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FOREWORDAs a part of our regular quarterly update exercise, we are pleased to present the direct and indirect tax updates covering the material changes that took
st th place during the period from the 1 of April to 30 of June, 2019. We have also covered the judicial precedents covering some of the important decisions rendered by the Indian judiciary during this period.
As the cover story, we have identied that the decision to ratify the Multilateral Instrument (“MLI”) by the Indian Government is a very important initiative by it and puts Indian taxation system comparable with the global taxation regime. We have tried to discuss in greater detail about the various issues considered by the MLI and when would they become effective. This has the potential to transform the global taxation regime as individual aspects of individual treaties may no longer be the basis on which international taxation issues shall be discussed. This would also bring in
some sort of global coherence regarding a number of complex issues.
In addition to the above cover story, we have also dealt with other important developments and judicial precedents in the eld of taxation.
We hope you nd the newsletter informative and insightful. Please do send us your comments and feedback at [email protected]
• Welcome to the world of MLI: How will it impact India’s tax treaties ..............................................................................04
CASE LAW UPDATES- DIRECT TAX
Case Law Updates - International tax
• Kolkata ITAT holds income from testing services rendered outside India as FTS under the India-Finland DTAA .........15
• No withholding tax on payments made for services relating to GDR issue ....................................................................18
• Delhi ITAT holds that consideration received for preparation of design and drawings would be considered as business income, and not royalty, when there is a PE in India......................................................................................................20
Case Law Updates - Transactional Advisory
• Receipt of share application money relevant for trigger of Section 56(2)(viib) of the IT Act...........................................23
• Amounts paid towards discharge of mortgage obligation in connection with a property – not cost of acquisition .........25
• Bombay HC had held addition under Section 68 of the IT Act cannot be made merely due to large investments made through an investment vehicle........................................................................................................................................27
• Madras HC dismisses Cognizant's writ over share buy-back characterization ..............................................................30
• Mumbai ITAT holds buy-back of FCCB at discounted price not business income..........................................................33
Case Law Updates - Miscellaneous
• Bangalore ITAT treats customer relationship rights as goodwill eligible for depreciation ...............................................36
• Mumbai ITAT Deletes Notional Rental Addition on Unsold Inventory held as Stock-in-Trade........................................38
• SC vacates stay granted by Delhi HC on notication enabling retrospective exercise of powers under Black Money Act .............................................................................................................................................................40
CASE LAW UPDATES- INDIRECT TAX
AAR Rulings
• ITC can be claimed when consideration is paid through book adjustment.....................................................................43
Case Law Updates – Other judicial pronouncements
• Sale of goods by a Duty Free Shop not exigible to GST................................................................................................46
• Writ is maintainable for pre-arrest bail in case of offences under GST legislations........................................................48
• Transfer of land development rights not a taxable service .............................................................................................50
• ITC available on construction of immovable properties for letting out ............................................................................52
• Transitional credit permissible where no refund was claimed under erstwhile law ........................................................54
• Not mandatory to set up permanent bench of tribunal at place where permanent seat of HC is situated......................56
• DGAP is legally bound to investigate a proteering case once referred or noticed........................................................58
Regulatory Direct Tax Updates
• India-Marshall Islands Tax Information Exchange Agreement Notied ..........................................................................62
Regulatory Indirect Tax Updates
• Applicability of GST on additional/penal interest ............................................................................................................64
• Treatment of post-sales discounts under GST ...............................................................................................................64
• Clarication regarding place of supply in respect of services provided by ports ............................................................64
• Refund of taxes to the retail outlets established in departure area of an international airport beyond immigration counters making tax free supply to an outgoing international tourist..............................................................................64
• Regulations notied for electronic integration declaration (“EID”) in relation to export of goods....................................65
• DGFT amended the import policy for electronics and IT Goods ....................................................................................65
• Increase in the validity period of export authorization ....................................................................................................65
• Mechanism to verify IGST payments for goods exported out of India............................................................................65
WELCOME TO THE WORLD OF MLI: HOW WILL IT IMPACT INDIA’S TAX TREATIES
1. Background
The Organisation for Economic Cooperation and Development (“OECD”) had undertaken a landmark Base Erosion and Prot Shifting (“BEPS”) project from the year 2009, at the behes t o f G -20 coun t r i es , i nvo l v i ng collaboration of more than 100 countries, in order to address the international tax avoidance techniques adopted by multinational companies (“MNCs”) to minimise their global tax liabilities. Such tax avoidance techniques generally refer to the strategies of MNCs that exploit gaps and mismatches in tax rules to articially shift prots to low or no-tax locations and reduce tax base for other high tax countries.
The intention was to revise the international tax framework in order to align it with the globally agreed position of taxing prots where the economic activities are carried out and value is created.
Carrying out such large scale changes on a treaty-by-treaty basis would have been time consuming and bilateral negotiations may have led to inconsistencies across treaties due to the inter-relations of the jurisdictions. Thus, BEPS Action Plan 15 was developed which contains the Multilateral Instrument (“MLI”) as an innovative mechanism that would allow a more coordinated approach with immediate effect, while retaining the exibility required to implement these changes in a broadly consensual framework to tackle base erosion.
On June 7, 2017, 68 developed and developing countr ies, including India, s igned the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Prot Shifting” in Paris, popularly referred to as MLI, to modify a large number of bilateral tax treaties entered into by over 68 countries. The signing of MLI represents the dawn of a new era with respect to the taxation of cross-border businesses. Technically, an MLI offers concrete solutions for governments to close loopholes in international tax treaties by transposing results from the BEPS project into
bilateral tax treaties worldwide.
While the MLI attempts to retain exibility by providing the countries a template of limited choices to choose from, it also mandates compliance with certain ‘minimum standards’. These minimum standards are aimed to counter treaty abuse and to improve dispute resolution mechanisms while providing exibility to accommodate specic tax treaty policies.
At the time of signature, India submitted a list of 93 tax treaties entered into by India with other jurisdictions that India would like to designate as Covered Tax Agreements (“CTA”) i.e. tax treaties to be amended through the MLI. Along with CTA list, India also submitted a provisional list of reservations and notications i.e. its MLI position with respect to various provisions of MLI.
Recently, on June 12, 2019, India announced her ratication of the MLI. The impact of the MLI on India’s CTAs shall be signicant and requires careful consideration for existing and proposed transactions and structures. As a next step, India also deposited its ratied MLI with the OECD with its nal positions on June 25, 2019.
India has notied 93 CTAs and as per the status updated by OECD till June 28, 2019, 29 countries (including India, Australia, Finland, France, Israel, Japan, Netherlands, New Zealand, Russia, Singapore, UAE, UK, etc.) have completed their ratication, out of which India has CTA with 22 countries.
2. Timelines for MLI
(i) Entry into force
For each country signing the MLI, the MLI shall come into force on the rst day of the month following the expiry of three months from the date of deposit of instrument of ratication with OECD.
Thus, as India submitted its instrument of ratication with the OECD on June 25, 2019, the MLI for the 22 countries with India will enter into force from October 01, 2019. For the remaining countries, the MLI will enter into force from the expiry of 3 calendar months from the end of the month in which these remaining countries submit their ratication of MLI.
For each CTA, it also needs to be analyzed whether the other jurisdiction has also ratied the MLI and from what date, in order to ascertain the time from when the provisions become effective for the tax treaty.
(ii) Entry into effect
The timelines for the MLI to come into effect with respect to a CTA differs based on the type of taxation to which the modications apply.
• In case of withholding tax at source on amounts paid to non-residents such as royalties, fee for technical services, interest, capital gains, etc. – MLI will enter into effect where the event giving rise to such withholding taxes occurs on or after the rst day of the next calendar year that begins on the latter of the dates on which the MLI comes into force for each treaty partner.
For example, in case of India and Singapore, if the MLI enters into force for India on June 2019 and for Singapore on September 2018, the CTA date is June 2019 and the MLI will come into effect for all withholding taxes under the India-Singapore tax treaty which relate to an event occurring on or after January 2020.
For the purpose of its own application of MLI to withholding taxes, India has chosen to replace “taxable period” for “calendar year”. Accordingly, in the above example, MLI will cover a withholding tax payable in India if the event giving rise to such tax takes place on or after April 1, 2020, while it will cover a withholding tax payable in Singapore if such event takes place on or after January 1, 2020.
• For all other taxes – MLI will come into effect for taxable period beginning on or after an expiry of 6 calendar months from the CTA date.
Hence, in the above example, for taxes such as tax on bus iness p ro ts attributable to a PE, the MLI shall apply to such taxes levied in India from FY 2020-21, whereas it will apply for the purpose of such taxes levied in Singapore on or after January 1, 2020.
Thus, the provisions of MLI will also impact India’s tax treaties with countries who have listed India as a CTA and have already deposited the instrument of ra t i ca t ion w i th OECD, fo r bo th withholding taxes and other taxes with effect from FY 2020-21 and onwards.
Two countries can opt for different years – taxable year or calendar year. For both, the MLI will apply asymmetrically.
For the remaining CTAs, MLI will be effective after such countries ratify MLI. Thus, as the tax treaties will be impacted at an overall basis and the impact of such an amendment could be signicant, it would be relevant to analyse its impact on each of the articles.
3. Key provisions and their impact on India's bilateral tax treaties
Part I – Scope and interpretation of the terms
(i) Article 1 – Scope of the convention
Article 1 gives the scope of MLI and claries that it will modify all CTAs.
(ii) Article 2 – Interpretation of terms
Article 2 provides the denitions of various terms used in the MLI. The signicant extracts of the denition are as below:
• The term CTA means an agreement for the avoidance of double taxation with respect to taxes on income (whether or not other taxes are also covered) that is in force between two or more parties and/or jurisdictions and with respect to which each such party has made a notication to the Depository of the OECD listing the agreements which are intended to be covered through this MLI;
• A party means a jurisdiction which has signed the MLI and for which the MLI is in force; and
• The term contracting jurisdiction means a party to a CTA.
Part II – Hybrid mismatches
Part II of the MLI covers Article 3 to 5 containing provisions for prevention of double non-taxation by hybrid mismatch arrangements, an arrangement
intended to secure a tax advantage within a multinational group resulting from a difference in tax treatment of the same nancial instrument or entity in different jurisdictions. These articles give the best practices (not minimum standards) to ensure that the benets are only granted to hybrid entities in appropriate cases.
(iii) Article 3 – Transparent Entities
MLI provides that income derived by or through a transparent entity shall only be considered income of a resident to the extent that income of such entity is treated for the purposes of taxation, as income of a resident of that contracting state. This provision is not a minimum standard and hence, it is optional for the countries whether to adopt the same or not.
India has reserved her right for non-applicability of the Article 3 in entirety.
Generally, India’s tax treaties do not contain a provision for scally transparent entities. Accordingly, an entity which is not “liable to tax” in the country where it has been formed may not qualify to be a resident to avail treaty benets.
Consequently, the eligibility of such entities to claim benet under India's tax treaties would continue to be as per the provisions of the particular tax treaty in this regard. Accordingly, the challenges faced by such entities like inability to claim credit of foreign taxes will remain.
(iv) Article 4 – Dual Resident Entities
MLI provides that residency of a person (other than an individual) who is resident in more than one contracting state (i.e. a dual resident entity), shall be determined by a Mutual Agreement Procedure (“MAP”) between the competent authorities of the contracting states having regard to its place of effective management (“POEM”), place of incorporation or constitution and any other relevant factors. It also provides that in absence of any agreement between the jurisdictions, such dual-resident entity will either not be entitled to any relief or tax exemption under the tax treaties except as agreed upon between the competent authorities of the contracting jurisdictions or will not be entitled to any relief or tax exemption at all.
At present, the OECD Model Convention provides that a dual resident entity shall be deemed to be a resident of the state in which its POEM is situated. Most of the tax treaties signed by India also contain the POEM clause as a tie-breaker rule to determine the tax residence of an entity.
India has not provided any reservation on applicability of this Article. Further, India has
1also chosen to apply this provision for 91 CTAs wherein residence of a dual resident entity will be determined based on MAP. Please note that this provision would apply only if the other treaty partner also agrees to apply Article 4 of the MLI.
(v) Article 5 – Methods for elimination of double taxation
Article 5 of the MLI refers to three options for preventing double non-taxation situations arising due to the residence state providing relief under the exemption method for income not taxed in the source state. As this is not a minimum standard, the fourth option available is to not adopt any of the options given above. Further, in case each contracting jurisdiction chooses a different option, the option chosen by a contracting jurisdiction shall apply with respect to its own residents.
India has expressed its reservation for Article 5 not to apply to any of its tax treaties in entirety. The possible reason for the same may be that India's tax treaties apply the credit method for providing relief from double taxation, the situation of double non-taxation (i.e. in both the source country and resident country) contemplated under Article 5 may not be relevant in the Indian context.
Part III – Treaty abuse
Part III of the MLI covers Article 6 to 13 containing provisions for prevention of treaty abuse. These are minimum standards in order to ensure a minimum level of protection against any treaty shopping being contemplated by certain MNCs.
(vi) Article 6 – Purpose of a CTA
Article 6 of the MLI provides a mandatory requirement to modify the text of the preamble of the CTA, by including the prescribed language to express the common intention of the
contracting states to eliminate double taxation. The language also includes the intent not to create opportunities for non-taxation or reduced taxation. Further, the language refers to a desire to develop an economic relationship or to enhance co-operation in tax matters, could also be added to the preamble if it is not already present.
Adoption of the above language is a mandatory requirement and accordingly, India’s tax treaties are likely to be modied to include the prescribed text. However, as there are no detailed discussions / guidelines available regarding this Article, it is not clear whether India has adopted the additional language regarding economic relationship and co-operation or not.
(vii) Article 7 – Prevention of Treaty Abuse
Article 7 of the MLI contains the provisions in relation to prevention of treaty abuse – which is a minimum standard. Under this Article, a benet under a CTA shall not be granted if it is concluded that obtaining the requisite benet was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benet, unless it is established that granting the benet would be in accordance with the object and purpose of the relevant provision of the CTA.
Certain jurisdictions may also choose to apply the provisions related to simplied limitation on benets (“LOBs”) provisions to their CTAs. Simplied LOB provisions require an entity to be able to claim relief in respect of an income, only if it is a 'qualied person' or if it is engaged in 'active business' and the income derived by such entity from India would need to be incidental to or emanate from its business. Also, (i) operating as a holding company; (ii) providing overall supervision or administration of group companies; (iii) providing group nancing; or (iv) making or managing investments (unless it is a bank or insurance company or registered securities dealer in the ordinary course of its business), do not qualify as 'active business' for the purposes of the MLI.
With regard to dealing with prevention of treaty abuse by applying the principal purpose test, India has not provided any reservation. As it is a minimum standard, it will apply to all CTAs.
Further, India has notied the list of 36 tax treaties which already contain the provision limiting the benet of the tax treaty if it is established that obtaining tax benet was one of the main purposes of the transaction. The provision of Article 7 shall be replaced by the language contained in the MLI where the other contracting state also noties with respect to this provision. Where the other contracting state does not notify this provision, the provision of MLI shall be superseded if the language of original provision is incompatible with this provision.
India has also chosen to apply the simplied LOB provision. If the other contracting state does the same, India’s CTAs may accordingly get amended to include the simplied LOB rule. At present, only 9 tax treaties signed by India have an LOB clause which shall be replaced by simplied LOB. MLI may supersede the language contained in the original provision if it is found to be incompatible with the MLI. Once adopted, a taxpayer will have to satisfy the simplied LOB rule in addition to the principal purpose test (“PPT”) to obtain the treaty benets.
(viii) Article 8 – Dividend Transfer Transactions
Article 8 of the MLI stipulates the conditions under which a person of one contracting state (holding shares benecially) can avail an exemption or limited rate of tax on dividends paid by another non-resident company. Article 8 requires the shares to be held by the benecial owner throughout a minimum holding period of 365 days in order to claim an exemption or lower withholding tax rate on dividend income. Contracting states can reserve the application of this Article in its entirety or reserve the holding period contained in any CTA, which is more or less than a period of 365 days.
India has notied 21 of its CTAs where a holding period of 365 days is proposed to be applicable in order to grant the benet of a concessional tax rate of dividend. If the other contracting states also notify these provisions, the provisions of the CTA would be replaced by Article 8 of the MLI. Further, India has reserved its right for the non-applicability of Article 8 on the India Portugal tax treaty where it already has a 24 month holding period condition.
Please note that Article 8 may not signicantly impact India under Indian domestic tax regulations, DDT is payable by the company distributing dividends and such dividend is exempt in the hands of shareholder.
(ix) Article 9 – Capital gains from transfer of share deriving value from immovable property
Article 9 of the MLI provides for indirect transfer taxation to levy the capital gains tax arising from alienation of shares or comparable interest of companies or other entities such as partnership or trust; that derive more than a certain percent of their value (“Value Threshold”) from immovable property, in the state where the immovable property is situated.
Article 9 provides for 2 (two) alternatives: (a) Option 1, which provides that where Value Threshold is met at any time during the 365 days preceding the transfer, capital gains from the sale of shares or comparable interests shall be taxable in the country where immovable property owned by the entity is situated. Contracting states can bilaterally negotiate the Value Threshold in their tax treaties; and (b) Option 2, which is similar to Option 1 but xes a Value Threshold of more than 50% for the trigger of source taxation in Article 9.
India has chosen to apply Option 2, and the look back period of 365 days triggers the source taxation of the transfer of shares or comparable interest where such shares or comparable interest derive more than 50% of their value form immovable property situated in India. While India has notied 71 of its CTAs which contain provisions dealing with source taxation of transfer of shares which derive their value from immovable property as mentioned in Option 1. In the event that the other contracting states also choose Option 2, the provisions of CTAs would be replaced by this provision given in MLI.
If the other contracting state does not notify the provisions of the respective CTAs, the provisions of MLI shall be superseded to the extent the provisions of CTAs are incompatible with the MLI.
(x) Article 10 – Anti-abuse rule for permanent establishment situated in a third jurisdiction
Article 10 of the MLI provides that where:
i. an enterprise of a contracting state to a CTA derives income from another contracting state and the former state treats such income as attributable to a PE of the enterprise situated in the latter state;
ii. the prots attributable to that PE are exempt from tax in the former state, then the benets of the CTA shall not apply to any item of income on which tax in the latter state is less than 60% of the tax that would be imposed if that PE was situated in the former state. In such a case, the MLI provides that such income shall remain taxable as per the domestic law of the latter state. The MLI also provides that any income derived from the former state in connection with / or incidental to active conduct of a business carried out through the PE (other than business of making, managing or simply holding investments for enterprise’s own account, unless these activities are banking, insurance, or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively) shall not be subject to tax in the latter state.
iii. If benets are denied as mentioned above with respect to item of income derived by a resident of a contracting state, the resident may request the competent authority and then, the competent authority may still grant the benets if it is determined that granting the benet is justied.
India has neither expressed any reservation nor has it notied any provisions of its CTA. Consequently, the MLI provisions in this respect would supersede the CTA and would apply to the extent that the provisions of the latter are incompatible with Article 10 of the MLI.
(xi) Article 11 – Application of Tax Agreements to restrict a Party's right to tax its own residents
Article 11 provides a saving clause to clarify that CTA shall not affect the right of taxation of a contracting state to tax its own residents, save for certain benets granted, under the provisions of the CTA.
India has neither expressed any reservation nor has it notied any of its CTA, which contain such a provision. Consequently, the MLI provisions in
this respect would supersede the CTA and would apply to the extent that the provisions of the CTA are incompatible with Article 11 of the MLI.
Part IV – Avoidance of Permanent Establishment Status
Part IV of the MLI covers Articles 12 to 15 containing mechanism for amendment of denition of PE in the existing tax treaties. However, the rules of attribution of prots to a PE have not been changed.
(xii) Article 12 – Articial Avoidance of PE through commissionaire arrangement and similar strategies
The MLI provides for a broader dependent agency PE rule. In addition to its applicability to persons having the authority to conclude contracts, the agency PE rule now extends to persons who habitually play the principal role in the conclusion of contracts that are routinely concluded, without material modications by the enterprise and these contracts are in the name of enterprise, or for transfer of ownership or granting right to use a property, or for provision of services. The activities described would however not create a PE, if carried on by certain independent agents in ordinary course of business.
Under the MLI provisions, a person cannot be considered an independent agent if he acts exclusively or almost exclusively on behalf of a person closely related to such enterprise. Article 12 gives an option to countries to opt out of this Article in its entirety.
While this is not a minimum standard and the MLI gives a right to countries not to adopt this article in entirety, India has not expressed any reservation and has notied all of its CTA, which contain provision(s) dealing with agency PE. If the other contracting states also notify the CTA, the provisions of the CTA would be replaced by Article 12 of the MLI.
However, if the other contracting state does not notify the provisions of the respective CTA, the MLI provisions contained in Article 12 would not apply to the CTA.
(xiii) Article 13 – Articial Avoidance of PE through specic activity exemption
Article 13 deals with specic activity exemptions to PE and provides two options to achieve this.
Option 1 provides that listed activities would qualify for specic activity exemption only if such activity qualies as preparatory or auxiliary in character. On the other hand, Option 2 allows contracting states to retain the automatic exemption to listed activities, irrespective of the same being preparatory or auxiliary based on the premise that these specically listed activities are intrinsically preparatory or auxiliary.
Additionally, Article 13 also provides for adopting an anti-fragmentation rule which denies specic activity exemption where the activities carried out by the foreign enterprise along with its related parties, at the same or another place, exceed the preparatory or auxiliary character.
India has chosen Option 1 and has accordingly notied all of its CTA which contain provisions dealing with preparatory and auxiliary activity exemption. When the other contracting state chooses Option 1 and also noties the CTA, the relevant provisions of the CTA would be replaced by Option 1 of Article 13 of the MLI. However, in case the other contracting state chooses Option 2, then due to incompatibility, the MLI provisions in Article 13 would not apply.
Where the other contracting state does not notify the provisions of the respective CTA, the MLI provisions contained in Article 13 would not apply to the CTA. It may be pertinent to note that India has not notied any provisions in respect of the anti-fragmentation rule and hence, it would not be relevant for India's CTAs.
(xiv) Article 14 – Splitting of contract
Article 14 of the MLI provides for determining time thresholds in a tax treaty for construction / installation / supervisory or any PE provision have been exceeded under a CTA. The Article provides for an aggregation of time spent on connected activities by related parties in the same project to determine the threshold. This provision is optional and does not apply where either of the contracting states have made a reservation on the application of this Article.
India has neither expressed any reservation nor has it notied any of its CTAs. In the event that the other contracting state noties or does not notify the CTA, the provisions of Article 14 of the MLI would apply to the extent the provisions of the CTAs are incompatible with Article 14. This is
applicable unless the other contracting state expresses its reservation on the applicability of Article 14, in which case those CTAs would not be impacted by this article.
(xv) Article 15 – Denition of closely related to entity (“CRE”)
Article 15 of the MLI provides the denition of CRE for the purposes of Article 12-14 of the MLI. For this purpose, a related party in relation to an enterprise covers a person who has control over the other enterprise or both are under control of same persons or enterprise. This provision also deems a person as a related party if such person possesses directly or indirectly more than 50% of the: (i) benecial interest; or (ii) aggregate vote and value of shares of an enterprise.
India has not expressed any reservation; the denition would apply to the CTA unless the other contracting partner to the CTA expresses a reservation on applicability of Article 12 - Article 14 of the MLI.
Part V – Multi Agreement Procedure (“MAP”)
Part V of the MLI provides the minimum standards for improving dispute resolution and the best practices associated with it.
(xvi) Article 16 – MAP
Article 16 requires contracting states to allow taxpayers to present a MAP case to the competent authorities (“CA”) of either of the contracting states unlike the earlier procedure of being able to present the case only to the CA of the state of residence. Furthermore, Article 16 requires that MAP access should be allowed in a case where the MAP application is presented within three years of the rst notication of the action resulting in taxation not in accordance with a CTA.
Under the MLI, CAs of both the states need to endeavour to resolve a case under MAP if they are not able to arrive at a satisfactory solution unilaterally. Also, the MAP agreements are to be implemented notwithstanding any time limits under domestic laws. The CA may also consult together for the elimination of double taxation in cases not provided for in the CTA.
i. Bilateral recourse to MAP
India has reserved its right for not adoptingthe modied provisions on the basis that itwould meet the minimum standard by allowing MAP access in the resident state and by implementing a bilateral notication process. Thus, each of the CTA would have a bilateral notication process to allow MAP recourse not only to Indian residents but also residents of other contracting states of CTA.
ii. Time period of three years to invoke MAP
India has notied tax treaties which provide a lower limitation period of (a) 2 (two) years and; (b) those that have minimum period of 3 (three) years for presenting a MAP case. Thus, the notied tax treaties with Belgium, Canada, Italy and UAE would now provide a minimum time limit of three years for MAP access.
India has also noties a list of 7 tax treaties where such a provision for time limit doesnot exist. Post the MLI, such tax treaties would also have this minimum standard provided the other contracting jurisdiction also makes a comparable notication.
iii. Bilateral MAP when unilateral MAP fails
India has notied its tax treaties which require a provision enabling bilateral MAP with the CAs of both the contracting states when unilateral MAP does not resolve the dispute.
(xvii) Article 17 – Secondary Adjustments
As a minimum standard under dispute resolution, the contracting states are to provide MAP access in transfer pricing (“TP”) cases. Also, as a complementing best practice, the MLI suggests that contracting states include a provision to provide that where a TP adjustment is made in one of the contracting states,the other contracting state shall provide corresponding adjustment. The MLI provides that a contracting state may opt out of this provision to the extent the CTA already contain such a provision.
India has reserved its right for the entirety of Article 17 not to apply to CTA and has notied its CTA that already contain the enabling provision
for secondary adjustment. Accordingly, the provisions of Article 17 will not apply to the treaties with these countries if the other contracting jurisdiction agrees to the same. For CTA that do not contain such a provision, the provisions of Article 17 would apply to the extent the provisions of the CTA are incompatible with the former.
4. Illustrative analysis of Articles of MLI having impact on certain tax treaties of India
Given below is a comparative of impact on India’s tax treaties with certain countries in order to give an indication of how the Articles of existing tax treaties would be impacted due to MLI:
Sl.
No.
MLI provision Impact of MLI on India’s tax treaties
Singapore Netherlands Japan France
1 Article 2 – CTA Both countries have covered each other as CTA 2 Article 4 – Dual
resident entities
Does not
apply
Article 4(3) of existing tax
treaty to be
replaced by
Article 4(1) of
MLI.
Article 4(2) of
existing tax
treaty to be
replaced by
Article 4(1) of
MLI. However,
no discretionary
relief can be
provided by
CA.
Does not apply
3
Article 6 – Purpose
Existing treaty language to co-exist along with additional language
prescribed (minimum standard). 4
Article 7 –
Prevention of
treaty abuse
PPT to apply and supersede the provisions of the tax treaty to the
extent incompatible with MLI. Simplied LOB not adopted by
The MLI marks a key milestone in the implementation of the BEPS project.
India’s involvement in the rst signing ceremony of MLI indicates India’s commitment and her proactive approach in combating BEPS. The success of the MLI would also depend on the number of countries that will sign it.
Having said the above, the OECD needs to be applauded for coming with a quick alternative as compared to the mammoth task of modication of more than 3,000 tax treaties. It is alsoworth noting that the OECD has done this phenomenal work over the last 4-5 years.
With the PPT being implemented as a minimum standard and strategies for avoidance of PE being tackled by Article 12 to 14 of the MLI, the network of the bilateral tax treaties will undergo a vital change. In the short and medium term, the MLI is likely to increase the complexity of doing business with other jurisdictions before the ambiguities are settled and stability is established. However, in a long run, the MLI will go a long way towards reducing BEPS.
7In the case of PJSC Stroytransgaz, the Delhi ITAT
held that the share of revenue received by a non-
resident, as part of the consortium made for projects
executed in India, shall be treated as its business
income and not as royalty.
FACTS
PJSC Stroytransgaz (“Assessee”) is a Russian
company having a branch ofce in India. During the
relevant AYs (i.e. AYs 2004–05, 2005–06 and
2006–07), the Assessee participated in water supply
augmentation project and oil pipeline project, etc. As a
part of the water supply project, the Assessee entered
into a consortium with Essar Constructions and Indian
Oil Corporation to meet the requirement of technical
qualication. With the same consortium, the Assessee
also entered into a supplementary agreement for the
division of work, as per which the
Assessee was to provide project
management services. This was to
be provided by the branch ofce of
the Assessee and the Assessee
would provide specialist manpower
for undertaking these services.
Further, it was also agreed that the
Assessee would directly provide
technical expertise and technical know-how for an
amount of USD 10 million. Therefore, the revenue
from this project was bifurcated by the Assessee into
two parts, one in the nature of FTS, which was
received by the branch ofce of the Assessee, and the
other in the nature of royalty, which was received by
the Assessee for providing know–how and technical
expertise to the consortium.
The AO refused to treat the additional income received
by the Assessee as royalty but instead treated it as
business income in the hands of the Assessee. On
appeal to the CIT(A), the CIT(A) upheld the order of
the AO. Being aggrieved by the decision of the CIT(A),
the Assessee has led an appeal before the ITAT.
ISSUE
Whether the income received by the Assessee from
the consortium, for providing technical know-how and
expertise, was in the nature of royalty or business
income?
ARGUMENTS
The Assessee argued that the principal focus of
Assessee’s business (not that of its branch ofce) was
preparation of designs for construction of pipeline
systems. Therefore, the technical
know-how and expert ise in
relation to the project was to
be rendered by the Assessee
directly and in relation to that the
income earned by the Assessee
constituted royalty income only.
Further, the Assessee argued that the technical bid
preceded the nancial bid and the Assessee was
involved in the technical bid, therefore, the conclusion
of the IRA that the Assessee provided services at the
bidding stage only is an erroneous conclusion drawn
without understanding how the pipeline business
worked. For strengthening its argument, the Assessee
also relied on the decision of Delhi ITAT in the case of 8
Iveco Spa, wherein payment received by a non-
resident having branch ofce in India was treated as
“”
Share of the non-residentAssessee for services renderedas a part of consortium would constitute business income.
WOULD BE CONSIDERED AS BUSINESS INCOME,
AND NOT ROYALTY, WHEN THERE IS A PE IN INDIA
7 PJSC Stroytransgaz v. Deputy Director of Income Tax, Circle 2(2), New Delhi; [2019] 106 taxmann.com 114 (Delhi- trib.).8 Iveco Spa v. ADIT (IT); [2016] 160 ITD 348.
18 In the case of M/s. Pidilite Industries Ltd., the
Mumbai ITAT held that the buyback of FCCB at a
discounted price did not constitute business income of
the Assessee as the gain was in the nature of capital
receipt and not revenue receipt.
FACTS
M/s. Pidilite Industries ltd. (“Assessee”) is a company
resident in India and is engaged manufacturing of
adhesives. For AY 2010-11, the Assessee led its
return of income declaring income of INR 1.20 Billion.
However, after the scrutiny assessment of the
Assessee, the AO determined the total income at INR
2.23 Billion, wherein inter alia an
addition of INR 21.3 Million on
account of discount received on
Foreign Currency Convertible
Bonds (“FCCB”) buy-back. During
FY 2007-08, the Assessee issued
zero coupon FCCB mainly for
capital expenditure and funding international
acquisition. The size of FCCB was USD 40 million and
denomination of each bond was USD 100,000. On
maturity, the FCCBs were to be redeemed at a
premium of 39.37% of the issue price. The net
proceeds of approximately USD 39 million was partly
used for investment in foreign subsidiaries and partly
for ongoing capitalization programs. Thereafter, the
Assessee sought permission from RBI to buy-back the
FCCB and once the permission was granted by RBI,
the Assessee bought back 17 bonds at a discount of
25%, thereby earning a total discount of USD 425,000
which in Indian currency amounted to INR 21.3 Million.
On this discount, the Assessee claimed deduction
while computing its business income stating that the
same is in the nature of capital receipts. However, AO
disallowed the deduction claimed by the Assessee
and treated it as income under Section 28(iv) of the IT
Act. In this regard, the AO relied upon the decision of 19 Bombay HC in the case of Solid Containers.
Against the order of the AO, the Assessee led an
appeal before the CIT(A) and the CIT(A) decided in
favour of the Assessee by holding that the discount on
FCCB cannot be treated as gains as envisaged under
Section 28(iv) of the IT Act. The CIT(A) observed that
as per RBI circular, the proceeds of FCCB could be
used only for purpose of import of capital goods, new
projects, expansion and modernization or overseas
direct investment in joint ventures/ wholly owned
subsidiaries and expressly prohibits the usage of
FCCB proceeds for working capital, general corporate
purpose and repayment of rupee
loans. The CIT(A) observed that
s ince the Assessee was not
engaged in the business of giving
and taking loans through debt
instruments, the reduction in loan
liability could not be said to be on
account of appellant’s business or
profession. Further, CIT(A) relied on the decision of 20
Bombay HC in the case of Bombay Gas Co., to state
that waiver of loans for acquiring capital assets would
be on capital account and considering that the bonds
were not used for trading purposes, discounts on
repurchase could not be treated as gains. The CIT(A),
therefore, proceeded with the deletion of addition
made by the AO.
Against the order of CIT(A), the IRA preferred an
appeal before the ITAT.
ISSUES
Whether discount on the buy-back of FCCB
constituted gains under Section 28(iv) of the IT Act and
should be considered while calculating business
income?
”“Discount on buy-back of FCCBs
taken for capital purposes isnot a revenue receipt.
18 DCIT v. M/s Pidilite Industries Ltd.; ITA Nos. 7351 & 7352/ Mum/ 2017.19 Solid Containers v. DCIT, 178 Taxmann 192.20 Bombay Gas Co. Ltd. v. ACIT, ITA Nos 646 and 1188 of 2009.
In the case of M/s. Incap Manufacturing Services 26Pvt. Ltd., the Bangalore ITAT has held that customer
relationship rights are in the nature of goodwill and has
accordingly allowed depreciation on the same.
FACTS
M/s. Incap Manufacturing Services Pvt. Ltd.
(“Assessee”) is a subsidiary of Incap Oyj Finland
(“Incap Finland”) and is engaged in the business of
manufacturing electrical equipment, sub-systems,
inverter, power products and power electronic
products, etc. For AY 2009-10 the Assessee led its
return of income declaring a loss of INR 119.7 Million.
However, after completion of
assessment proceedings by the
AO, the losses were reduced to INR
107 Million as the AO disallowed the
depreciat ion c la imed by the
Assessee amounting to INR 12.6
Million on customary relationship
rights. The said depreciation claim was rejected by the
AO on account of the fact that depreciation on goodwill
is not allowed.
The CIT(A) upheld the order of the AO and the
Assessee led appeal before ITAT. The ITAT
remanded the matter back to the AO to decide in the
light of SC’s judgement in the case of Smifs 2 7
Securit ies . The Assessee fur ther led a
miscellaneous petition against the order of ITAT, which
was allowed by the ITAT, but the question on
depreciation was remanded back to the AO.
The AO acknowledged that the Assessee had
considered customer relationship rights as intangibles
on which depreciation was claimed. Therefore, the
matter before the AO was on two issues; rst, whether
depreciation can be claimed on intangible assets and,
second, whether customer relationship rights
constituted intangible assets. On the rst part of
whether depreciation can be claimed on intangible
assets, the Assessee relied on the SC decision of 28Smifs Securities, to contend the same. On the
second issue of whether customer relationship rights
can constitute intangible assets, the AO relied on the
Bangalore ITAT judgement in the case of M/s. Sanyo 29
BPL, which held that the customer distribution
networks do not result in intangible asset. Further, the
AO also opined that the ITAT has already rejected the
claim of the Assessee that customer relationship
rights constituted intangible assets, vide order of the
ITAT on the miscellaneous petition. Given the same,
the AO rejected the depreciation claim of the
Assessee on account of the fact that
customer relationship rights do not
constitute intangible assets.
Against the order of the AO, the
Assessee led an appeal before the
CIT(A), which was dismissed by the
CIT(A) again and thus, the matter landed up before the
ITAT.
ISSUES
• Whether the customer relationship rights are in
the nature of intangible assets?
• Whether depreciation can be claimed by the
Assessee on intangible assets?
ARGUMENTS
The Assessee argued that customer relationship
rights gained by the Assessee were a part of the
Business Transfer Agreement (“BTA”) executed as
slump sale for which the Assessee had paid a lump
sum consideration. However, in its books of accounts
it had valued xed and intangible assets separately.
26 M/s Incap Manufacturing Service Pvt. Ltd. v. Deputy Commisioner of Income-tax; ITA Nos. 2214 to 2216/ Bang/ 2018. 27 CIT v. Smifs Securities Ltd., 348 ITR 3022.28 Supra.29 M/s. Sanyo BPL Pvt. Ltd. v. Deputy Commissioner of Income-tax (75 taxmann.com 253) (Bangalore Trib.).
The Mumbai ITAT in the case of Kanakia Spaces Pvt. 32Ltd., has held that for AYs prior to AY 2019-20, unsold
inventory held by builders and developers should be
considered as stock-in-trade and should not be
subject to notional rent under Section 23 of the IT Act
in the hands of the builder or developer.
FACTS
Kanakia Spaces Pvt. Ltd. (“Assessee”) was engaged
in the business of construction of housing projects. In
AY 2013-14 and AY 2014-15, the Assessee in its return
of income, showing certain unsold ats in various
projects as stock-in-trade. The AO
sought to tax the annual letting
value (“ALV”) of the unsold ats as
income from house property of the
Assessee. The AO proceeded to
tax the ALV of the unsold houses in
the hands of the Assessee. The
Assessee appealed before the
CIT(A) without success and hence,
an appeal was preferred before the ITAT.
ISSUES
Whether the ALV of unsold housing units may be taxed
in the hands of the builder as income from house
property for AYs prior to AY 2019-20?
ARGUMENTS
The Assessee claimed that it did not intend to hold the
unsold ats as investment and earn rental income
therefrom, but only as stock-in-trade. Such stock-in-
trade constitutes a business asset of the Assessee
and no notional ALV could be assessed as income
from house property in the hands of the Assessee.
While the AO had placed reliance on the decision of
the Delhi High Court in Ansal Housing Finance and
33Leasing Company Ltd., which had treated ALV of
nished housing units held by the developer as
income from house property, the Assessee relied on a
contrary judgment of the Gujarat High Court in Neha 34 Builders Pvt. Ltd. The IRA simply relied on the
holding in Ansal to support its contention that the ALV
must be taxed as income from house property.
DECISION
The ITAT took note of Section 23(5) of the IT Act which
was inserted by way of the Finance Act, 2017, with
effect from April 1, 2018, i.e., AY 2019-20, and
subsequently amended in 2019.
This section deems the ALV of
unsold housing property in the
hands of the developer or builder
as nil for two years after the
completion of the project. However,
since the assessments in the case
of the Assessee pertained to AY
2013-14 and AY 2014-15, section
23(5) was not applicable.
The ITAT acknowledged that the two differing High
Court judgments relied by the Assessee and the IRA
were not decisions of its jurisdictional High Court, i.e.,
the Bombay High Court. While the Delhi High Court in
Ansal had concluded that ALV from unsold houses
should be taxed as income from house property, since
the only issue of consideration for assessment under
the head of income from house property is ownership
of the property by the assessee while the Gujarat High
Court in Neha Builders had considered that in case
the property was held as stock-in-trade, then such
property would partake the character of the stock,
income from which would be business income and not
income from house property. The ITAT upon careful
consideration of the precedential value of the two
conicting High Court judgments, deferred to the law
“”
If two reasonable constructions of a taxing provision are possible,
that construction which favorsthe tax payer must be
adopted.
32 Kanakia Spaces Pvt. Ltd. v. DCIT, ITA No. 7288/Mum/2017, decided on April 23, 2019.33 CIT v. Ansal Housing and Finance and Leasing Company Ltd., (2013) 354 ITR 180 (Del HC).34 CIT v. Neha Builders Pvt. Ltd., (2008) 296 ITR 661 (Gujarat).
provisions of CrPC were not applicable in the instant
case. Thus, the HC could not interfere in such
proceedings.
The Respondent also contended that the Petitioners
were guilty of circular trading as they claimed ITC
without procuring inputs, and passed on the same to
companies without selling any goods. Such an act was
a cognizable and non-bailable offence and the
Respondent had power to arrest such person under
Section 69(1) of the CGST Act.
DECISION
The HC observed that there was an incongruity
between Section 69(1) and Section 132(4) and (5) of
the CGST Act. Section 69(1) of the CGST Act provided
for the power of the commissioner to order arrest of
person only in cognizable and non-bailable offences.
However, Section 69(3) discussed about the
applicability of CrPC in case of arrest in non-
cognizable and bailable offences. The HC highlighted
that it was unclear as to how a person who had
committed a non-cognizable and bailable offence
could be arrested under the GST legislations.
In relation to the applicability of CrPC, the HC
disagreed with the Respondent’s contention that the
Petitioners could not rely on Section 41 and Section
41A of the CrPC. It was of the view that Section 70(1)
of the CGST Act was the parallel provision for Section
41A of CrPC, as they both deal with summoning of
person for enquiry.
In relation to maintainability of the writ, the HC relied
on SC rulings and observed that in case of exceptional
circumstances, the HC was empowered to issue the
writ of mandamus to direct an ofcer not to effect 42
arrest. However, it held that writ must not restrict the
proper ofcer from performing his statutory function.
Although the HC held the writ petition to be
maintainable, it did not grant relief to the Petitioners
against arrest. The HC observed that GST was in a
nascent stage. The taxpayers had exploited the law by
projecting huge turnover which remained on paper
and availed ITC to the tune of INR 250 crores. Thus,
there was nothing wrong in the Respondent
apprehending the person involved in fraudulent claim
of ITC should be arrested. Moreover, the list of
offences included under Section 132(1) of CGST Act
have no co-relation to an assessment. Thus, the
argument that prosecution can only be launched post
completion of assessment was not valid.
The HC also recorded that Section 69(1) of CGST Act
used the phrase “reasons to believe” whereas Section
41A(3) of CrPc used phrase “reasons to be recorded”.
Therefore, there was no requirement to record
reasons to believe in the order to authorize arrest.
SIGNIFICANT TAKEAWAYS
Under the erstwhile service tax regime, it was a settled
position of law that a person could be arrested only
post an enquiry was conducted, and an opportunity
was granted to such person, sought to be arrested, to
defend his/her/their stand.
However, the aforementioned judgement is contrary
to the said position in context of GST legislations. 43
Relying on its own ruling in P.V. Ramana Reddy the 44
Telangana HC in Ferrous Enterprises Pvt. Ltd.,
held that when arrest was not prohibited prior to
assessment, any coercive action which was less
grave than arrest, would also not be prohibited.
Although, the aforementioned Telangana HC
judgement of P.V. Ramana Reddy was challenged by
way of a special leave petition before the SC, the same
was dismissed. Similar stand has also been taken by 45 various HC of other States.
46 47 However, certain HCs , and the SC in Meghraj,
granted pre-arrest bail in the matters of wrongfully
availing ITC. Thus, another special leave petition was
led before the SC. The said special leave petition has
been referred to a three judge’s bench and is pending 48for hearing. It would be worthwhile to wait and watch,
whether the SC settles the position for the GST regime
in a manner similar to the erstwhile service tax regime.
42 Km. Hema Mishra v. State of U.P., 2014 (4) SCC 453; Kartar Singh v. State of Punjab, 1994 (3) SCC 569.43 Makemytrip India Pvt. Ltd. v. Union of India (2016) 44 STR 481 afrmed by the SC in Union of India v. Makemytrip India pvt. Ltd. (2019-SCConline SC 560).44 Ferrous Enterprises Pvt. Ltd. v. Union of India, TS-417-HC-2019(Tel).45 Mahendra Kumar Singhi v. Commissioner of State Tax, 2019 (5) TMI 310 (Mad HC); Meghraj Moolchand Burad v. Directorate General of GST (Intelligence) , Pune, 2019 (2)
TMI 1150 (Bom HC).46 Sapna Jain and Ors v. Union of India, 2019 (5) TMI 1610; M/s. Jayachandran Alloys (P) Ltd. v. The Superintendent of GST And Central Excise, 2019 (5) TMI 895 (Mad HC).47 Meghraj Moolchand Burad v. Directorate General of GST (Intelligence), Pune, 2019 (1) TMI 1563 (SC).48 Sapna Jain and Ors v. Union of India, [TS-381-SC-2019-NT].
The Appellant also contended that DLF Ltd. had made
several enquiries with the authorities to ascertain
whether transfer of TDR was exigible to service tax.
The Appellant also submitted that the demand, for the
substantial period in dispute, was barred by limitation.
On the other hand, the Revenue Authorities
(“Respondent”) argued that the Appellant had indeed
transferred TDR to DLF Ltd. under the Agreement.
The transaction between the LOCs and the Appellant
was mutually exclusive of the transaction between
DLF Ltd. and the Appellant under the Agreement. The
former transaction was not under scrutiny in the
present case. The funds provided by DLF Ltd. were in
the nature of a business advance paid to the Appellant
for the procurement of TDR.
The Respondent further contended that the balance
sheet of the Appellant reected such advance
amounts received towards TDR as ‘inventory’, which
clearly indicated that there was a transfer of TDR from
the Appellant to DLF Ltd. Thus, such transfer was not
futuristic in nature. Therefore, the Respondent argued
that the Appellant was liable to pay service tax on such
advances received from DLF Ltd. in terms of Rule 3 of
Point of Taxation Rules, 2011, which provided for the
time of receipt of any advance as the point of taxation.
DECISION
The CESTAT noted that the Agreement did not
encourage the actual transfer of TDR by the Appellant.
The Agreement was futuristic in nature as the transfer
of TDR could be effected only after the acquisition of
the concerned land. As throughout the transaction, the
Appellant would never be the owner of the land, it
would have no right to transfer any TDR.
The CESTAT observed that in order to render a
transaction liable for service tax, the nexus between
the consideration agreed and the service activity to be 50
undertaken should be direct and clear and the money
received should be directly attributed to an identied 51activity. However, this was not the case in the instant
matter. Therefore, the CESTAT held that the funds
provided by DLF Ltd. could not be considered as
consideration for service provided.
The CESTAT further observed that in terms of Section
3(26) of General Clauses Act, 1897, TDR being in the
nature of a benet arising out of land, would be treated
as an “immoveable property” in the instant case.
Therefore, transfer of the same was outside the
purview of “service” under Section 65B (44) of the
Finance Act.
The CESTAT also noted that since the Respondent
had not responded to the letters of DLF Ltd., seeking
clarity on the levy of service tax on transfer of TDR, it
can be inferred that the Respondent was not clear on
whether such a transaction was a taxable service or
not. Thus, there was no mala de on part of the
Appellant. Accordingly, the CESTAT held that the
demand of service tax conrmed by the assessing
authority was unsustainable and the same was set
aside.
SIGNIFICANT TAKEAWAYS
The levy of service tax on TDR has always been a
disputed issue under the erstwhile service tax regime.
The aforesaid ruling of the Chandigarh CESTAT is the
rst decision of its kind wherein the CESTAT claried
that in the instant case, TDR would be treated as an
immoveable property and hence, its transfer would not
a taxable service under the FA. However, it must be
noted that the Hon’ble CESTAT has restricted its
analysis of taxability of TDR to the factual matrix of the
instant case, and has not examined the nature of TDR
in general. Hence, the issue of levy of tax on TDR still
remains a grey area.
It may also be noted that under the GST legislations,
TDR has been explicitly treated as a supply, exigible to
GST at the rates prescribed in this regard. However, a
writ petition has already been led before the Bombay
HC challenging the constitutional validity of levy of 52
GST on TDR.
51
50 Mormugao Port Trust v. CC, CE&ST, Goa - 2017 (48) S.T.R. 69 (Tri. - Mumbai).51 Cricket Club of India v. Commissioner of Service Tax, 2015 (40) S.T.R. 973.52 Nirman Estate Developers Pvt. Ltd. v. Union of India W.P. 3357 of 2018 Bombay HC.
53In the case of M/s Safari Retreats Pvt Ltd and Anr.,
the Orissa HC held that ITC would be available on
GST paid on procurement of goods and/or services
utilized for construction of a mall, which includes GST
payable on the rental income.
FACTS
M/s Safari Retreats Pvt. Ltd. and Anr. (“Petitioners”)
were engaged in the business of construction of
shopping malls and letting them out on rental basis.
They procured various inputs and input services for
the purposes of construction, and
paid GST on the same. The
Petitioners were desirous of setting
off the ITC of the same against their
output GST liability on renting of
immovable property. However, in
view of the restriction on availability
of ITC under Section 17(5)(d) of the 54
CGST Act , the GST authorities (“Respondent”)
advised the Petitioners to deposit the GST amount
without utilizing the ITC. Therefore, the Petitioner
challenged the denial of the benet of ITC under
Section 17(5)(d) of the CGST Act.
ISSUES
Whether ITC can be claimed on goods and/or services
utilized/consumed in the construction of malls for the
purpose of letting it out?
ARGUMENTS
The Petitioners argued that the provisions of Section
17(5)(d) of the CGST Act would not be applicable to
this case. They were entitled to avail benet of ITC of
GST paid on procurement of goods and/or services as
GST was payable by them on the rentals income
received from letting out of the mall. It was also
submitted that as there would be no break in the
supply chain of the Petitioners, ITC were to be made
available to the Petitioners.
The Petitioner contended that Section 17(5)(d) of the
CGST Act was not made applicable to builders who
sold units in buildings before the issuance of a
completion certicate, considering that GST was
payable on the output supply. However, ITC was
denied under Section 17(5)(d) of the CGST Act to
builders who were letting out their buildings for renting,
even though GST was payable on the letting out.
The Petitioner argued that Section
17(5)(d) of the CGST Act classied
the aforesaid taxable persons under
two different categories, even though
both were carrying continuous
business without any break in supply
chain. Such classication was not a
reasonable classication and was
egregiously arbitrary and discriminatory, and hence,
was violative of Article 14.
The Petitioners also contended that the denial of ITC
under Section 17(5)(d) of the CGST Act had led to a
sharp and inevitable increase in cost which the owner
of the building was compelled to incur. This had also
rendered the construction uncompetitive as compared
to similar built-up units existing previously. Therefore,
such a discrimination was violative of the fundamental
right to carry on business granted under article
19(1)(g) of the Constitution of India.
Lastly, the Petitioners argued that it was a settled
posit ion of taxat ion statute that only such
interpretation was to be adopted which avoided or
obviated double taxation. However, denial of ITC in
the instant case, was clearly against the intention of
the legislature and frustrated the object sought to be
achieved by the legislature in enacting the GST
legislations.
”“ ITC shall be available tobuilders engaged in constructionservices for letting out of units.
53 M/s Safari Retreats Pvt Ltd and Another v. Chief Commissioner of Central Goods and Service Tax and Others, 2019-VIL-223-ORI.54 Section 17(5)(b) of the CGST Act states that ITC shall not be available on “goods or services or both received by a taxable person for construction of an immovable property
(other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.”
claimed a refund. As (i) the Petitioner did not avail
these options, (ii) assessment for the period was
already completed and (iii) Telangana GST Act, 2017
does not provide for utilization of NCCF as transitional
relief, the Petitioner was not entitled to the transitional
relief under Section 140 (1) of the Telangana GST Act,
2017.
DECISION
The Telangana HC observed that the Petitioner was
entitled to refund against the amount of NCCF or seek
adjustment of their liability under the GST regime.
The HC stated that as (i) there were no provisions in
the Telangana GST Act, 2017 to suggest that NCCF
were inadmissible as ITC under the Telangana GST
Act, 2017; and (ii) Petitioner had furnished all the
returns required under the erstwhile law, the
conditions limiting the grant of transitional relief in the
rst proviso to section 40(1) of the Telangana GST
Act, 2017 were not satised and as such, the
Petitioner was entitled to transitional relief under
section 140(1) of the Telangana GST Act, 2017. The
HC observed that when the revenue itself admitted
that the Petitioner was entitled to refund against the
unutilized NCCF, the revenue ought to have given a
purposive interpretation to section 140 of the
Telangana GST Act, 2017. In light of these
observations, the HC remanded back the matter to
Assistant Commissioner of Sales Tax for fresh
consideration in light of the aforementioned
observations.
SIGNIFICANT TAKEAWAYS
The decision is in line with the approach of the higher
judiciary in previous cases involving the question of
availability of transitional credit to tax payers. The
courts have been liberal in their approach in allowing
taxpayers to le their claims for input credit and have
passed orders directing concerned ofcers to allow
easy access to the por ta ls and ass is t in 56implementation and administration of GST law.
While the nal order of the Assistant Commissioner of
Sales Tax is not traceable, it is expected that the order
of the Assistant Commissioner of Sales Tax would
ensure smooth transition from pre-GST regime to
GST regime.
The decision is a welcome ruling for all the taxpayers
facing issues in claiming transitional credits under the
GST regime. The ruling reinforces the settled
principle of law that substance should be preferred
over form, and if a taxpayer is entitled to a relief under
a statute, then such relief should not be denied on
mere technicalities.
56 Abicor & Binzel Technoweld (P.) Ltd. v. Union of India, [2018] 91 taxmann.com 187 (Bombay); Continental India (P) Ltd v. Union of India, Writ (Tax) No. 67 of 2018.
rst proposal written regarding constitution of GST
Tribunal.
FACTS
A proposal was made by the State Government
recommending that the State Bench of the GST
Tribunal should be established at Lucknow. The
proposal was revised on March 15, 2019 on account of
an order of the Allahabad HC dated 58
February 28, 2019 , which relied on
the decision of the Supreme Court 59in Madras Bar Association . It
was thus proposed to set up the
State Bench of GST Tribunal at
Allahabad instead, due to the
Principal Bench of the HC being situated there.
Aggrieved by the revised proposal / letter, the Oudh
Bar Association (“Petitioner”) led a writ petition
before the Allahabad HC praying quashing of the
revised letter/proposal.
ISSUE
Whether the permanent Bench of a Tribunal can be set
up only where the “Principal Seat” of the HC is
situated?
ARGUMENTS
The Petitioner submitted that the judgment of Madras 60
Bar Association did not mandate constitution of
Tribunal where the Principal Bench of the HC was
situated. Furthermore, the interlocutory order passed
by the Allahabad HC did not give directions for
constitution of State bench of the GST Tribunal at
Allahabad, it was merely an observation. The only
direction given by the HC was with regards to giving a
cut-off date by which the bench of the Tribunal should
be set-up. Therefore, the observation made by the HC
was in the nature of an obiter dicta and not binding.
The Petitioner submitted that section 109 of the CGST
Act, provides that the Government may on
recommendation of the GST Council, by notication,
constitute regional benches as may be required.
Accordingly, the Petitioner argued that under the
CGST Act, constitution of benches
of GST Tribunals falls within the
domain of the Government based
on the recommendation of the GST
Council. The HC had no power to
interfere in such a matter.
It was further submitted that the rst
proposal had been consciously made by the State
Government, keeping in mind the various aspects of
the pre-GST Tribunal. The Respondent had no
occasion to revise its proposal without recording due
reasons.
61The Petitioner also relied on a decision of the SC to
state that there was no permanent seat of the HC at
Allahabad. The seats at Lucknow and Allahabad were
of equal status. It was thus open for the State
Government to constitute the GST Tribunal at either of
the two places, or even at both the places.
The respondent, on the other hand, argued that the
revised proposal was sound under the provisions of
the CGST Act as the requisite procedure was followed.
It was further argued that the order of the HC was
directory in nature and required a revision of the earlier
proposal under law.
”“Permanent Bench of Tribunal
can be set up wherever a Seatof the HC is situated.
OF HC IS SITUATED
57 Oudh Bar Association High Court, Lucknow through General Secretary and Another v. UOI through Secretary, Ministry of Finance & Ors. PIL Civil No. 6800 of 2019. 58 Writ Petition No. 655 (Tax) of 2018.59 Madras Bar Association v. UOI, (2014) 10 SCC 1. 60 Madras Bar Association v. UOI, (2014) 10 SCC 1.61 Nasiruddin v. STA, Tribunal, (1975) 2 SCC 671.