Stay Safe. Stay Healthy.

Direct Tax

A payment made to a non-resident celebrity for appearance in an event held outside India for promoting business in India, whether taxable in India?

Where the specific provision for taxability of an entertainer under section 115 BBA fails, whether the income falls outside the ambit of taxability?

M/s. Volkswagen Finance Pvt Ltd [ITA No. 2195/Mum/2017]


The taxpayer, an Indian Company, organized an event at Dubai for the launch of its new model of car exclusively for the Indian Market. Around 150 people, mostly prospective Indian customers and journalists were flown to Dubai for their participation in the event. The taxpayer charged the expense of the event in its books of accounts.

Consideration was paid to an Oscar-winning celebrity for making an appearance at the event. The Indian company had full rights to use “free, non-exclusive’ promotional usage of all the event footage/ material/ films/ stills/ interviews, etc.” of the above-mentioned launch.

The taxpayer did not withhold any taxes on payments made to celebrity for an appearance on the grounds that the event was not held in India, and hence the income did not accrue or arise in India.

Further, the taxpayer also contended that the specific provision pertaining to the taxability of the entertainer clearly states that income earned should be from a performance in India. Given that the event in the current case was held in Dubai, the income falls outside the ambit of taxation in India.


Dismissing the plea of the taxpayer, the Mumbai Tax Tribunal held that the first limb of section 5(2)(b), i.e. “accrues or arise” has to be read with section 9(1)(i) which extends the scope of income accruing or arising in India by including, in the deeming fiction. It provides for taxability of income which, directly or indirectly, accrues or arises to a non-resident, through or from any business connection in India, is also chargeable to tax in India. The expression "through“ includes ‘by means of,’ ‘in consequence of’ or ‘by reason of.’

The Tax Tribunal held that the payment made by the taxpayer was for ‘’below the line publicity” incurred wholly and exclusively for the business of taxpayer in India. Thus, there was an established business connection between the event held in Dubai and the taxpayer’s business in India. As a corollary thereto, it was held that the income from an appearance in the event, the non-resident has an intangible business connection in India.

Further, Mumbai Tax Tribunal held that specific provisions for entertainers only deal with the mode and rate of tax in the hands of a non-resident. The modality of taxation cannot be treated as restrictions on chargeability to tax under section 5(2)(b) r.w. section 9.

Our Comments

This is an interesting ruling as it discusses the concept of intangible business connection.

The tax tribunal has taken a compelling argument, and now it appears more and more revenue authorities would travel beyond the conventional concepts to get people under the tax net.

Its time that corporates look at their tax position very carefully and thoroughly evaluate the risks before taking any aggressive tax positions.

Whether the deeming fiction of Explanation 5 to section 9 can be stretched beyond comprehension for treating a foreign company as a resident in India?

Can unilateral amendments, either made retrospective or prospective, to the provisions in the domestic laws, be read into and override the provisions of DTAA?

M/s. Sofina S.A. vs ACIT [ITA No.7241/Mum/2018]


The taxpayer is a Belgium based Venture Capital Investor, listed on Euronext, who has invested across 9 countries. The company holds a stake of 11.34% in Accelyst Pte Ltd, a tax resident of Singapore (hereinafter referred to as ‘The Singaporean Company’). The Singaporean company had no other assets apart from its investments in Accelyst Solutions Pvt. Ltd, India (hereinafter referred to as the Indian Company).

During the year under consideration, the taxpayer sold its entire stake in the Singaporean company. Since the Singaporean company substantially derived its value from India, the shares sold by the taxpayer were deemed to be situated in India as per Explanation 5 of section 9 and Article 13(5) of the India Belgium tax treaty (indirect transfer provisions). The tax officer went a step further and held that the transfer should be considered as a transfer of capital stock of a company resident in India.

Further, the tax officer also extended the see-through approach to Article 13(4) of India Belgium Tax Treaty to para 5 of article 13.


Considering the claim of the revenue to be fallacious, the Mumbai Tax Tribunal held that explanation 5 of section 9 was made available by the legislature to create a deeming fiction for the purpose of taxation of capital gains under the IT Act. It cannot be extended to determine the residential status of the company. Further, in the absence of any corresponding amendment in the tax treaty, the unilateral amendment of explanation 5 of section 9 cannot be read into the India Belgium tax treaty.

Further, where the India Belgium treaty includes a see-through provision in paragraph 4 of Article 5, the same cannot be extended to paragraph 5 of the article unless specifically provided.

Our Comments

The decision of the Mumbai Tax Tribunal once again clarifies that amendments under the Act cannot be unilaterally applied to the Tax Treaty. It also approves the availability of Tax Treaty benefits in case of indirect transfer cases.

Whether AAR ruling, which is not absolute and unqualified, is binding the revenue authorities?

Whether deputation of experienced and knowledgeable employees to another country makes available technical knowledge?

Whether fees for included services from a permanent establishment need to be offered to tax on a net basis or gross basis

M/s. General Motors Overseas Corporation [ITA NO. 1282/MUM/2009]


The taxpayer is a company incorporated in the USA, engaged in the business of providing management and consulting services to the group entities worldwide. The taxpayer had entered into a Management Provision Agreement (‘MPA’) with an Indian company (one of its group companies) to provide executive personnel in connection with the development of various operating activities to the Indian company. During the year, the President, the Managing Director and the Vice president (Manufacturing) of the taxpayer were deputed to India to render such service.

During the year under consideration, the taxpayer had obtained an advance ruling from the AAR for taxability of the amount received from its India affiliate as reimbursement of the salary of deputed employees. However, AAR passed an unqualified opinion in the absence of information about the actual services rendered by the employees. Power was given to the authorities to examine the actual conduct of the parties.

Further, given that the taxpayer constituted a Permanent Establishment (PE) in India, it had offered the net income to tax in light of Article 7.


Taking on record the material produced by both the parties, the tribunal held that where the ruling of AAR was not absolute and unqualified and where the power was given by the AAR to the authority to examine the actual conduct, the revenue has not erred in passing an order different from AAR ruling

Further, with respect to reimbursement of salary cost, the tribunal has held that the experience of an expert lies in the mind of an expert. If such an expert having knowledge and expertise is transferred from one tax jurisdiction to another tax jurisdiction, then it cannot be said that only the employees were per se transferred and not the technology. Since the deputed employee would implement the standards of the taxpayer in India, such technology will be considered as made available. Thus, the reimbursement of the salary shall qualify as Fees for Included Service.

As a corollary, the tribunal rejected the contention of the taxpayer of taxing the reimbursement income on a net basis. It was provided that in the case where foreign company constitutes PE, the income shall be taxed on a net basis subject to limitations provided under the domestic taxation law. Thus, according to section 44D of the Act, the taxpayer was not entitled to any deduction for the purpose of computing income by way of fees for technical services.

Our Comments

The debate on the taxability of reimbursement of salaries on deputation arrangement has been ongoing. It's crucial for the company to draft a deputation agreement as well as the modalities of arrangement appropriately from a tax perspective in order to avoid any tax risks.

Transfer Pricing

Whether aggregation of loans from two entities holds true for determining AE relationship u/s 92A(2)(c)?

Soveresign Safeship Management Pvt Ltd - ITA No.2070/Mum/2016


The taxpayer is engaged in providing ship management and consultancy services. For AY 2011-12, it had reported international transactions in the form of advances received in the course of business from two group companies by considering these entities as Associated Enterprises (AE).

TPO also considered the two group entities as AEs u/s 92A(2)(m), i.e., there exists a relationship of mutual interest between the taxpayer and the two group entities.

At the DRP level, it was held that the taxpayer did not render any services to the concerned AEs, and hence the advances received by the taxpayer should be treated as loans taken from the AEs. It was also observed that since the aggregate of the loans availed from the two entities amounted to more than 51% of the assets of the taxpayer, they were AEs of the taxpayer u/s 92A(2)(c).

In the appeal before Mumbai Tribunal, the following observations were noted:

  • As per sec 92A(2)(c), each enterprise should advance a loan of more than 51% of the assets to constitute itself as an AE.
  • A part of the advances received by the taxpayer from the AE was in connection with rendering ship management and consultancy services and hence could not be treated as a loan received.
  • In view of the above facts, both the group companies would not be treated as AEs since the loans from the individual entities did not satisfy the condition specified in sec 92(A)(2)(c).
  • Also, rejecting the Revenue’s argument that the taxpayer had reported them to be AEs in Form 3CEB, ITAT specified that the facts in the financial statements and the unambiguous meaning of AEs overrides the transactions reported by the taxpayer.

In conclusion, Tribunal held that the mentioned two companies are not AEs of the taxpayer, and hence no adjustment to arm’s length price in respect of the transactions undertaken needs to be carried out.

Our Comments

There are significant differences in the decisions of the appellate forums, but the interpretation of the law in its original form holds true in any situation.

This decision re-confirms the fact that for determining the AE relationship, section 92A(1) cannot be applied on a standalone basis and needs to read in conjunction with section 92A(2).

This decision also supports the taxpayer in a scenario whereby the transactions have been reported in Form 3CEB as undertaken with related parties, the same can be challenged by the taxpayer if it is proven to be an inadvertent mistake in interpreting the law.

Whether it is appropriate to change the comparables with the change in the method of determining ALP?

MTU India Private Limited - ITA No.1744/PUN/2019


The taxpayer was engaged in the marketing and distribution of diesel engines and spare parts, including overhauling and repairing diesel engines and earned commission income on the sale of spare parts, associated equipment, and engines of overseas MTU entities to customers in India. The taxpayer had aggregated the different segments, namely indenting, trading and services, while benchmarking the transactions and had used TNMM as the most appropriate method.

In AY 2015-16, TPO proposed TP adjustments due to the following primary concerns:

  • Aggregation of transactions in indenting, trading, and service segments.
  • An appropriate method for benchmarking the engine sale and after-sale service segments.

TPO did not approve the aggregation of the different business segments and proposed a TP adjustment post bifurcation of the segments. TPO allocated the costs to three segments on the basis of ad-hoc keys of allocation.

On segregation of the above transactions, the taxpayer requested to apply RPM for the segment of trading of spare parts. However, TPO preferred TNMM citing unavailability of ‘same or nearly similar’ comparable companies and holding that TNMM accepts broader similarity. DRP also agreed with the TPO and preferred TNMM over RPM.

When the taxpayer appealed to the Tribunal, it observed the following points:

Segregation of Indenting, Trading, and Service segments:

Tribunal found that the taxpayer’s activity of indenting meant securing orders from Indian customers for the diesel engines supplied by its parent company, i.e., a pre-sale activity. Trading and Service segments were after-sale activities as they were related to the trading of spare parts and servicing of the diesel engines.

Referring to the definition of ‘Transaction’ provided by Sec 92F(v) and Rule 10A(d), Tribunal opined that since the risks and rewards of all the three segments had no relation with each, they cannot be deemed as ‘closely linked transactions.’

Hence Tribunal upheld the decision of the TPO and DRP of segregating the three segments of Indenting, Trading, and Services for the purpose of benchmarking.

Most Appropriate Method of benchmarking for the Trading segment:

Tribunal relied on Rule 10B(1)(b) and opined that RPM is specifically meant for purchasing the goods and selling the same as such. Also, it confirmed that the comparables have to be selected on the basis of similarity in business operations irrespective of the method applied for benchmarking.

Thus, it concluded that the TPO was not just in applying TNMM with functionally dissimilar companies and redirected the TPO to determine ALP under RPM.

Transfer Pricing Adjustment:

Tribunal also condemned the TPO’s act of allocating the costs to the different segments on an ad-hoc basis and directed to undertake the allocation on some logical or reasonable keys.

The taxpayer had also appealed for the TP adjustment made in the trading segment for non-AE transactions. Relying on some judicial precedents, ITAT directed to restrict the TP adjustment to the transactions with the AE in the trading segment.

Our Comments

This case emphasizes on clarifying the ambiguities while interpreting aggregating transactions for benchmarking. Further, it stresses on the fact that once comparable companies are found to be fit, the same cannot vary with respect to change in the method applied.

Can the TPO determine the ALP without using any of the methods specified u/s 92C?

Anheuser Busch InBev India Ltd - ITA no.1205/Mum./2016


The taxpayer is engaged in the business of brewing, packaging, distribution, marketing, and selling of beer. The taxpayer was incorporated from various business acquisitions done by the group in India. After the process of acquisitions was completed in India, the taxpayer had entered into a Technology Transfer Agreement(TTA) with the holding company of the group for obtaining technical know-how and support in the initial years of business set up in India. With the progress in time, the taxpayer upgraded its facilities in the business strategy, and the need for technical support from the holding company ceased, resulting in the termination of the TTA.

Consequently, the taxpayer entered into another General Service Agreement (GSA) with the group for obtaining various business services on a centralized basis, consistent with the standard practice adopted by the group for other countries.

During AY 2011-12, the taxpayer paid an amount of INR 26.22 crores to its AE for the services mentioned in the GSA. When the case was referred to the TPO, the taxpayer submitted the calculations in the form of an auditor certified cost base for the charges paid, which was allocated to the different entities on a reasonable basis like time spent, headcount, etc. In the submitted documents, AE was considered as the tested party, and this cost base was found to be at ALP using TNMM.

To justify the arm’s length of the payment made towards intragroup services, the taxpayer had submitted copies of email correspondences, group presentations, cost center reports, margin variance analysis, etc. with the AO. However, the AO was not convinced by the supporting documents provided by the taxpayer.

Further, TPO also observed that some evidence provided by the AE did not have clarity on the value, cost, or benefit of the services provided by the AE. Hence TPO determined the ALP of the services provided to be ‘NIL’ and made an adjustment of INR 26.22 crores without applying any specified method mandated by law. DRP also upheld the findings of the TPO.

At the Tribunal level, the following observations were made:

  • The taxpayer had submitted voluminous documents to show the actual rendition and benefit of the services received.
  • An economic analysis was also provided by the taxpayer in the TP Study, which proved the transaction to be at arm’s length using TNMM.
  • In light of the above points, the Tribunal opined that the TPO had not accepted the economic analysis of the taxpayer and not performed any independent benchmarking as mandated by sec 92C and rule 10B after rejecting the analysis under TNMM.
  • Further Tribunal also observed that the taxpayer’s AE had approached the AAR for issues involved in the above-mentioned services. AAR observed that AE was providing specialized services to fulfill the exclusive needs of the Indian companies for the manufacture of beer under its brand name and not offering a standard service for general use.
  • AAR further observed that AE had provided such service through human intervention by training the personnel of Indian Companies through various programs, models and by allowing online access to secret information. Thus, stating that the services were not merely managerial but also technical in nature.
  • In its ruling on 6 June 2018, AAR concluded that the amount paid for the services provided by the AE was ‘fees for technical services.’
  • Relying on the above ruling, Tribunal confirmed that the taxpayer had received and benefited from services rendered by the AE.
  • Thus it concluded that the determination of ALP as ‘NIL’ had no legal sanctity and hence, cannot be sustained. The TP adjustment was, therefore, deleted.
  • Relying on precedents, Tribunal also highlighted the fact that the taxpayer does not need to show that any legitimate expenditure incurred by it was also incurred out of necessity nor to show that any expenditure incurred by him for the purpose of any business conducted by him had actually resulted in profit or income either in the same year or in any of the subsequent years.

In conclusion, since the TPO did not determine the ALP by using one of the methods mandated by the law, the Tribunal rejected the adjustment proposed by the TPO.

Our Comments

This case highlights an important fact that AO/TPO cannot reject the ALP accepted by the taxpayer without substantiating the rejection by another price determined using the methods specified u/s 92C. Also, TPO has the powers to only determine the ALP of a particular transaction and cannot step into the shoes of the AO to either look into the commercial expediency or benefit derived.

Can Sec 92A(1) be applied on a standalone basis without considering the conditions provided in Sec 92A(2) to determine the AE relationship?

Kaybee Pvt Ltd - ITA No 2165/Mum/15

The taxpayer is an Indian company having an individual as a shareholder holding 99.9% shares in the company. During 2007-8, the taxpayer had entered into international transactions with a company wherein its majority shareholder was appointed as the director.

AO stated that both the companies were AEs u/s 92(A)(1)(b), i.e., in respect of which one or more persons participate, directly or indirectly, or through one or more intermediaries, in management control or capital of both the enterprises.

When appealed before the Mumbai Tribunal, it was observed that in case of the taxpayer for a previous year, a co-ordinate bench had relied on a previous judgment and treated the two entities as AEs on applying Sec 92(A)(1) on a standalone basis. Further, it was noted by the Tribunal that the amendment in the finance bill of 2002 was inadvertently missed by the Tribunal while delivering the previous judgment. The said amendment in the section clearly mentioned that for the purpose of applying subsection (1) of 92A, the conditions specified in subsection (2) should be satisfied. It also highlighted that mere participation by one enterprise in the management or control or capital of the other would not render them as AEs unless a criterion mentioned in subsection (2) of sec 92A is satisfied.

The Tribunal also placed reliance on the Gujarat High Court ruling of the case of Veer Gems. Subsequently, Revenue’s SLP dismissed by Supreme Court wherein it was held that there was no AE relationship between family-controlled entities if conduction mentioned in 92A(2) were not fulfilled.

On request of the revenue to refer the case to a larger bench, Tribunal stated that once a higher judicial forum has expressed its view on the matter, it would not be appropriate to carry out a parallel exercise here.

Thus, in conclusion, Tribunal opined that the two entities were not AEs since none of the conditions under section 92(A)(2) were getting satisfied and thus deleted the TP adjustment.

Our Comments

Understanding of the above case confirms the correct interpretation of law and rules out the ambiguity in terms of establishing AE relationship, especially family-owned companies. Further, it also states that the Tribunal can review the matter afresh even if there are judicial precedents available in the taxpayer’s case in case of any inadvertent mistakes/ misinterpretations are found in the precedents.

Indirect Tax

Whether identifying customers in India for a foreign supplier qualifies as ‘intermediary services’ under the GST law?

[Background: The place of supply in case of ‘intermediary services’ is the location of the supplier of services. Therefore, such services supplied by an Indian service provider become taxable to GST in India even if they otherwise fulfill the criteria to qualify as ‘export of services.’]

Fom Aluminium Machines Pvt. Ltd. - Authority for Advance Ruling (AAR), Karnataka [2020 (3) TMI 894]


The petitioner submitted as follows:

  • The applicant was engaged in the following activities:
    • Booking orders from Indian customers of its foreign parent company;
    • Promotion and developing sales of machinery produced by a third party supplier;
    • In both the above cases, the applicant received consideration in the form of a sales commission.

In view of the above, the AAR ruled as follows:

  • As per Section 2(13) of the IGST Act, “intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both, or securities on his own account.
  • In the above-mentioned case, the applicant acts as the agent to the foreign parent company as well as the third party supplier beyond doubt.
  • Therefore, the applicant’s services squarely fall under intermediary services.

Our Comments

In this case, the applicant was involved in identifying customers in India for foreign suppliers. The fact that the applicant’s consideration was in the form of sales commission further substantiated the fact that the applicant is acting as an ‘agent.’ Therefore, the AAR ruled that the applicant’s services fall squarely within the ambit of intermediary services.

Whether input tax credit (ITC) can be claimed in relation to inputs used in the construction of a warehouse in a case where such a warehouse is given on rent on which GST is payable?

[Background: In view of Section 17(5) of the CGST Act, ITC pertaining to goods or services received for construction of the immovable property is not eligible for set-off against the outward tax liability.]

Unity Traders - AAR, Madhya Pradesh [2020 (3) TMI 618]

Applicants contentions

  • It is liable to pay GST on the rent realized from renting the warehouse.
  • Section 17(5) provides for a situation where inputs are consumed in the construction of an immovable property which is meant and intended to be sold. This is because the sale of the immovable property post-issuance of completion certificate does not attract any levy of GST.
  • In the present situation, denial of ITC would be unjust and opposed to the basic rationale of the GST law.

The AAR in view of the facts of the case and the applicant’s contentions ruled as follows:

  • Section 17(5) is an exclusion in spite of the goods or services used in the course or for the furtherance of his business as per Section 16.
  • The said section is very clear, and there is no scope of any other interpretation.
  • Therefore, ITC is not admissible on the goods and services received for construction of the warehouse used for letting out on rent.

Our Comments

In a similar case [2019 (5) TMI 701], the Hon’ble High Court of Orissa read down Section 17(5)(d) to provide that ITC should be available to a person when he is engaged in providing the immovable property on rent. It is expected that the issue will remain litigation-prone until ruled upon by the Supreme Court.