Whether capital gains arising from the sale of units of mutual funds would be treated at par with that of shares and be taxable in India as per Article 13(4) of India–UAE Tax Treaty
Dy. CIT vs Sri. K. E. Faizal [TS-389-ITAT-
Taxpayer, a UAE resident individual, had sold units of equity-oriented mutual funds from which he derived short-term capital gains. He filed the tax return in India claiming that the said gains are taxable in UAE and not in India pursuant to Article 13(5) of India-UAE Tax Treaty. However, the tax officer treated the said units at par with shares and held the gains to be taxable in India pursuant to Article 13(4) of the tax treaty.
The tax tribunal observed that Article 13(4) of the tax treaty covers within its purview capital gains arising from the transfer of shares while Article 13(5) covers capital gains arising from any other property i.e., except shares. Hence, Article 13(4) cannot be applied to the sale of units unless the same qualifies as shares for the purpose of the tax treaty.
Further, the tax tribunal observed from the term securities under the Securities Contract (Regulation) Act that “securities” include shares and units of a mutual fund. This implies that shares and units are distinct and cannot be considered at par. Hence, capital gains arising from the sale of units would not be taxable in India as per Article 13(5) of the tax treaty.
Post introduction of long-term Capital Gains Tax in India, it is imperative for the taxpayers to examine the tax treaties for other asset classes like units, bonds, etc. as the tax treaty may provide for favorable tax treatment. This ruling emphasises the fact that under India-UAE Tax Treaty capital gains on only shares are taxable in India and capital gains on other assets would be taxable only in UAE.
Whether payments made for cloud hosting services are taxable as royalty under the Income Tax Act or the India-US Tax Treaty?
Rackspace vs Dy. CIT [TS-398-ITAT-2019
The taxpayer is a dedicated cloud computing and hosting services company incorporated in the USA. The taxpayer claimed that the income from cloud hosting services is business income, and in the absence of permanent establishment in India, the said income is not taxable in India. However, the tax officer held that the said income is in the nature of royalty under the Income Tax Act as well as the India-US Tax Treaty and hence the same is taxable in India.
The tax tribunal observed that the definition of royalty under explanation 2 to section 9(1)(vi) includes payment for use or right to use an industrial, commercial, or scientific equipment. The tax tribunal noted that the customers of the taxpayer were merely availing hosting services and were not using or having control over the equipment. However, Finance Act 2012 retrospectively clarified that such payment would be royalty whether or not possession or control of the equipment was with the taxpayer. In light of the above, such payments would be taxable as royalty under the Act.
Pursuant to the India-US Tax Treaty, the definition of royalty is exhaustive and not inclusive in nature. Further, the term “use” or “right to use” implies possession/ control over the property. However, in the instant case, there is no privilege or right granted to the Indian customers over the servers and other equipment used to provide cloud hosting services, which are nothing but standard services. Furthermore, the equipment is used by the taxpayer for providing these services to the customers and not vice-versa. Also, the agreement entered into between the taxpayer and the customers are limited to the provision of cloud hosting services only and not hiring or leasing of the underlying equipment. In light of the above, the payments are not taxable as royalty under the India-USA Tax Treaty.
This is the first decision that discusses the taxability of cloud hosting services. There are many decisions on web hosting services having divergent views on taxability. However, this decision provides a great deal of clarity on the taxability of cloud hosting services under the tax treaties. It is pertinent to note that the language employed by the India-US Tax Treaty is mostly similar to other tax treaties and hence the observations made thereunder can be imported to other tax treaties as well.
It is to be seen whether the Revenue Authorities would appeal before the Bombay High Court as this decision would have far-reaching impact on many digital companies.
Whether salary cost recharge be taxable as fees for technical services (FTS) under the Income Tax Act and the India-France Tax Treaty?
Whether payments for technical and managerial services are taxable as FTS under the Income Tax Act or India-France Tax Treaty?
M/s. Faurecia Automotive Holding vs
DCIT [TS-417-ITAT-2019 (Pune)]
Taxpayer, a tax resident of France, is engaged in designing and building dashboards, door panels, soundproofing, etc. for passenger car interiors.
Salary cost re-charge
While filing the tax return in India, the taxpayer did not offer salary cost recharge to tax in India. However, the tax officer considered salary cost recharge as FTS and held the same to be taxable in India.
The tax tribunal observed that the expat employed by the Indian subsidiary was in receipt of salary and other emoluments like any other employee would be. Further, the said expat was working under the control, supervision, or direction of the Indian subsidiary only. Also, the income earned by the expat was offered to tax in India as salaries including the amount paid by the taxpayer which is duly supported by Form 26AS and computation of income produced before the tax authorities. Further, the definition of FTS under the Act provides an exception that income taxable as salaries would come out of the purview of FTS. In light of the above, salary cost re-charge would not be taxable as FTS under the Act. Hence, analyzing the taxability under the tax treaty is not relevant.
Payments for technical/ managerial
Pursuant to a services agreement, the taxpayer also received consideration for the provision of global information support services to its Indian subsidiary which was also not offered to tax in India since the same did not make available any technical knowledge, skills, etc. However, the tax officer held that the payment received for support services is royalty/FTS as per the Act as well as the tax treaty.
The tax tribunal noted that the taxpayer provided services in fields such as management, marketing, accounting, legal, human resources, purchasing, etc., all of which fall within the purview of managerial services. In addition to the above, the taxpayer also renders technical services in the form of IT support services in 3 fields i.e., operations, technical support, and technical studies. Hence, it is clear that the support services are actually in the nature of technical and managerial services. Accordingly, payment for such services would be taxable as FTS under the Act. However, the same is not taxable as FTS under the India- France Tax Treaty since the services do not make available technical skills, knowledge, etc. to the service recipient. In arriving at the said conclusion, the tax tribunal noted that the India-France tax treaty does not have make available clause, but it contains “most favored nation” (MFN) clause which enables the taxpayer to import the beneficial provisions of a tax treaty entered into after the India-France Tax Treaty came into force. In light of the above facts, the tax tribunal held that the payments, though FTS in nature, are not liable to tax in India under the India-France Tax Treaty.
Yet another decision on the taxability of cost recharge for employee cost. However, it is pertinent to note that this decision distinguishes the Delhi High Court decision in the case of Centrica Offshore. This is a good development for taxpayers and would help companies who have entered into similar deputation arrangements.
Furthermore, it is imperative that the tax treaty is read in conjunction with the protocol so that in cases where taxability arises under a tax treaty as well, the protocol may provide for some relief by virtue of the MFN clause.
Whether the TPO was right in
(1) determining the ALP of
payment of Fees for Management
services in a segregated manner
(2) determining ALP at NIL?
INA Bearings India Pvt Ltd [ITA No.150/
PUN/2017 & ITA No.282/PUN/2017] –
The taxpayer is engaged in manufacturing & distribution of roller and linear bearings system and engine components. The taxpayer adopted TNMM as MAM and aggregated the transaction of Management services with other international transactions under manufacturing and trading segments.
The Transfer Pricing Officer (‘TPO’) rejected the benchmarking approach adopted by taxpayer and segregated the transaction of Management fees without applying any specific method and determined its ALP at Nil thereby making an upward TP adjustment. The Commissioner of Income Tax ‘CIT(A)’ upheld the adjustment made by TPO.
The Income Tax Appellate Tribunal (‘ITAT’) held that:
- Referring to sections 92(1), 92B and 92C(1) of income tax act and also placing reliance on HC ruling in case of Knorr-Bremse India Pvt Ltd1 and Magnetic Marelli Powertrain India Pvt Ltd2, ITAT held that although purchase of goods and the services lead to manufacturing of final product however it doesn’t mean that they are interdependent on each other. Also, both the transactions were carried out with different AE’s, hence there is no question of any inextricable link between these transactions. Accordingly ITAT upheld TPO’s segregation approach.
- On perusal of various supporting documents such as agreements, invoices, service wise benefit analysis submitted by the taxpayer, ITAT held that the services were in nature of normal business services and not in the nature of stewardship activities. Accordingly rejected the contention of TPO.
- ITAT noted that taxpayer has entered into a service level agreement with its AE for receipt of management services wherein the pricing was based on hourly rates plus a mark up of 5%. Basis the documents submitted, ITAT observed that there was no adhoc cost charged by the AE. Also even if it is to be assumed that the mark-up of 5% is not at ALP and should be as low as 1% or even less than that, still the difference of such mark up in comparable uncontrolled transactions would be within the arm’s length range. Accordingly the actual cost incurred in providing such services are at ALP. Basis the above, ITAT deleted the adjustment.
Approach of aggregation of separate transactions only to adopt the TNMM is not tenable, However, the ITAT has given due cognisance to the commercial reality of the pricing of the intra-group services to not warrant any adjustment. It demonstrates the need to maintain appropriate transactional evidenced and supporting details with respect to intra-group services.
Maruti Suzuki India Limited – Civil Appeal no 5409 of 2019 (Arising out of SLP(C) No 4298 of 2019)- AY 2012-13
The erstwhile entity i.e. M/s Suzuki Powertrain India Limited was amalgamated with M/s Maruti Suzuki India Limited with effect from April 2012, which was duly approved by the order of the High Court (HC) dated 29th January 2013. It was also taken on record by the registrar of Companies (ROC) on 17th March 2013.
The taxpayer contended that the assessment proceedings undertaken by the AO (notice issued after the amalgamation) is in the name of the non-existent earlier entity. Accordingly, taxpayer filed an appeal before Income Tax Appellate Tribunal (ITAT) wherein, the ITAT held that assessment made in the name of Suzuki Powertrain India Limited for AY 12-13 is a nullity since the entity was not in existence.
The High Court (HC), while affirming this view of the ITAT followed its own decision in taxpayer’s case for previous AY 11-12. Holding that no question of law arose, the HC dismissed the appeal under Section 260A of the Income Tax Act 1961.
Aggrieved, the revenue filed an appeal before Honourable Supreme Court (SC).
SC observations and conclusion:
- Hon’ble SC noted in case of Saraswati Industrial Syndicate Ltd, it was held that when two companies are merged and form a third company or one is blended with another, the amalgamated company loses its entity. Also, the amalgamating company ceasing to exist, it cannot be regarded as a person u/s 2(31) of the Act 1961.
- Further, SC noted that in Delhi HC ruling in the case of Spice Entertainment it held that an assessment framed in the name of the amalgamating company, which ceased to exist in the eyes of law, is invalid and untenable in law. Such a defect would not be cured in terms of Section 292B of the Act. Further, the fact that the amalgamated company participated in the assessment proceedings would not operate as estoppel. Following the above decisions Delhi HC quashed assessment orders which were framed in the name of an amalgamating company.
- SC also observed that the assessment order in taxpayer’s own case for AY 11-12 was set aside on the same ground which resulted in SLP which was dismissed by the Supreme Court.
- SC noted that the in the present case, despite the fact that the AO was informed of the amalgamating company having ceased to exist the jurisdictional notice was issued only in its name. SC opined that “the basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation.” SC further remarked that “participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law.” Basis the similar finding, revenue contention was dismissed in the case of the taxpayer while dismissing the SLP for AY 2011-2012.
Based on the above facts, SC dismissed revenue appeal and stated that we find no reason to take a different view and also that the court must abide by promoting the interest of certainty in tax litigation.
In amalgamation / merger and other similar cases, an assessment proceeding initiated for the nonexistent amalgamating company can be strongly challenged by taxpayers.
Edward Lifesciences (India) Private Limited - ITA No.1189/Mum/2017 (AY 2012-13) & ITA No.7198/Mum/2017 (AY 2013-14)
The taxpayer is engaged in distribution of cardiovascular products to hospitals and other medical institutions. During the year the taxpayer has incurred certain Advertising, Marketing and Promotion (AMP) expenses for distributing its products in India.
TPO’s Comments: On perusal of the documents submitted by the taxpayer (i.e. agreement and FAR analysis), the Transfer Pricing Officer (TPO) observed that the taxpayer was merely a low risk distributor and was not supposed to carry out the aforesaid functions as it lead to creation of marketing intangibles; thereby considering the AMP expenses as international transaction and computed an AMP adjustment based on OP/OC earned by comparable companies. The Dispute Resolution Panel (‘DRP’) upheld the order of the TPO.
The Income Tax Appellate Tribunal (‘ITAT’) held that:
- The nature of expenditure incurred by taxpayer were in nature of scientific meetings, medical advice, campaign, training etc. which help in creating awareness among doctors, new technology and product benefits.
- Further, the ITAT was of the view that the TPO /DRP /AO had ignored a crucial aspect of the receipt of subvention income, wherein the associated enterprise (AE) had agreed to compensate the taxpayer by way of subvention income in order to achieve an arm's length margin in India, which effectively tantamount to compensating the taxpayer for all the expenses relating to its distribution activity. This subvention income was duly offered to tax by the taxpayer.
- It further stated that considering the subvention income, the taxpayers operating margin would be much higher than the margins earned by the comparable distributors and accordingly there could not be any adjustment to ALP thereon.
Basis the above, ITAT granted relief to taxpayer.
The ITAT in this decision has granted relief on the adjustment pertaining to AMP expenses basis the existence of operational subvention arrangement.
In intra group distribution arrangements, it is recommended that the operational arrangement is framed well considering the functional/ risk profile of Indian company and it is also documented clearly in the intercompany agreement so as to justify/ support the AMP expenses incurred by the Indian company.
M/s. Sava Healthcare Ltd. v/s The Asst. Commissioner of Income Tax ITA Nos.1062 to 1068 / PUN / 2017 (AY 2007-08 to 2013-14)
The taxpayer was engaged in business of trading and export of medicines. During the year, the taxpayer had sold finished goods to its AEs and benchmarked the transactions using Transactional Net margin method (‘TNMM’) showing at 16.72% margins as against average margins of the comparables at 2.77%.
TPO: Basis the functional profiles of group entities in Mauritius, Dubai, Singapore etc., the TPO had noted that, the major functions, assets, resources, etc. of the group are situated in India and the AEs in Dubai and Mauritius were not doing any functions other than receiving and sending money (which is also being undertaken in India and by employees of taxpayer). Further, the TPO also viewed that goods were dispatched to Singapore godown, but the bills were made in the name of AEs in Mauritius and Dubai. The entire global purchases were routed through AEs at Mauritius and Dubai, which was subsequently brought back to India, by way of dividend and salary to the group promoter (which was claimed as exempt by the promoter). Accordingly, TPO stated that the control and management of the affairs of taxpayer group was wholly in India.
Separately, he rejected TNMM applied by the taxpayer and invoked Profit Split Method (‘PSM’) and proposed to allocate 97% of profits to the taxpayer. Wherein, the taxpayer went in appeal with the DRP.
DRP: With respect to the TPOs direction that control and management of the affairs of taxpayer group was wholly in India, the DRP did not interfere with the same. However, regarding application of PSM, the DRP upheld the same, however, recalculated the allocation to 70%. Accordingly, the taxpayer went in appeal with the ITAT.
ITAT: ITAT held that the AO should have determined the control and management of affairs of taxpayer group and the TPO does not have any jurisdiction for determining POEM of the taxpayer.
Regarding application of PSM, the rules for applying PSM are completely overlooked and no comparables are selected and the DRP, on its own, has made allocation of profits. The said exercise carried out by DRP is beyond its jurisdiction. The DRP has also failed to consider the aspect that no such transaction (of control and management) was reported in Form No.3CEB.
The taxpayer had objected to the exercise of powers by TPO alleging that no international transaction arises on the premise of benchmarking transaction of control and management of AE parties from India. The said objection has not been dealt with by TPO/DRP. Accordingly, the ITAT held that the entire TP proceedings were in violation of the TP regulations and accordingly quashed.
Before adjudicating a case, the departmental authorities are expected to ensure that basic principles are followed such as
- whether principles of natural justice are followed,
- conditions to be satisfied for making TPO reference
- jurisdiction available to respective authorities, etc
In case any of the above essential checks are missing, taxpayers can challenge the validity of the assessment proceedings.
Where the claim of transition credit has been rejected, can the department demand interest even if such transition credit has not been utilized for payment of GST liability by the taxpayer?
M/s Commercial Steel Engineering Corporation - Hon’ble High Court of Patna [Writ Petition No. 2125 of 2019]
Facts of the case
- The petitioner claimed transition credit under GST of ITC pertaining to the VAT regime by filing TRAN- 1, and accordingly the same was credited to his electronic credit ledger.
- Later, this claim was rejected by the department on the grounds that it was wrongly availed by the petitioner and tax along with interest was demanded.
- The transition credit has been lying in the electronic credit ledger and is not utilized for the payment of GST liability.
- The mere filing of TRAN-1 would not amount to either availing or utilizing the transition credit until the department can demonstrate that such credit has been availed or utilized by the petitioner.
- The petitioner had filed an application in TRAN-1, and the credit balance was reflected in the electronic credit ledger. Thus, it amounts to availing of credit, and hence interest is applicable.
- An availment of a credit is a positive act, and unless carried out for reducing any tax liability by its reflection in the return filed, it cannot be a case of either availment or utilization.
- On a plain reading of section 73, it can be said that only on availing or utilizing the disputed input tax credit, it would be recoverable.
- The Court while distinguishing the decision of the Hon’ble Supreme Court in Union of India & Ors. vs Ind. Swift Laboratories Ltd. observed that in the said case, ITC was utilized by the dealer, unlike in the case on hand.
The principle laid down by the court would be beneficial to the taxpayers as it will eliminate the interest liability in cases where any ITC has been wrongfully claimed in the returns but has not been utilized for payment of the liability.
However, it would be interesting to see if the department prefers an appeal against this decision in view of the precedence laid down by the Supreme Court in Ind. Swift Laboratories.
M/s E-DP Marketing Private Limited - Authority of Advance Ruling (AAR), Madhya Pradesh [2019 (7) TMI 44]
Facts of the case
- The applicant imported crude soybean oil into India on a CIF basis (Cost + Insurance + Freight).
- At the time of import of goods into India, the applicant is required to pay Customs Duty (including IGST) on the CIF value of imported goods.
- Further, by virtue of Notification No. 10/2017 - Integrated Tax (Rate) dated 28 June 2017, IGST is payable on ocean freight at 5% by the importer on an RCM basis.
- As per the aforesaid notification, the applicant/importer is again required to pay IGST on the component of ocean freight under RCM.
- Hence, it leads to double taxation of IGST on the ocean freight component, which is illegal and against the basic principles of GST law.
In view of the notifications under GST, there is no ambiguity in regard to the payment of IGST on ocean freight. IGST on ocean freight has to be paid by the importer under RCM, irrespective of the fact that such freight charges are included in the intrinsic CIF value on which Customs Duty (including IGST) has been already paid by the importer.
The issue of double taxation of ocean freight has been a bone of contention between the government and the importers. The issue relates to the constitutional validity of the notification levying IGST on ocean freight on the following grounds:
- The notification levies IGST on service rendered by a foreign service provider to a foreign recipient.
- The notification levies IGST twice on ocean freight which is outside the jurisdiction of the AAR.
This matter is currently pending before various High Courts by way of writ petitions filed by importers and will attain finality only once a decision is given by the courts.