Direct Tax

Issue Ruling SKP Comments
Whether Liaison Office (LO) and Indian subsidiary of the taxpayer would constitute Permanent Establishment (PE) of the taxpayer in India?


LO – Fixed place PE in India

The premises were leased by the overseas group entity of the taxpayer, which was constantly at the disposal. This was evidenced by the specific chambers/rooms and staff allotted to the GE group for their work. It was held that continuous usage of the premises is sufficient to prove that the said premises have satisfied “at the disposal” test. Lastly, the premises was prominently involved in the finalization of contracts or had a major role in finalizing commercial terms, thus, indicating that the overseas GE group entities carried on business in India through its LO in India.

Indian subsidiary – Dependent Agent PE (DAPE) of GE Group Entities

Delhi HC upheld the tax tribunal’s view that an agent is not required to conclude every single element of a customer contract, and if the same is not auxiliary in nature then such agent can constitute DAPE in India. Furthermore, the Indian subsidiary is performing significant activities for GE’s group entities only. Thus, the HC opined that an agent of a foreign company is an agent of dependent status even if there is more than one company in the related group. Thus, GE India constitutes DAPE of GE Group Entities in India.

This decision highlights the importance of documentation, roles and functions carried out by the Indian entity/LO. This clearly shows that the transfer pricing documentation should be prepared with utmost clarity and sincerity and not be treated merely as a compliance activity.

This decision will have a far-reaching impact on the MNC’s operating in India as it gives an insight into the Indian Revenue Authorities’ approach while examining the documents and the internal business structures.

Thus, the MNCs operating in India, especially, with LO or through expatriates/long-term deputation should have a re-look at the functions performed in India by the LO/ subsidiary/expatriates in light of this decision. Furthermore, with the introduction of BEPS related measures, now all the activities performed by the LO would require meeting the preparatory and auxiliary test in order to mitigate PE risk.

Whether payments made to foreign LLPs by the taxpayer is covered under Independent Personal Services and hence would be taxable in the country of residence?


Delhi tax tribunal ruled that the professional fees payment by taxpayer (LLP engaged in providing international accountancy and advisory services) to overseas Grant Thornton LLPs for rendition of services to taxpayer’s foreign clients would not be taxable in India under Article 15 (Independent Personal Services) of the respective tax treaties and in the absence of fixed place of business in India, TDS u/s. 195 would not be applicable.

Furthermore, the tax tribunal rejected the stand of the tax officer that only individuals were covered by the beneficial provisions of Article 15 and hence, in the present case, the service recipients were LLPs, Article 15 was not applicable. Also, the tax tribunal observed that in the tax treaties with the USA, UK and France, it was mentioned in Article 15 itself that it is applicable to both, individuals and firm of individuals. Furthermore, in case of a tax treaty with the Netherlands, the term ‘resident’ means any person, including an individual, a company, any other body of persons and any other entity, which is treated as a taxable unit. Thus Article on ‘Independent Personal Services’ is definitely applicable on income derived by a partnership firm or an LLP.

This decision brings a sign of relief for the corporate taxpayers (including LLPs) since whether the Article on “Independent Personal Services” is available for all entities has been a litigation subject for a long time.

Though this decision brings about some relief to taxpayers other than individuals, it is still not free from doubts since the wordings of the Article pertaining to Independent Personal Services use the terms “residents” and “he” or “she” simultaneously.

Hence, taxpayers need to be mindful of this decision as the Indian Tax Authorities may still claim that the terms “he” or “she” generally mean individuals and therefore LLPs or other corporate entities may not be covered.

Whether Service-tax/R&D cess borne by the service recipients in India would be taxable in the hands of nonresidents?


Mumbai tax tribunal ruled that the element of Service Tax and R&D cess, which was collected, paid and borne by the India entities cannot be treated as income in the hands of the taxpayer.

The tax tribunal rejected the tax officer’s stand that since royalty is taxable on a gross basis in terms of Article 12 of the Indo-USA tax treaty, the taxpayer cannot claim a deduction from gross royalty towards service tax & other levies given that it was taxpayer’s responsibility to pay such levies to the government. In doing so, the tax tribunal referred to ‘reverse charge mechanism’ under the Service Tax Act and also referred to the R&D Cess Act provisions, whereby the liability to pay Service-tax and R&D cess was on the Indian concerns. Thus, considering the statutory as well as the contractual framework of royalty agreements, the tax tribunal held that royalty was taxable without including the amount of Service-tax and R&D Cess.

Service Tax and R&D cess are indirect taxes, which are collected from the service recipient and paid to the Exchequer by the service provider who acts as an agent for the purpose of indirect taxes.

The decision by the Mumbai Tax Tribunal is a welcome decision since it stresses upon the fact that a portion of statutory and regulatory taxes borne by the Indian entities cannot be taxed as income in the hands of the nonresident counterparts although treaty benefit has been availed to that extent.

Transfer Pricing

Issue Ruling SKP Comments
Whether high customs duty paid on excess imports made by the taxpayer vis-à-vis comparable companies qualifies for an adjustment?
ITAT rejects exclusion of import duty from purchase price on following grounds :

Duties paid on imports forms a fundamental part of the cost of material purchased. As a result, in the normal business practice, no independent enterprise would agree for a purchase price without taking into account the duty structure or carriage cost.

Even in the case of comparable companies, the rates of excise duty and sales tax paid on inputs, vary as per the nature of the imports. Moreover, the sourcing of raw materials would not affect net margins as the same would be taken care of by the pricing of goods.

Sourcing of goods from a local or a foreign market is the choice of the taxpayer and such minor differences shall not affect the profits except in case of special circumstances highlighted in Skoda Auto India Pvt. Ltd. vs ACIT- 2009-TIOL-214-ITAT, Pune in which; import of material was mandatory for the taxpayer in its’ initial years of operation.

In addition to this, exclusion thereof from the purchase price would create the distortion in the price of tested party and will decrease the comparability.

Accordingly, ITAT rejects assesse’ s plea to provide adjustment on account of high import duty.

Due to the globalized nature of the Indian economy, Customs duty paid on imports cannot be a reason for an adjustment except in special circumstances; wherein the taxpayer does not have the choice of sourcing of materials.
Whether advances routed through AE paid to third party comes under the purview of international transaction?

The advances were routed through the AE by the taxpayer due to commercial considerations for the purpose of acquisition of distributorship. It was not a case of financing or lending or advancing of any money. Accordingly, advances were not given for the AE but for third parties (i.e. routed through the AE). As the AE did not retain the advance for a significant period, it did not give rise to an international transaction.

Mere routing of transaction via AE does not give rise to an international transaction. Diversion of income from the taxpayer to its AE plays an important role in the determination of the attraction of the Section 92B.

Indirect Tax

Issue Ruling SKP Comments

Question 1

Whether essential activities in relation to transmission and distribution of electricity, which were not taxable in the pre-negative list regime under service tax, can now be made taxable under GST by merely issuing a circular?

Question 2

Whether composite supply under GST would cover the cases of composite supply wherein exemption from GST had been granted in respect of principal supply?

Facts of the case

  • In the pre-negative list regime under service tax, transmission and distribution of electricity were exempted through notification.
  • The Government of India through a circular clarified that the supply of electricity meters for hire to the consumers was an essential activity having a direct and close nexus with the transmission and distribution of electricity, and therefore covered by the above exemption.
  • In the negative list regime under service tax, transmission and distribution were in the negative list of services and hence was not taxable.
  • Under GST, similar to the pre-negative list regime, the transmission and distribution of electricity are exempt through notification.
  • Furthermore, the government vide Circular No. 34/8/2018-GST dated 1 March 2018 (impugned circular) clarified that charges, such as application fee, meter rent, testing fee, etc., collected by electricity companies are taxable under GST.

Applicant’s contentions

  • The said charges are towards services, which are mandatory to provide as per the sections 42 and 43 of the Electricity Act
  • As per exemption notification and circulars issued these services were not taxable under service tax.
  • Now, even if the government intends to revoke such an exemption, it has to be done prospectively by a notification and not by a clarificatory circular.
  • By the virtue of section 173 read with section 174(2) (c) of the CGST Act, all privileges and rights under the service tax law were to continue and therefore, what was covered by a notification could not be withdrawn by a circular.
  • Alternatively, the said services should be treated as naturally bundled with the principal supply of transmission and distribution and therefore, taxable as a composite supply, at the rate of tax applicable to the principal supply, i.e., exempt from tax.


The High Court observed that:

  • The government for the entire duration of the negative list regime had proceeded on the basis that these services were included in the transmission and distribution of electricity and therefore no demand was raised till date by the department.
  • By issuing a clarificatory circular, the government had sought to give a different interpretation of the very same services as against the clarification issued for the pre-negative list regime.
  • Thus, the impugned circular to the extent it makes the said services taxable under GST is ultra vires the GST law and is struck down.

Question 2

  • The government contended that in the present case, since the principal supply is exempt from the levy of the tax, the provisions of composite supply would not be applicable.
  • The court opined that there was nothing in Section 8 (tax liability on composite supplies) of the CGST Act to read any such construction. Therefore, even if the end result is nil tax liability, the said services cannot be taken outside the purview of the composite supply.

The decision of the High Court is based on the principle of promissory estoppel whereby, the Court has prevented the government from taking a view contrary to the settled position under the service tax law. However, it may be open to the government to tax the said services by bringing in an appropriate amendment in the GST law.

Furthermore, though the subject of this case involves the electricity sector, this judgment would also have implications for businesses where the principal supply is exempt, and the GST law is silent on the treatment of ancillary supplies. The scope and extent of composite supplies thus remain to be tested in subsequent litigations.

Whether ITC is available for lease rent paid during the pre-operative period (i.e., the period till the construction is completed) for the leasehold land on which the resort is being constructed and treated as a capital expenditure?

The applicant stated that since the lease rent for pre-operative period was capitalized under the accounting head ‘Leasehold Land’ and not under ‘Building Block’, it could be inferred that such services received were not for construction of the immovable property, and there was no direct or indirect nexus between them.

The AAR ruled that for the applicant to enjoy uninterrupted right to use the land, it was required for the applicant to procure the impugned services. Thus, merely capitalizing the lease rent under a different heading is of little significance in the context. Hence, the AAR ruled that ITC was not available to the applicant for the lease rent paid during the preoperative period in this case when the same was capitalized.

In line with the precedents laid down by various AAR’s in the past, the current ruling is based on the substance of the transaction rather than the accounting treatment adopted by the taxpayer.
Whether the GST liability arises on the value of the building constructed under the GST regime and handed over to the landowner in terms of a Joint Development Agreement?

The applicant is engaged in supplying construction service of building to the landowner against the consideration of the transfer of development rights of such land.

The applicant intended to obtain clarity on the taxability of the said transaction under the GST law.

In this regard, the AAR held that the said transaction is squarely covered by para (b) of Notification No. 4/2018-Central Tax (Rate) dated 25 January 2018, and hence the applicant is liable to pay GST for the service provided to the landowner. Furthermore, the value of supply should be determined in accordance with para 2 of the Notification No. 11/2017-Central Tax (Rate) dated 28 June 2017.

Furthermore, the AAR also held that in accordance with Section 142(11) of the CGST Act, 2017 the applicant has to pay service tax/GST proportionate to the services provided before/after the introduction of the GST regime.

In a growing trend under the GST regime, the applicants have been filing advance ruling applications to gain more clarity on issues involving disputes between the parties to the transactions. Furthermore, clarity on the issue of taxability of the transfer of development rights should also give a boost to the infrastructure sector since it is a common development model adopted by builders and landowners.

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 above-mentioned Advance Rulings provide clarity about the issues being faced and have persuasive value in matters before the tax authorities