From The Judiciary

Whether payments made to Cricket Control Boards/Associations of the different Member countries of ICC from foreign bank account liable to withholding tax in India?

PILCOM vs CIT West Bengal-VII
[Supreme Court of India (SC) – Civil Appellate Jurisdiction – Civil Appeal No. 5749 of 2012]

Background

PILCOM (PAK-INDO-LANKA, JOINT MANAGEMENT COMMITTEE) is a committee formed by the Cricket Control Boards/Associations of three countries viz. Pakistan, India and Sri Lanka, for the purpose of conducting the World Cup Cricket tournament for the year 1996 in these three countries. Basis the competitive bids, these three nations were selected in the meeting of the International Cricket Council (ICC) to have the privilege of jointly hosting the 1996 World Cup Cricket Tournament.

PILCOM had opened two bank accounts in London operated jointly by the Indian and Pakistani representatives. It was required to pay varying amounts to the Cricket Control Boards/Associations of different countries as well as to ICC in connection with conducting the preliminary phases of the tournament and also for the purpose of promotion of the game in their respective countries. The payments made represented the following categories:

1. Payment for disbursement of prize money;
2. Payment to ICC;
3. Payment for ICC Trophy;
4. Guarantee money paid to 17 countries which did not participate in the World Cup matches;
5. Guarantee money paid to countries who did not play any match in India;
6. Guarantee money paid to countries with whom DTAA exist;
7. Guarantee money paid to other participating countries.

The revenue’s contention was that PILCOM has failed to deduct taxes under section 194E.

After taking into consideration, the contentions of both the parties and the tribunal, the High Court held the following:

• The payment for disbursement of price appears to be mere reimbursement of cost and accordingly shall not be subject to any tax.
• For payments under points ii to v, it cannot be held that the cricket associations of these countries earned money through any Source of income in India and hence cannot be subjected to tax.
• Unlike section 195, section 194E nowhere mentions if the income is chargeable to tax or not. Thus, for payments under point vi and vii, it was held that such payment shall be subject to tax in India under section 115BBA r.w.s 9(1)(1), but only to the proportion of matches played in India.

Aggrieved by order of the High Court, the taxpayer filed an SLP with the Supreme Court

Held

The Supreme Court has upheld the order of the High Court. Further, despite not being the ground of appeal, the High court and the Supreme Court has provided for the following interpretation of section 194E:

Sec 194E is not affected by the DTAA since such a deduction is not the final payment of tax, nor can it be said to be an assessment of tax. Thus, irrespective of the existence of DTAA, the obligation under Section 195E has to be discharged once the income accrues under Section 115BBA.

Further, the advantage of the DTAA can be pleaded and taken by the real taxpayer on whose account the deduction is made, not by the payer.In case the eligibility to tax is disputed by the assessee on whose account the deduction is made, the benefit of DTAA can be pleaded, and if the case is made out, the amount in question will always be refunded with interest. But, that by itself, cannot absolve the liability under Section 194E of the Act.

Our Comments

Though the discussion of the applicability of section 194E is casespecific, the High court and the Supreme Court has provided a unique interpretational dimension to the provision.

The judicial precedent has indeed opened gates for numerous questions such as:

• Where the act provides for specific withholding tax provisions for certain income of non-residents like 194E, 196D, etc., whether the beneficial rate of DTAA can be applied? If not, can it be said that the government would collect the taxes more than bilateral DTAA?
• Is it only for the payee to dispute such deduction of tax and not for the payer to raise this contention by relying on DTAA?

Whether services provided to non-pool members are eligible for the benefit of Article 8 under India France DTAA?

Air France Vs. Addl. CIT
I.T.A. No. 5008/DEL/2011 (A.Y 2004-05) AND I.T.A. No. 5009/ Del/2011(A. Y 2005-06)

Background

The taxpayer is a foreign company, engaged in the operation of aircraft in international traffic.

It is a tax resident of France and is liable for taxation in France. It is a member of the International Airline Technical Pool (IATP). It has incorporated a branch office in India.

During the year under consideration, the taxpayer had serviced only one airline, i.e., Iberworld, who was not a member airline but was of the status of a guest airline covered under the IATP pool. The taxpayer filed a nil return claiming the entire income earned by the assessee in India is exempt pursuant to section 90 read with Article 8 of India France DTAA.

Disregarding the taxpayer’s contention, the revenue contended that the benefit of Article 8 cannot be extended to non- IATP members and accordingly should be taxable in India as Fees for Technical Service (FTS). Also, given that the Indian branch of the company constitutes a Permanent Establishment in India, the income derived from permanent establishment should be taxable in India.

Aggrieved by the order, the assessee file an appeal with the ITAT.

Held

Considering the contentions of both the parties, the Delhi tribunal held the following:

• There are no specific services referred to between the head office and the branch office. The entire receipts collected by the branch office are remitted to the head office after meeting the local expenditure, and the said receipts of the branch office are from the public at large and not from the rendering of services to the head office. Thus, the assessee company does not have a Permanent establishment in India
• Further, Annexure A of the IATP manual evidently provides that there is no bar on member airlines to provide service to non-IATP Pool members and, in fact, even if non-IATP Pool members take such service from a pool, it would be considered as a pool service to them. Article 8(2) specifically mentions that the DTAA will apply to the profits derived by an enterprise of a Contracting State from the operation of aircraft in international traffic from the participation in a pool, a joint business or an international operating agency and shall be taxable only in that Contracting States. Thus, even though under domestic law the assessee has to pay tax in India while deriving income from Indian territory, yet because of Article 8(2) of the DTAA agreement, Air France is exempted from paying any tax in India as its services/ activities, and profit thereof derives from pool participation.

The tribunal has grossly relied on jurisdictional HC decision in the case of Lufthansa German Airlines.

Our Comments

There were few decisions earlier that have accepted the principle that if the taxpayer is principally in the business of Airlines/Shipping, then the income from the pooling arrangement would be considered as a part of the income from Shipping /Airline business. In this decision, the court has accepted that even if the income is from servicing non-pooling partners, but the principal business of the taxpayer is of Airline/ Shipping the benefit of Article 8 of DTAA shall be available to the taxpayer.

Whether comparable must be selected basis the quantitative filters (without analyzing functional characteristics)?

Open Solutions Software Services Pvt Ltd – ITA No.201/DEL/2018

Ruling

The taxpayer is engaged in the business of development of computer software and related services to its AE.

The taxpayer has benchmarked the aforesaid transaction using the Transactional Net Margin Method (TNMM).

TPO rejected the transfer pricing analysis of the taxpayer and introduced new filter criteria to identify comparable companies. The new comparable companies introduced were viz., Wipro Technology Services Ltd, Infosys Ltd, Persistent Systems and Thirdware Solution Ltd. The Dispute Resolution Panel (DRP) affirmed this action of TPO.

However, ITAT deleted the TP adjustment on the ground that comparables introduced by TPO are not functionally similar.

High Court dismissed revenue’s appeal on following grounds:

• If distinguishing functional factors are substantial, it cannot be ignored while selecting the comparable.
• Comparables cannot be picked on the basis of broad classification under various heads, and that the actual functional profile of the comparable must be similar.

Our Comments

High Court has re-emphasized the importance of functional similarity while selecting comparable companies. While the application of filters merely narrows down the search, the functional profile cannot be ignored to select the comparables.

Could Royalty payments to an Associated Enterprise (AE) be justified for an entity having losses at the operational plant/facility level?

Asahi India Glass Limited – ITA No.2501/DEL/2014 – AY 2008-09

Ruling

The taxpayer is engaged in two manufacturing segments viz., automotive glass (comprising of auto and architectural glass) and float glass. The taxpayer has entered into transactions with its AE viz., purchase of raw material, stores and spare parts, capital goods, payment of royalty for technical know-how, payment for technical services, receipt of commission income. For the purpose of benchmarking, the taxpayer followed an aggregated approach and adopted TNMM at the entity level.

During the course of assessment proceedings, TPO analyzed segmental results of both plant/facility separately. While TPO agreed that the benefit of know-how had been passed on to one plant, it denied the benefit to another plant on account of segmental operating losses. Thus, TPO determined the arm’s length price of royalty at Nil by concluding that no economic benefit has been passed on to this plant and made TP addition.

The Commissioner of Income-tax (Appeals) [CIT(A)] observed that the brand and associated technology are quintessential for continued existence. Thus, CIT(A) deleted the TP addition.

Income Tax Appellate Tribunal (ITAT) ruled in favor of the taxpayer on the following grounds:

• It was observed that royalty paid by the taxpayer amounted to only 1.71% of sales.
• Turnover depicted an increasing trend from the year 2005 to 2008.
• The Tax authority has accepted royalty transactions in earlier years.
• Relying on Delhi High Court ruling in EKL Appliances Ltd, it is held that once it is established that knowhow and technical information was provided, payment of royalty cannot be challenged on the basis of profitability or earnings of the taxpayer.

Our Comments

Time and again, the tax authorities have alleged that benefit test is required to be demonstrated by the taxpayer while justifying payment for royalty. On the other hand, courts in India in most of the cases have held that availing of such service is a commercial/business decision of the taxpayers, which cannot be questioned. Additionally, profitability/ earning is not a parameter to conclude whether any benefit is derived or not from the use of intangible.

Whether the aggregation approach should be adopted for benchmarking transaction of maintenance services and software license distribution activity?

M/s Parametrics Technology Private Limited - ITA No.359(Bang)/2016 – AY 2011-12

Ruling

The taxpayer has entered into following transactions with its AE: (1) purchase of software licenses for resale in India; and (2) payment of maintenance services to AE.

For the purpose of benchmarking, the taxpayer has aggregated both these transactions and adopted TNMM.

During the course of transfer pricing proceedings, while the TPO accepted the TNMM for purchase of software license transaction, he re-characterized maintenance service as technical services.

TPO upheld that revenue from maintenance services should be allocated between the taxpayer and AE in the ratio of 90:10. Thus, TPO determined arm’s length price of this service as only 10% (as against 40% paid by the taxpayer) and made TP addition. The DRP upheld the TPO’s view and proposed to use Profit Split Method PSM instead of TNMM.

Income Tax Appellate Tribunal (ITAT) held as under:

• ITAT observed that the taxpayer is a distributor of software licenses and, thus, agreed that core technical problems could only be resolved by AE (and not the taxpayer).
• ITAT also agreed that unless proper and appropriate maintenance services are provided to its customers, it would be difficult for the taxpayer to market the software licenses. Accordingly, ITAT held that maintenance service is inter-linked with distribution activity.
• It was also observed that the pricing policy, as well as the benchmarking approach adopted by the taxpayer, was accepted by TPO in preceding years.

Hence, the appeal of the taxpayer is allowed.

Our Comments

This ruling has re-emphasized the importance of demonstrating the inter-linking of transactions in order to adopt the aggregation principle. This ruling would also be helpful to taxpayers engaged in the software distributor industry where they often make payment for maintenance service in addition to software.

Whether drawings and specifications pertaining to post-importation activities can be automatically added to the transaction value of imported machinery for computation of Customs duty?

[Background: As per Rule 9(1) (e) of Customs Import Valuations Rules, 1988 corresponding to Rule 10(1)(e) of Customs Import Valuations Rules, 2007 provide that all payments made as a ‘condition of sale’ of imported goods are to be added while determining the transaction value.]

Commissioner of Customs (Port), Kolkata versus Steel Authority of India Limited - Hon’ble Supreme Court of India [2020 (4) TMI 774]

Company’s contentions

• The payments related to drawings, designs, etc. were not pertaining to the imported goods but were made in connection with modernization, expansion, and modification of the Indian plant.
• Thus, these payments pertain to post-importation activities.
• Further, the Company submitted that it was not a condition for them to take design and engineering (relating to such post importation activities) from the supplier only.
• Therefore, the said payments cannot be included in the assessable value for Customs duty.

Based on the above contentions, the Supreme Court, while ruling in favor of the Company/Respondent held as follows:

• An importer of equipment of a plant could always choose to obtain drawings and designs for undertaking post importation activities from an overseas consortium supplying such equipment.
• This may confer on such arrangement attributes of a turnkey contract, but that fact by itself would not automatically attract the ‘condition’ clause contained in the Valuation Rules.
• The Revenue sought to emphasize their case on the basis that as it was a turnkey project, importation of equipment’s and post-importation project implementation exercise were mutually dependent.
• In our opinion, reading such implied condition into the contracts would be impermissible in the absence of any other material to demonstrate subsistence of such conditions.

Our Comments

In recent years, many companies have started setting up their manufacturing plants in India, which usually involve the import of foreign machinery and technical expertise. It is the Revenue’s tendency to include all payments in relation to such projects in the assessable value of imported machinery for computation of Customs duty.

This Supreme Court judgment, although based heavily on the facts of the given case, provides important guidance on the limitations imposed by the Customs Valuations Rules, including certain payments in relation to post-importation activities in determining the assessable value of imported goods.

Whether the sale of online publications such as digital law journals qualify as ‘e-books’ on which GST is chargeable at the reduced rate of 5%?

Venbakkam Commandur Janardhan - Authority for Advance Ruling (AAR), Tamil Nadu

Facts

• The digital law journals are electronic versions of printed law journals sold by the applicant.
• The digital version consists of a DVD and a dongle. The subscription is valid for 1 year, and the updates are provided weekly when the user connects to the internet.
• The renewal is charged separately after one year without needing any more supply of DVDs etc.
• There is also an online version available through a website that can be accessed through user id and password.

In view of the above facts, while answering the question in negative, the AAR ruled as follows:

• The software is updated with new content, updates of cases when connected to the internet. Thus, it is seen that the DVD in effect contains software that requires an End User License Agreement to be accepted by the user.
• The DVD is not an electronic version of the print journals. If it was an electronic version of the print journals, the DVD would have machine readable files in any format such as .doc, .txt, .pdf or any other readable files and not the executable file (setup application) which it has.
• In the case at hand, the supply involves access to an online database hosted on the website of the applicant.
• Thus, it is evident that the above are not ‘e-books’ but the supply of access to an online database textbased information.

Our Comments

In the current scenario, when the technology is developing at a rapid pace, there are occasions when the applicability of the GST law to a technological innovation is unclear, such as the present case. Therefore, the AAR relied on the facts of the case to determine the applicability of the definition of ‘e-books’ to the product being sold by the applicant.