Direct Tax

Whether tax/ fiscally transparent entities can avail tax treaty benefits if income is taxable in the hands of its beneficiaries?

ING Bewaar Maatschappij BV (trustees of ING Emerging Markets Equity Fund) vs Dy. CIT [TS-738-ITAT-2019 (Mumbai)]


Taxpayer, a fund established in Netherlands and registered with SEBI as a sub account of FII, is a tax transparent entity in Netherlands i.e., the taxpayer would not be taxable in its own right. During AY 2007-08, the taxpayer had earned short term capital gains in India. However, it did not offer the same to taxpayer in India as the same was not taxable in India as per Article 13 of the India-Netherlands tax treaty. The taxpayer contended that given that it was a Trust AOP, its income was taxable in the hands of its beneficiaries who were subject to tax in Netherlands, the tax treaty benefits should also be extended to the taxpayer.

However, the tax officer rejected the contention of the taxpayer and inferred that the taxpayer cannot be assessed based on the status of its beneficiaries. Further, the taxpayer was a nontaxable entity in Netherlands. Hence, the benefits of the tax treaty cannot be extended to the taxpayer and thus, the same was taxable under the Incometax Act, 1961 (the Act).


The tax tribunal observed that the taxpayer was a tax transparent entity i.e. income was taxable at the beneficiary level. The taxpayer had no legal existence whatsoever and it was merely a contract between the beneficiaries. Further, it was noted by the tax tribunal that the role of the taxpayer was that of a custodian of investments and hence the income earned therefrom was not accruing to the taxpayer in its own right. Hence, the said income would be taxed in the hands of the beneficiaries who were tax residents of the Netherlands. This fact was proved by the tax resident certificates already filed before the tax officer. Hence, tax treaty protection cannot be denied as such. It was also observed that when a taxpayer was a representative assessee of a tax transparent entity, the status of its beneficiaries was relevant for the purpose of determining tax treaty protection. It was evident from the tax residency certificates already available with the tax officer that the beneficiaries were tax residents of Netherlands and hence short-term capital gains derived from India were not subject to tax in India. In other words, tax treaty protection cannot be denied to a tax transparent entity in the given factual matrix. In this regard, the tax tribunal placed heavy reliance on the legal position provided in the case of Linklaters LLP vs ITO (2010) 9 ITR 2017 (Mumbai Tribunal).

SKP’s Comments

The issue of tax transparent entities availing tax treaty protection has been a controversial subject before the tax authorities at various levels. This issue has been a subject matter of debate on a global level also, so much that the OECD has included this issue in one of its Action Plans (Action Plan 3) under BEPS Project.

In the Indian context, the Revenue Authorities have always adopted a position that tax transparent entities should not be allowed treaty benefits.

However, this decision once again affirms the tax-payers position that the Tax Treaty should be available if ultimately the beneficiaries are resident of the same country. Similar position has also been provided under BEPS Action Plan 3.

Whether payments made for purchasing software licenses falls within the definition of royalty under the Act as well as India-Italy tax treaty?

ACIT vs M/s. Saipem India Projects Pvt. Ltd. [TS-795-ITAT-2019 (Chennai)]


Taxpayer, an Indian company, was engaged in the business of engineering and procurement assistance services, design and execution of large scale oil & gas onshore and offshore projects, cryogenic tanks, etc. It had purchased certain software licenses from Saipem Italy, which were used for providing services to customers for various support functions in accounting, reporting, etc. The tax officer contended that payments made for licenses were covered within the ambit of royalty under the Act as well as under the India-Italy tax treaty. Hence, the tax officer disallowed the said payments on the premise that the taxpayer failed to withhold taxes on the same as per the provisions of the Act.


The tax tribunal observed that the taxpayer had made payments to Saipem Italy for purchasing software licenses on a personal, non-exclusive, non transferable license with a right to make unlimited copies. However, the said software can be used for internal purposes only and sub-licensing, assignment or transfer of such license/ software was not allowed.

The tax tribunal placed heavy reliance on the decision of Karnataka HC in the case of CIT vs Synopsis International Old Limited (2012) 28 162 (Karnataka) and observed that the term license means granting authority to do a particular thing which was otherwise illegal. A license, per se, does not confer any right rather it prevents it from being unlawful. A license transfers an interest to a limited extent, whereby the licensee merely acquires a right in the copyrighted article and not in the copyright itself. However, merely because the terms non-exclusive and non-transferable were used in the license agreement, it does not take away the software out of the definition of the copyright. Further, even if license was not transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software made it abundantly clear that there was a transfer of certain rights, which Saipem Italy possess in the said license. In terms of the tax treaty the consideration paid for the use or right to use the said confidential information in the form of computer programme software itself constitutes royalty and is therefore liable to tax. It was not necessary that there should be a transfer of exclusive right in the copyright as contended by the taxpayer. Hence, the payments made for software licenses to Saipem Italy fell within the mischief of royalty under the provisions of the Act.

SKP’s Comments

The decision once again ignites the controversy of taxability of software.

While by and large majority of the rulings are in favour of taxpayer on this issue, this ruling once again racks up a controversy and would have to be considered while determining the taxability of software.

The decision of Supreme Court in the case Samsung Electronics is long pending. Taxpayers are looking forward to the pronouncement of this ruling so that this issue is settled.

Whether income from Inland Haulage Charge (IHC) is covered within the ambit of shipping income as per Article 9 of India-France tax treaty?

Whether the taxpayer has a DAPE in India as per Article 5 of India-France tax treaty?

CMA CGM SA vs Dy. CIT [TS-1209- ITAT-2019 (Mumbai)]


Taxpayer, tax resident of France, was engaged in shipping business in international waters. The taxpayer conducted certain business activities in India through an agent in India (i.e. CMA CGM India) and earned income from IHC. It filed its return of income in India after availing benefit under Article 9 of the tax treaty. However, the tax officer held that IHC received by the taxpayer was in connection with the activities pertaining to inland transportation and hence the same cannot be considered as international transport. Accordingly, benefit under Article 9 of the tax treaty would not be available to the taxpayer.

Further, the tax officer held that the taxpayer had a dependent agent PE (DAPE) in India and accordingly income from IHC would be taxable as business profits in India as per Article 5 r.w. Article 7 of the tax treaty.


The tax tribunal inferred that since IHC forms part of income from operation of ships in international traffic, benefit under Article 9 of the tax treaty would be available to the taxpayer and accordingly income from IHC would not be taxable in India. In this regard, the taxpayer placed heavy reliance on OECD model commentary which was accepted by the tax tribunal.

On the issue of constituting a DAPE in India, the tax tribunal observed that once it was proved that revenue from IHC was taxable as shipping income, Article 5 of the tax treaty cannot come into play. Further, the tax tribunal observed that the Indian agent was remunerated at arms length as per the terms of Advance Pricing Agreement entered into between the taxpayer and the Indian Government, the Indian agent was not a DAPE of the taxpayer in India.

Transfer Pricing

Whether the terms of agreement between taxpayer and third party customer would constitute internal CUP with respect to payment of royalty to the Associated Enterprise (AE)?

Nycomed Pharma Pvt Ltd. – ITA No. 6775/M/2014 ITA No. 1950/M/2015 ITA No. 4284/M/2016

Taxpayer is engaged in the business of running a research and development center for synthesizing of test compounds as well as licensing/ sub-licensing of drug Pantoprazole and design and maintenance of IT infrastructure.

The taxpayer earned royalty income from sub-licensing, manufacturing, and selling drug to third party customers. The taxpayer retained 1% of the total sales consideration and balance 99% proceeds were remitted to AE.

The Transfer Pricing Officer (TPO) proposed a transfer pricing adjustment by determining the ALP of royalty payment to AE at NIL value. The TPO further highlighted that since there was no written agreement between the taxpayer and AE, no enforceable legal liability is casted upon the taxpayer to pay royalty to its AE.

During the proceedings before the CIT(A), the adjustment proposed by the TPO was quashed and the contentions put forth by the taxpayer were upheld. Aggrieved by the CIT(A) order, the revenue filed an appeal before the Mumbai Tribunal/ ITAT.

ITAT Ruling

  • As per clause (c) to Rule 10B (2) of the Income Tax Rules the international transaction is comparable to the uncontrolled transaction in case wherein contractual terms (whether or not such terms are formal or in writing) are same.
  • Formal contract is not the only criteria to establish the parties’ rights to the contract, but the terms agreed, understood and acted upon, form the basis of the transaction. This was also evident from the board resolutions, e-mail correspondences exchanges, raised credit notes, deducted TDS etc. presented by the taxpayer during the CIT(A) proceedings.
  • The taxpayer was granted the right to commercially exploit the license by the AE by way of sub-licensing the same to third party customers. This arrangement between AE and third party customers were in existence even before the taxpayer’s incorporation and the rate charged to third party remained same. The only difference in the arrangement was that the taxpayer now retained a margin before remitting the proceeds.
  • Since the purchase and sale of license took place during the same period and significant functions were not performed by the taxpayer, the transaction between taxpayer and third party customers would constitute internal CUP for the purpose of benchmarking the royalty payments made to AE.
  • A miniscule portion (1%) held by taxpayer and remitting balance proceeds to AE is considered to be below the ALP determined as against the gross amount received on the sale of license.
  • Therefore, the transaction pertaining to payment of royalty to the AE was held to be at arm’s length.

In view of the above, the Mumbai ITAT dismissed the appeal of the Revenue

SKP’s Comments

A written agreement alone does not impose a need to enforce legal liability in a commercial transaction.The actual functions carried out and risks assumed by the parties under consideration is to be analyzed before undertaking comparability analysis.

Whether the terms and conditions of APA should be applicable to the prior years (even though no roll back period covered in APA) if the functions and risks assumed by the taxpayer are identical?

Festo India Pvt. Ltd. – IT(TP)A No. 969(B)/2014 IT(TP)A No. 1028(B)/2014 IT(TP)A No. 209(B)/2015 CO. No. 74(B)/2017 (in IT(TP)A No.209(B)/2015)

Taxpayer is engaged in the business of manufacturing and trading pneumatic equipment used in industry automation.

Taxpayer has entered into many international transactions including the transaction pertaining to import of finished products for resale, manufacturing of products and components and payment of SAP charges.

During the assessment proceedings, the TPO adopted TNMM as the MAM with respect to the trading segment as against RPM adopted by the taxpayer and accordingly proposed an adjustment.

Taxpayer’s contention

  • It was contended that APA entered into by the taxpayer for FY 2014- 15 to FY 2018-19, covered the transaction pertaining to import of finished products wherein TNMM was considered to be MAM and an arm’s length margin of 3.5% was concluded.
  • Taxpayer contended that the FAR analysis for the years under litigation is identical to the period covered under APA.

Bangalore ITAT Ruling

  • While the APA signed between the taxpayer and CBDT did not include the roll back provision, however, as per Rule 10MA of Income Tax Rules 1962 (roll back provisions) the circumstances for application of the said rule were required to be analyzed.
  • It was highlighted that in order to apply the agreed terms of the APA, the transaction must be identical in terms of functions undertaken and risks assumed.
  • The matter was set aside and TPO/ AO were instructed to compare the FAR of the taxpayer with respect to the transaction during the period under consideration with the details presented in the APA and compute ALP accordingly.

SKP’s Comments

Wherein the facts of the case (nature of the transaction, functional and risk profile, etc.) remain identical and it is duly established that the circumstances warrant similar analysis, then the issues dealt with at the APA stage may be relied upon to settle the disputes pertaining to prior years.

Whether the AO/ TPO was justified in determining the ALP as NIL with respect to the cost contribution arrangement?

Ipsos Research Pvt. Ltd. – ITA No. 1361/ Mum/2017

Taxpayer is a market research company which has entered into a cost contribution arrangement with its AE. The taxpayer has benchmarked the transaction pertaining to Shared Resources Allocation(SRA) agreement using TNMM as the MAM.

The agreement for SRA highlighted that all the group companies needed services regarding advice and assistance in the areas of business development, client liasoning, planning, financing, accounting, legal, personal matters, communication, branding etc. These group companies had nominated one of its AE to aggregate the full cost pertaining to such services and share such costs with group companies on a cost plus 6% mark up basis.

TPO argued that the taxpayer had not provided enough back up supporting documents and accordingly considered ALP as NIL; proposing adjustment on the basis of the following concerns –

  • - Failure to establish whether the said services were actually availed;
  • – Failure to justify that there is no duplication of services;
  • – These expenses are in the nature of shareholder/stewardship activities;
  • – Failure to quantify the benefits derived from the services; and
  • – Willingness of the taxpayer to pay for such services to independent entities.

Taxpayer’s contention

  • Taxpayer contented that these services were availed for the overall benefit of the business activity as well as to maintain efficiency and uniformity in quality considering the nature of its business.
  • As per the audited segmental data relied and accepted by the TPO, since higher margins were earned in the AE segment as compared to non-AE segment, it can be inferred that the said transaction of cost contribution arrangement is at arm’s length.

Mumbai ITAT Ruling

  • ITAT observed that centralized sharing of services among group entities avoids duplication of services and achieves economies of scale which is evitable with respect to the cost contribution arrangement of the taxpayer.
  • The TP study of the taxpayer as well as the global TP study demonstrated a detailed functional analysis with respect to the said transaction. It also reflects the benefits derived by the taxpayer. The ’benefit of chart’ provides the description of the services and how are they rendered.
  • As per the SRA Agreement, the cost incurred were not in the nature of shareholding/stewardship activities. Further, it was noticed that the AE’s to whom payment was made for such services were not the shareholders of the taxpayer.
  • The segmental data was audited and the margins reflected in the segmental accounts were arrived after debiting payments made under SRA Agreement. Thus, payment towards the cost contribution arrangement are already benchmarked.
  • Considering that margins earned in AE segment are more than margins earned in Non-AE segment, the TP adjustment proposed was deleted.

SKP’s Comments

This ruling emphasizes the need to capture real time and proper documentation supporting the needbenefit analysis for determining the arm’s length nature of management fee transaction.

Whether branch office would constitute PE where branch office and head office have common customers in India?

Taxpayer is a company incorporated under the laws of Netherland having a branch office BO in India. Taxpayer is engaged in provision of design and engineering services to its head office as well as third party customers in India along with other supervisory support services to refinery, petrochemical, and other process industries. The taxpayer aggregated all the transactions undertaken during the year (i.e. supply of equipment, design engineering and supervisory services, cost allocation, reimbursements, etc.) and benchmarked using TNMM as the MAM by claiming idle capacity adjustment.

During the assessment proceedings, the TPO denied the idle capacity adjustment and upon analyzing the functions performed by the branch office, inferred that it was involved in negotiations on behalf of head office. Further, the expenses incurred by branch office during the year under consideration were not commensurate with the scale of its turnover.

On the basis of the above facts, TPO was of the view that branch office constituted a PE in India and adequate profits from head office needs to be attributed to branch office. This contention was backed by the TPO’s observation that there are common customers of both in India and there was an implied involvement of the branch office’s employees in head office providing services to customers in India.

Taxpayer’s contention

  • Taxpayer contended that since the branch office exists in India, income arising therefrom is taxable in India. Further, the transactions between both are subject to transfer pricing provisions and the said transactions are benchmarked. Thus, profits related to the part of contract which are directly carried out by head office shall be taxable in Netherlands and no further income shall be attributable to the branch office.
  • It was highlighted that with respect to the work orders entered directly by head office with the Indian customers, all the functions are carried out by the head office and there is no involvement of the later.
  • The taxpayer contented that the expatriate employees are also not involved in the negotiations or marketing for the branch office and such employees directly work for the head office as evident from the work orders placed on record.

Delhi ITAT Ruling

  • ITAT observed that no unreasonable or understated expenses were highlighted in the taxpayer’s accounts. Also, the rationality of the expenditure is to be considered from the businessman’s point of view.
  • No evidence was placed on record to prove nexus between head and branch office with respect to the services offered directly to the customers by the head office.
  • ITAT held that “where transaction between the head and branch office have otherwise been held to be at arm’s length by taking into account the risk bearing functions, no further profit should be attributed to the branch office.

SKP’s Comments

Where head office directly provides services to customers in India, despite the presence of a branch office, concern of later being considered to be a PE gets triggered. A clear distinction of the functions being carried out by head office and branch office plays a crucial role in such situations and thus a robust FAR analysis helps in distinguishing their activities from one another.

Indirect Tax

Whether the activity of settingup of data center facilities would qualify as ‘works contract’ under the CGST Act?

[Background: As per Section 2(119) of the CGST Act, works contract means a contract for building, construction, fabrication etc. of any immovable property wherein transfer of property in goods is involved in the execution of the contract.]

Hewlett Packard Enterprise India Private Limited - Authority for Advance Ruling, Karnataka [2019 (11) TMI 1145]


  • The applicant proposes to undertake projects for setting-up of data centre facilities for its clients.
  • The activities would include civil, interior and exterior architectural, mechanical and electrical works, obtaining statutory approvals like occupancy certificate etc.
  • There may be scenarios where the customer awards the entire contract to the applicant or would require the applicant to only undertake a portion of the entire contract on a standalone basis or as a combination of the same.


  • Once the entire work has been completed, then the building acquires a new look and an identity in terms of its functionality. Thus the contracted activities and the supply of the required material are in relation to an immovable property.
  • The contract also involves transfer of property in goods. Therefore, the proposed activities of the applicant are covered under the definition of works contract.

SKP’s Comments

The concept of what constitutes an ‘immovable property’ and therefore a works contract vis-à-vis a composite supply continues to be a disputed issue. In the present case, the AAR agreed with the applicant’s contention that the contract constitutes a work contract taxable to GST at the rate of 18%.

In this case, the ITC will be blocked for the recipient under Section 17(5) of the CGST Act.

Whether TDS provision under GST law applicable to a co-operative society registered under Tamil Nadu Cooperative Society Act of 1975, and not under Society Registration Act 1860?

[Background: As per Notification No. 50/2018-Central Tax dated 13 September 2018, TDS provisions are applicable to a society established by the Central Government or the State Government or a Local Authority under the Societies Registration Act, 1860.]

Tamil Nadu Coop Silk Producers Federation Ltd. - AAR, Tamil Nadu [2019 (12) TMI 49]


  • The applicant submitted stated that they are a co-operative society registered by registrar of industrial cooperative societies.
  • The equity of State Government is 0.43% and Government of India is 29.8% apart from Co-operative Society 69.77%.
  • It was also submitted that the applicant is not registered under the Societies Registration Act 1860, but instead under the Tamil Nadu Cooperative Societies Act 1961.


  • It is seen that the applicant was established by the Government of Tamil Nadu as a Cooperative Society registered as an Apex Society under the Tamil Nadu Co-operative Societies Act 1983, but the equity ownership at present or in the past never went beyond 51%.
  • Therefore, the applicant is not a person or category of person notified for the purpose of applicability of TDS provisions under the GST law.

SKP’s Comments

Various state as well as the central government have adopted the model for creation of co-operative societies in various fields of importance such as agriculture, milk etc. This ruling should help to clarify any doubts on the applicability of the TDS provision on these co-operative societies.