld the genuineness of the transaction and rejected AO's contention of restructuring being a colorable device by observing as under:
- In the case of Azadi Bachao Andolan (263 ITR 706), the SC observed that McDowell's decision cannot be read as every attempt at tax planning is illegitimate and must be ignored, or that every transaction permissible under law, which reduces the tax burden, must be looked upon with disfavor.
- The AO has exceeded his jurisdiction by denying the benefit of amalgamation, ignoring that the scheme is sanctioned by the Hon'ble High Courts at Madras and Chandigarh.
- AO has erred in holding that the scheme of amalgamation is an afterthought considering that the was a scheme was duly approved by two High Courts and shareholders, creditors and bankers of both the companies, Registrar of Companies and Regional Directors of Dept. of Companies Affairs of Chandigarh and Chennai after giving due notice by publication in newspapers.
The ruling lays an important principle that legitimate transactions which reduce tax burden cannot be looked at with disfavor characterizing them as a colorable device.