Whether services provided by the external advisors are in the nature of Independent Personal Services (IPS) or Fees for Technical Services (FTS)
Dy. CIT v. Hydrosult Inc. [TS-43-ITAT-2019 (Ahd)]
Whether services provided by advisors are of independent nature?
The tax tribunal held that on perusal of service agreement between the taxpayer and the non-resident individuals, the latter were contracted as an “Advisor” for rendering advisory services and the risks attached to it were with the non-resident individuals to a great extent. Thus, it was held that the services rendered by the Advisors were independent in nature.
Whether Services are IPS or FTS in nature?
The tax tribunal accepted the contention of the taxpayer that the non-resident individuals have rendered professional services of independent nature and are therefore liable to be taxed. It also stated that they will be taxed only in the state of residence since none of them have a fixed base available to them in India and none of them have stayed in India for more than the relevant period as provided under the Tax treaty in the concerned financial year. Hence, the services rendered were covered under IPS and FTS Article would not apply.
There is a thin line of distinction between IPS and FTS. Ideally, if services are covered under both, i.e. FTS and IPS, then IPS being a specific provision would be considered over FTS being a general provision and taxed accordingly. Also, FTS clause in certain tax treaties specifically provides that the income covered in IPS clause would be excluded from the FTS clause.
Furthermore, this decision also explains what constitutes “independent character” for determining whether the services are IPS in nature. Thus, in cases where the external consultant is contracted as an Advisor, and the related risks are with the taxpayer, then it may be possible that the services rendered by such a person may be covered under IPS, subject to the satisfaction of period of stay in India and availability of fixed base in India.
Whether a partner receiving remuneration and interest from a partnership firm avail benefit of presumptive taxation under section 44AD of the Income-tax Act, 1961 (ITA)
Mr. A. Anandkumar v. ACIT [TS-41-ITAT-2019 (CHNY)]
The tax tribunal observed that the remuneration and interest received from a firm would be considered as profits or gains of business or profession only to the extent eligible under section 40(b) of the ITA. However, it was observed that these payments indirectly amount to a distribution of profits by the firm on which the firm would have paid tax. Hence, this by itself would not translate such remuneration and interest into gross receipts or turnover of the business of the partner of the firm. In light of the above scenario, the tax tribunal held that the taxpayer could not avail the benefit of the presumptive taxation.
This decision clearly brings out the proposition that presumptive taxation scheme is not available to persons earning remuneration or interest from a partnership firm as this cannot be considered as turnover/gross receipts.
Whether the transfer of project specific designs/drawings/plans makes available any technical knowledge, skill, know-how or process
Buro Happold Limited v. Dy. CIT [TS76-ITAT-2019 (Mum)]
The tax tribunal observed that the taxpayer is engaged in the provision of consultancy services relating to the projects and in that context, it is required to provide technical designs/ drawings/plans. In other words, the said technical design/drawings/plans are project-specific.
The tax tribunal furthermore held that reading the second limb of Article 13(4) (c) of India-UK tax treaty disjunctively of the make available clause (i.e., first limb) would amount to wrong interpretation of law as the words “or consists of the development and transfer of a technical plan or technical design” (second limb) would take color from the first limb.
However, the tax tribunal observed that since the said design/drawings/plans are project-specific, it cannot be used by the service recipient independently without recourse to the service provider. Accordingly, the contention of the taxpayer that the same do not make available any technical knowledge, experience, skill, etc., has been accepted.
The tax tribunal highlighted a very important interpretation principle that make available clause as appearing in Article 13(4) (c) of India-UK tax treaty has to be considered even for the transfer of technical designs, drawings, plans, etc. This argument made by the taxpayer is unique as conventionally it was always understood that the make available clause applies only to services and does not apply to supply of design and drawings. It is to be seen whether higher courts accept this unique argument or not.
The above mentioned case was
handled and supported by SKP
McKinsey Knowledge Center India Pvt Ltd [Petition (s) for Special Leave to Appeal ( C ) No (s). 1785/2019]
The Hon'ble Supreme Court rejected the Special Leave Petition (SLP) filed by the taxpayer against the order of the Delhi High Court, which characterized the taxpayer as a KPO unit.
The Delhi High Court has observed the following before concluding that the taxpayer operated as a KPO unit:
- The research and information services division provided journalistic research information support, domain-specific research support, analytics and capital market insights, etc.
- Referring to the agreements, the HC noted that the functions of the taxpayer also included knowledge management systems and other infrastructure support services.
- HC also opined that the perception that a BPO service provider can move up the value chain by providing services of a KPO, is not enough to functionally compare BPO and KPO service providers.
- The services rendered were specialized and required special skill-based analysis and research, which is beyond the more rudimentary nature of services by a BPO.
BPO vs. KPO has been a long controversy in the Indian transfer pricing litigation environment. Now that the SC has rejected the SLP, findings of the High Court would serve as the final test in the said controversy.
It is relevant to note here that the Safe Harbour Rules in India prescribes the higher rate of mark-up (18% to 24%) for KPO’s vis-a-vis BPO (17% to 18%).
Raymond Fasteners Pvt Ltd [ITA No.994/ PUN/2016]
ITAT rejected TPO/DRP's adoption of internal Comparable Uncontrolled Price (CUP) Method and preferred Transactional Net Margin Method (TNMM) over internal CUP Method to benchmark the export transaction by stating that the transfer pricing law requires a comparison between transactions that are same while benchmarking the arm's length price under CUP method. The factors that are held by the ITAT to be looked upon before application of CUP are discussed below:
Volume Differences: The transaction should not only involve the same goods, but the volume of the transaction should also be more or less similar. The transaction with non-AE was less than 1% of that with AE.
Functional Differences: It was noted that sale to non-AE was purely a resale transaction (Import for resale in India), whereas sale to AE was goods manufactured by the taxpayer in India. Therefore, the ITAT concluded that the price pre-agreed with non-AE could not be benchmarked/basis to charge sale price to AE, where the taxpayer acted as a contract manufacturer.
Also, the taxpayer did not carry out any marketing functions nor did it bear any credit risk or pay any royalty to the AE for the use of technology while manufacturing the goods for the AE unlike its transaction with the non-AE. Hence, there were functional differences in a transaction entered by the taxpayer with its AE and non-AEs.
Geographical Differences – AE was located in France whereas non-AEs were located in India.
Reliance was also placed on the Bombay High Court ruling in the case of Amphenol Interconnect India Pvt Ltd wherein it was held that in case of geographical and functional differences, TNMM was to be applied instead of CUP Method for the purpose of benchmarking analysis.
It is a settled rule that the application of CUP method requires strict comparability standards. Factors, such as volume, geography, critical functions and corresponding risks, are the key parameters for application of CUP method.
Whether Corporate guarantee is an international transaction? If yes, whether bank quotes can be used to benchmark corporate guarantee transaction?
M/s JE Energy Venture Private Ltd [ITA No. 7602/Del./2017]
ITAT upheld corporate guarantee as an international transaction, and rejected the use of bank quotes by the TPO to benchmark the said international transaction as inappropriate CUP.
Corporate Guarantee is an international transaction
The taxpayer had submitted that providing a corporate guarantee in case of a loan to its AE, is not an international transaction as no benefit had been passed on to the AE. However, the said submissions were rejected by the ITAT stating that no loan would be provided to the AE had this corporate guarantee not been given by the taxpayer, and the taxpayer has taken the risk without consideration, which no other third party would have taken.
Bank Quotes without any adjustment not a suitable benchmark for corporate guarantee transaction
On the approach of the TPO to use bank guarantee rates to benchmark the corporate guarantee transaction, the ITAT held that bank guarantee rates could not be compared with corporate guarantee rates by any standard. By placing reliance on the order of the coordinate bench of the ITAT in case of Glenmark Pharmaceuticals Ltd, the ITAT accepted the submission of the taxpayer that unless a reasonable adjustment for material differences is made to the general quotes of bank guarantee, the same cannot be accepted as a valid CUP. Thus the TPO has directed to benchmark the corporate guarantee transaction by providing an opportunity to the taxpayer.
The said ruling will provide relief to those taxpayers where bank guarantee rates have been used to benchmark the corporate guarantee transaction by the TPO. Furthermore, the said ruling also emphasizes the need for robust benchmarking analysis with respect to corporate guarantee transactions.
The introduction of the transfer pricing regulations in KSA would have far-reaching impact on the compliance requirement and the inter-company pricing policies adopted by the persons operating in the KSA. The transfer pricing regulations would apply to a wide range of controlled transactions between related parties, including transactions entered between resident entities. Accordingly, the persons operating in KSA will be required to evaluate the impact of the new legislation on their existing business.
Whether Input Tax Credit (ITC) is admissible on inward supplies for construction of a warehouse using pre-fabricated technology?
Tewari Warehousing Co Pvt Ltd - Authority for Advance Ruling (AAR), West Bengal [2019-VIL-47-AAR] Held
The AAR observed that:
- The applicant is constructing the warehouse on a piece of land taken on a thirty years lease for building a storage facility. On expiry, the period can be extended by a fresh lease.
- The structure being built is, therefore, not for the purpose of temporary enjoyment, but intended to be used as a permanent structure subject to usual business uncertainties.
- Furthermore, the warehouse cannot be relocated by unfixing the pre-fabricated structures alone.
- The dismantling of the floor, which is the most important component of the warehouse, is not possible without substantial damage to the foundation.
In view of the above observations, the AAR held that the warehouse under construction is an immovable property, and the ITC is not admissible on the inward supplies for its construction in accordance with Section 17(5) (d) of the CGST Act.
The issue of what qualifies as an ‘immovable property’ was a bone of contention between the department and taxpayers even under the erstwhile indirect tax laws. In view of this advance ruling, the issue is likely to continue under the GST regime.
Whether the applicant is liable to GST on the merger of his proprietorship firm as a going concern with a private limited company?
B.M. Industries - AAR, Haryana [2019-VIL-46-AAR] Held
The applicant submitted that:
- The merger is for the complete business of the applicant as a whole involving transferring of all assets and liabilities.
- Selling of business cannot be called a transaction in the normal course of furtherance of business and hence, is outside the scope of ‘supply.’
- As per Para 4(c) of Schedule II of the CGST Act, 2017, transfer of a business as a going concern is not treated as supply.
- Furthermore, services by way of transfer of going concern have been exempted vide Notification No. 12/2017-Central Tax dated 28 June 2017.
The AAR accepted the above contentions and held that the applicant would not be liable to pay tax on the merger of a sole proprietorship as a going concern with a private limited company.
Whether ITC available in the credit ledger or cash ledger account of the sole proprietorship firm shall be transferred to the respective credit and cash ledger of the private limited company?
B.M. Industries - AAR, Haryana [2019-VIL-46-AAR] Held
The AAR held that provisions of Rule 41 deals with the transfer of unutilized ITC in case of a merger. These provisions are not applicable to unutilized balance lying in electronic cash ledger. Therefore, only the ITC in electronic credit ledger of the applicant should be transferred to the respective credit ledger of the private limited company, consequent upon the merger.
The transfer of going concern has been squarely covered in the said exemption notification. However, whether the balance in the electronic cash ledger can be transferred on account of such a transfer was uncertain. This advance ruling should provide a clearer picture to taxpayers so that it is ensured that balance if any in the electronic cash ledger is utilized before the merger.
Whether the value of expired loyalty points, on which money had been paid to LSRPL by the issuer of points, would amount to consideration for ‘actionable claim,’ and therefore outside the scope of GST?
Loyalty Solutions and Research Pvt Ltd (LSRPL), Appellate Authority for Advance Ruling, Haryana [2019-VIL05-AAAR] Held
- On purchase of products of ‘partners’ to loyalty programme, end-customers get reward/payment points.
- These reward points can be redeemed by customers while making future purchases of products of ‘partners.’
- In pursuance to these reward points management, ‘partner’ transfers an amount equivalent to 0.25 of INR, per reward point as issuance charges to LSRPL.
- Whenever any purchase is made by the end customer, by using/ redeeming rewards points, LSRPL transfers an amount equivalent to 0.25 INR per reward point used to the concerned store, and the concerned store gives discounts on the payment to be received from end-customer to this extent.
- If the customer does not redeem the reward points within their validity period of 36 months, the reward points are forfeited, and the amount equivalent to 0.25 INR per reward point is retained by LSRPL.
The AAAR answering the question in the negative upheld the ruling of the AAR. The AAAR observed that:
- It is an admitted position that the amount received upfront from the partners in respect of the generated payback points is booked as revenue in LSRPL’s account.
- In the given case, the consideration has two components - fixed and variable.
- When there can be no claims by the end-customers after the expiry of the validity period, these are no more actionable claims. LSRPL treat the retained money as revenue which can never be described as any claim against anyone.
What qualifies as an actionable claim is a matter of interpretation and is largely fact-based. This ruling can increase tax cost for businesses operating under a similar business model.
It should be noted that an Advance Ruling is binding only on the applicant who had sought it and the concerned jurisdictional authority, i.e., an Advance Ruling is specific to an applicant and shall not be applicable to other taxpayers facing similar issues. However, the abovementioned Advance Rulings provide clarity about the issues being faced and have persuasive value in matters before the tax authorities.