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FOREWORDWe are delighted to present to you, the latest issue of the Tax Scout, our quarterly update on recent developments in the eld of direct and indirect tax laws for the quarter ending December 2017.
The OECD/G20 had formulated 15 Base Erosion Prot Shifting Action Plans to address base erosion and prot shifting carried out by tax planning arrangements. To implement these Action Plans, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Prot Shifting (MLI) was suggested as an alternative to the onerous process of treat-by-treaty amendment for implementing BEPS. As the cover story, we have discussed India’s position in respect of the provisions in the MLI and its implications on taxpayers.
Further, the implementation of GST and the Government of India’s pro-export approach had given an impetus to the government for re-looking at the Foreign Trade Policy 2015-2020. This time, as a part
of the Cover Story, we have discussed the various modications made to the Foreign Trade Policy 2015-2020, subsequent to its mid-term review, as released by the Directorate General of Foreign Trade.”
Additionally, we have also analyzed some of the important rulings by the Indian judiciary and certain key changes brought about by way of circulars and notications in the direct and indirect tax regimes
during the October - December Quarter.
We hope you nd the newsletter informative and insightful. Please do send us your comments and feedback at [email protected].
• Implications of India’s position in respect of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Prot Shifting. 04
• Alchemised Foreign Trade Policy 2015 – 2020. 07
Case Law Updates – Direct Tax
• Delhi HC reads down section 145(2) of the IT Act and various ICDS provisions issued thereunder. 11
• Purpose of the subsidy is conclusive test to determine nature of the subsidy. 17
• Depreciation permissible even when the entire cost of the asset has been allowed as application of income. 19
• SC stays operation of Delhi HC judgment & order in Bhushan Steel on taxability of subsidy amount. 21
• Deemed income provisions under section 56(2)(viib) applies to all class of shares and tax ofcer can challenge the valuation report submitted by taxpayer. 23
• CBDT cannot issue circulars having retrospective operation. 25
• Delhi HC issues guidelines for reopening of assessment under section 147 of the IT Act. 27
• Fixed mobilization fees received by non-resident for transportation of drilling units to India, having nonexus with the expenses incurred, cannot be construed as reimbursement of expenses. 30
• No benet under section 80-IB if SSI does not continue to meet eligibility criteria in subsequent years. 33
• Only solar days relevant for establishment of service PE in India; FTS not taxable if no specicprovision under the DTAA. 36
• Outsourcing of back ofce support functions does not create a PE. 38
• No tax on JDA until its registration. 41
Case Law Updates – Indirect Tax
• Entire fees received by hospital is towards the provision of health care services. 45
• No service tax liability on amounts paid towards salaries and perquisites of deputed expats andcommission received for marketing of foreign entity. 48
• Bona de purchasers cannot be denied the benet of input tax credit under the Delhi VAT Act, 2004. 51
• Exemption of excise duty extends to education and higher education cess imposed on such excise duty. 54
• Provisions of a state legislation cannot override the objects of a benecial scheme. 56
Non Judicial Updates – Direct Tax
• CBDT releases nal rules on the Country by Country reporting and Master File implementation. 59
• CBDT clarication pertaining to indirect transfer. 61
• Draft amendment to rule 17A of the IT Rules and Form 10A. 61
• CBDT issues POEM clarication for operations carried on through regional headquarters. 62
Non Judicial Updates – Indirect Tax
• CBEC claries applicability of IGST on sale/transfer of goods while being deposited in a warehouse. 65
• CBEC issues clarications regarding the transaction value and levy of GST on various services such as accommodation services, betting and gambling in casinos, horse racing, admission to cinema, homestays,printing and legal services. 65
• CBEC claries refund/claim of countervailing duty as Duty Drawback 66
erosion and prot shifting carried out by tax planning
arrangements that availed benecial provisions of
applicable tax treaties by exploiting mismatches in tax
rules across countries. The project identied 15 action
plans (“BEPS Action Plans”) to curb such practices,
and consequently, ensure that prots of an enterprise
are charged to tax at the place of value creation. It was
found that more than 3,000 DTAAs would have to be
amended, to introduce provisions that constrain
BEPS. Consequently, an Ad-hoc Group, of which
India was part of, was formed and entrusted with the
task of preparing a multilateral instrument for
implementing BEPS, which would be applicable
concurrently with DTAAs. This multilateral instrument
was suggested as an alternative to the onerous
process of t reat -by- t reaty amendment for
implementing BEPS. The Ad-hoc Group came up with
the Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and Prot
Shifting (“MLI”), and adopted it on November 24,
2016. Subsequently, India signed the MLI on June 7, 1 2017.
2As mentioned above, upon coming into effect, the
MLI would apply concurrently with existing DTAAs,
and modify their application, bringing it in line with the 3measures outlined in the BEPS Action Reports.
Further, a DTAA would be subject to such modication
only if both parties to such DTAA (collectively, referred
to as “Parties” and individually as “Party”), notify the 4DTAA as being covered under the MLI. When a DTAA
is notied by both Parties, it is referred to as a covered
tax agreement (“CTA”). It should be noted that a
jurisdiction is not obligated to subject to the MLI, all
DTAAs which it is party to.
Additionally, the MLI prescribes certain minimum
standards pertaining to abuse of treaty provisions and
dispute resolution, which all participating countries are 5 required to adhere and in respect of such provisions,
there may even be mandatory amendment of all CTAs 6to ensure observance of the minimum standards,
unless the CTA already meets such standards. In
relation to its provisions that do not pertain to the
prescribed minimum standards, the MLI may provide
exibility to a Party, by way of an option to opt out of
such provision or part of the provisions through
reservations. In general, the MLI provides, in majority
of its provisions, that should a Party not reserve the
applicability of a particular provision and not notify the
respective provision of a CTA, or if a Party does not
state that such provision is reserved in its entirety, then
that MLI provision would be added to the CTA and
prevail over the portion of the CTA to the extent of the
inconsistency. Further, in certain instances, the MLI
may also provide a Party, an option to choose among
alternative provisions intended to address the same
concern. The chosen alternative would be applicable,
however, only if both Parties opt for it. If one Party to
the DTAA chooses an option, and the other Party
chooses a different option or does not choose any
option, then none of the options would apply to the
relevant CTA.
Under its provisional list, India notied 93 DTAAs, i.e.
all DTAAs that it has entered into, thereby subjecting
such treaties to the selected MLI provisions. In light of
this background, the position adopted by India with
respect to the MLI provisions and the implications
thereof, are discussed in the ensuing paragraphs.
Implications of India’s Position
Provisions concerning Minimum Standards
Prevention of treaty abuse
As discussed earlier, prevention of treaty abuse is a
minimum standard that participants to the MLI are
required to adhere to. To that end, the MLI requires the
1 Government of India Press Release dated June 7, 2017.2 The MLI would enter into force on the rst day of the month following the expiry of 3 calendar months from the date on which 5 signatories have deposited their instrument of
ratication, acceptance or approval with the OECD. For each country signing the MLI after the fth instrument is deposited, the MLI would come into force on the rst day of the month following the expiry of three months from the date of such deposit.
3 In that regard, the MLI differs from protocols to a DTAA, as the latter directly amend the DTAA instead of merely operating on a concurrent basis. 4 Where an MLI provision is found to supersede or modify an existing provision of a CTA, the parties, to such CTA, are generally required to make a notication to the OECD
specifying such provisions.5 The minimum standards prescribed under the MLI pertain to BEPS Action 6 (Preventing the Granting of Treaty Benets in Inappropriate Circumstances) and BEPS Action 14
(Making Dispute Resolution More Effective), respectively. 6 To be determined in the course of the review and monitoring process as provided under the BEPS framework.
conict with principles of taxation contained in the IT
Act, IT Rules and applicable judicial precedents as
they stand.
FACTS
The Finance Act, 1995 substituted section 145 of the
IT Act to provide that the taxpayers had to follow either
mercantile or cash system of accounting. The
substituted section 145 of the IT Act also empowered
the Government to notify any Accounting Standards
(“AS”) to be followed by any class of taxpayers or in
respect of any class of income. Pursuant to the
amendment, the Government notied two AS vide a 9Notication dated January 25, 1996, which were
borrowed from the ASs issued earlier by the Institute
of Chartered Accountants of India (“ICAI”).
Subsequently, the CBDT appointed the Accounting
Standards Committee to, inter alia, study the
harmonization of AS issued by ICAI with direct tax
laws and accordingly, suggest ASs to be adopted
under section 145 of the IT Act. This committee
drafted and recommended 14 tax ASs, against which
the Chamber of Tax Consultants (“Petitioner”), a
voluntary non-prot organisation, made detailed
representations pointing out how the proposed ASs
were against well-established legal positions.
However, Finance Act (No. 2), 2014 amended section
145 of the IT Act, empowering the Government to
notify ICDS, to be followed by any class of taxpayers
or in respect of any class of income. Successively, the
CBDT circulated 12 draft ICDS for public comments.
Eventually, following a series of notications issued by
the CBDT, the ICDS were nally notied vide a 10Notication dated September 29, 2016 (“Impugned
Notication”) which were required to be followed by
all the taxpayers following mercantile system of
accounting, for the purposes of computation of income
chargeable to tax under the head ‘Prots and gains of
business or profession’ and ‘Income from other
sources’, with effect from AY 2017-18. Subsequently, 11 the CBDT by a Circular dated March 23, 2017
(“Impugned Circular”), issued clarications in the
form of frequently asked questions to provide clarity
regarding the ICDS for better implementation thereof.
Following the issue of this circular, the Petitioner
approached the Delhi HC challenging the vires of
section 145 of the IT Act, as well as of the Impugned
Notication and the Impugned Circular.
ISSUES
(1) Whether the amendments to section 145 of the IT
Act are an instance of delegation by the
Parliament to the Government, of essential
legislative powers?
(2) Whether ICDS are an instance of excessive
delegation of legislative powers? Whether the
impugned ICDS are contrary to the settled law as
explained in various judicial precedents and are,
therefore, liable to be struck down?
(3) Whether the impugned amendments to section
145 of the IT Act, Impugned Notication and the
Impugned Circular, are violative of Articles 14, 19
(1) (g), 141, 144 and 265 of the Constitution?
DELHI HC READS DOWN SECTION 145(2) OF THE
IT ACT AND VARIOUS ICDS PROVISIONS ISSUED
THEREUNDER.
8 Chamber of Tax Consultants v. Union of India (2017) 87 taxmann.com 92 (Delhi HC).9 Notication No. 9949 [F.No. 132/7/95-TPL] dated January 25, 1996.10 Notication No. 87/2016 dated September 2, 2016.11 Circular No. 10 of 2017 dated March 23, 2017.
14 as interpreted by the Courts. It placed reliance on various judicial precedents and held that the accounting
standards did not have the power to determine the income chargeable to tax under the IT Act. It held that the
computation of income for the purpose of income-tax is governed by the provisions of law and as interpreted by the
Courts.
Having held that the ICDS is not meant to overrule the provisions of the IT Act, the IT Rules and the relevant judicial
precedents, the HC examined ICDS vis-a-vis the binding judicial precedents in the backdrop of legal provisions.
14 Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, (1997) 227 ITR 172/93 Taxman 502 (SC); B.S.C. Footwear Ltd. v. Ridgway Inspector of Taxes, (1972) 83 ITR 269 (H.L.); Challapalli Sugars Ltd. v. CIT, (1975) 98 ITR 167 (SC).
15 CIT v. Triveni Engg. & Industries Ltd. (2011) 336 ITR 374 (Delhi HC) and CIT v. Advance Construction Co. (P.) Ltd. (2005) 275 ITR 30/143 Taxman 61 (Gujarat HC).16 CIT v. Triveni Engg. & Industries Ltd. (2011) 336 ITR 374 ( Delhi HC).17 Shakthi Trading Co. v. CIT (2001) 250 ITR 871/118 Taxman 301 (SC).
I C D S I - A c c o u n t i n g Policies : Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss was in accordance with ICDS
ICDS I I - Valuation of Inventories :
In case of dissolution of a p a r t n e r s h i p r m o r association of person or body of indiv iduals, not wi th s t a n d i n g w h e t h e r t h e business carried on by such entities is discontinued or not, the inventory on the date of dissolution shall be valued at the net realisable value.
Petitioner
l Petitioner contended that the concept of prudence has been done away wi th, which was previously provided for under AS 1.
l ICDS I was contrary to various 15judicial precedents , to the extent it
provided that concept of prudence was not to be followed.
Respondents
l Respondents argued that the concept of prudence had not been done away with under ICDS I, but had to be followed on a case to case basis.
l Concept of prudence would continue to apply under various ICDSs like ICDS III (relating to construction contracts), ICDS X (relating to provisions of contingent liability and contingent assets).
Petitioner
It was argued that ICDS II was contrary to the SC decision in Shakthi
17Trading Co. , where the SC held that on the dissolution of a rm, where the business of rm was not discontinued and was taken over by other partners, the stock-in-trade of the rm could be valued at cost or market value, whichever was lower.
l The HC observed that ICDS X specically prohibited recognition of cost or liability to be incurred in future. Similarly, ICDS III allowed expec ted l osses on l y on a proportionate basis. Thus, the HC held that these ICDS were not in accordance with the concept of prudence and contrary to judicial
1 6dec is ions which he ld that expected losses had to be allowed as deduction.
l The HC also held that the concept of prudence was embedded in section 37 (1) of the IT Act which allows deduction in respect of expenses 'laid out' or 'expended' for the purpose of business.
l Thus, the HC held ICDS I to be contrary to the IT Act and judicial precedents, to the extent it did away with the concept of prudence.
l HC noted that section 145A of the IT Act (non obstante provision) permits a taxpayer to value its inventories in accordance with a method regularly employed by it. Therefore, the HC held that where a part icular method had been adopted by a taxpayer, the same method would govern the valuation of inventories, irrespective of the ICDS.
l The HC also held that paragraph 24 of ICDS II was contrary to the decision of the SC in Shakthi T r a d i n g C o ( s u p r a ) a n d accordingly, held it to be ultra vires the IT Act.
HC held that the treatment of re ten t ion money had to be determined on case-to-case basis, by applying the settled principles of accrual of income. The HC further held that ICDS III was contrary to the principle laid down in various judicial precedents that retention money does not accrue until and unless the defect liability period is over and it is certied that no liability is attached further.
l Set off of incidental income
The HC held that ICDS III was contrary to the decision of Bokaro Steel (supra)
Thus, to the extent explained above HC held ICDS III as ultra vires the IT Act.
l Export Incentive
HC held that ICDS IV was contrary to the decision of the SC in the case Excel Industries (supra), to the extent ICDS IV required a taxpayer to recognize income from export incentive in the year of making of the claim if there was reasonable certainty of its ultimate collection.
l Revenue recognition method
The HC held ICDS IV to be ultra vires the IT Act, to the extent it permitted only one method of income recognition, as it was contrary to b inding jur id ical precedents
l Retention money
Petitioner
It was argued that ICDS III was c o n t r a r y t o a p l e t h o r a o f
18decisions, where the Courts held that the retention money did not accrue to a taxpayer unless and until the defect period was over.
l Set off of incidental income
Petitioner
It was argued that ICDS III read with ICDS IX, ran contrary to the decision of the SC in Bokaro Steel
19Ltd. wherein it was held that if the taxpayer received any amount which was inextricably linked with the process of setting up of plant and machinery, such receipts would reduce the cost of its assets.
l Export Incentive
Petitioner
Petitioner pointed out that ICDS IV required a taxpayer to recognize income from export incentive in the year of making of the claim if there was 'reasonable certainty' of its ultimate collection. Thus, the Petitioner argued that ICDS IV was contrary to the decision of the SC in
20Excel Industries, wherein it was held that income from export incentive accrued in the year in which the claim was accepted by the Government.
l Revenue recognition method
Petitioner
It was argued that according to AS 9, either proportionate completion or completed service contract method could be adopted for recognition of revenues from service contract. It was also asserted that Courts in a plethora of
21cases had held that the taxpayer
ICDS II I- Construction Contracts:
l Retention money
Contract revenue shall comprise of the init ial amount of revenue agreed in the contract, including retentions and the same shall be assessed on the basis of proport ionate completion method.
l Set off of incidental income
ICDS III, read with ICDS IX dealing with 'borrowing cost' provides that the contract cost would not be reduced by any incidental income.
I C D S I V - R e v e n u e Recognition :
l Export Incentive
Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim for escalation of price and export incentives, revenue recognition in respect of such claim shall be postponed to the extent of uncertainty involved.
l Revenue recognit ion method
S e r v i c e t r a n s a c t i o n s revenue shall be matched with service transaction cost and income shall be r e c o g n i z e d o n t h e p r o p o r t i o n o f w o r k completed.
18 CIT v. Simplex Concrete Piles India (P.) Ltd. (1989) 179 ITR 8; CIT v. P&C Constructions (P.) Ltd. (2009) 318 ITR 113 (Madras HC); Amarshiv Construction (P.) Ltd. v. Dy. CIT (2014) 367 ITR 659 (Gujarat HC); and DIT v. Ballast Nedam International (2013) 355 ITR 300 (Gujarat HC)
19 CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC)20 CIT v. Excel Industries Ltd.(2013) 358 ITR 295 (SC)21 CIT v. Bilahari Investment (P.) Ltd. (2008) 299 ITR 1 (SC); CIT v. Manish Build Well (P.) Ltd. (2011) 16 taxmann.com 27(Delhi HC); Paras Buildtech India (P.) Ltd. v. CIT (2016) 382
Interest shall accrue on time basis determined by the amount outstanding and the rate applicable.
ICDS VI-Effect of change in foreign exchange rate: I n respec t o f fo re ign currency loans, exchange differences arising on the s e t t l e m e n t o r o n c o n v e r s i o n s h a l l b e recognised as income or as expense in that year.
ICDS VII- Government grants :
R e c o g n i t i o n o f Government grant shall not be postponed beyond the date of actual receipt.
ICDS VIII-Valuation of securities: At the end of a n y p r e v i o u s y e a r , securities held as stock-in-trade shall be valued at a c t u a l c o s t i n i t i a l l y r e c o g n i s e d o r n e t realisable value at the end of that previous year, whichever is lower.
Such comparison of actual cost initially recognised and net realisable value shall be done category wise and not for each individual security
may either follow proportionate completion method or contract completion method.
l Interest Income
Petitioner
It was argued that application of ICDS IV would result in non-performing assets of NBFCs becoming taxable, even though such interest was not recoverable.
Respondent
It was argued that where interest income was recognized on time basis, any loss arising on such income becoming irrecoverable would be allowed as deduction under the section 36(1)(vii) of the IT Act.
Petitioner
It was argued by the Petitioner that ICDS VI was contrary to the SC
22decision of Sutlej Cotton Mills Ltd. where it held that exchange loss or gain in relation to capital item would be capital in nature.
Petitioner
It was argued by the Petitioner that generally, conditions are attached to the receipt of government grant, non-fullment of which may lead to return of such amount. Thus, it could not be said that the income had accrued even though the grant had been received.
Petitioner
It was argued by the Petitioner that the method o f va lua t ion o f securities under the ICDS was different from what was prescribed under the AS, to the extent it requires securities to be valued category wise (as stipulated in ICDS VIII), therefore, the taxpayer would be required to maintain two books o f accounts , one for accounting purposes and the other one for income tax purposes.
l Interest Income
HC observed that paragraph 8 of ICDS IV was introduced to create a m e c h a n i s m o f t r a c k i n g unrecognized interest amounts for future taxability and had requisite legislative backing through the amended provision of section 36(1)(vii) of the IT Act.Thus, the HC held paragraph 8 of ICDS IV to be valid.
HC held that to the extent ICDS VI sought to treat change in foreign exchange as income, i t was contrary to the SC decision in Sutlej Cotton Mills Ltd. (supra) and, hence, ultra vires the IT Act.
The HC held that such treatment of grants as provided under ICDS VII was contrary to the accrual system of accounting, hence, ultra vires the IT Act.
The HC accepted the argument of the Petitioner and noted that ICDS VIII provided for a bucket approach of valuation (i.e. securities should be valued category wise, rather than on individual basis), however, ICDS II did not provide for any such method for valuation of inventories. Thus, the HC held that the respondents themselves had adopted different methods of valuation and such changes could not have been made without corresponding amendments to the IT Act . Hence, the HC held paragraph 10 of ICDS VIII as ultra vires the IT Act.
SC has issued notices to hear petition challengingthe Delhi HC judgment on
taxability of subsidy
30In Bhushan Steel Ltd., SC has issued notices for hearing of the petition seeking special leave to appeal against the judgment and order of the
31Delhi HC in Bhushan Steels. Accordingly, it has also stayed the operation of the impugned judgment of the Delhi HC. The Delhi HC in the case of Bhushan Steels (supra), had ruled that amount received under a subsidy scheme was revenue in nature on account of absence of restrictions to utilize the amount for capital purposes alone.
FACTS
Bhushan Steels and Strips Ltd. (“Assessee”), was a company engaged in the manufacturing of galvanized steel strips and sheets. As some of its productions units were located in an area that had been notied by the government of Uttar Pradesh (“UP”) as backward area, it was exempted, under a state government scheme, from payment of sales-tax in respect of goods that were manufactured in a new industrial unit. This scheme stood revised in 1991, and post-revision, certain entities were exempted from paying sales-tax that they collected, to the extent of their capital expenditure.
The AO added the sum to the taxable income of the Assessee. On appeal, the CIT(A) found in favour of the Assessee, noting that the impugned sum was meant to be an incentive for establishment of industries in backward regions of the state. Accordingly, it could not be taxed as a trading receipt. The Delhi ITAT dismissed the appeal preferred by the IRA against the order of
the CIT(A). Accordingly, the IRA approached the Delhi HC.
The HC observed that the Assessee enjoyed the freedom to use retained sales-tax for any purpose, and without any restrictions on the end use. Thus, it agreed with the IRA that the intent behind the subsidy was to incentivize the recipient to expand its business by increasing its protability. Thus, the subsidy was revenue in
nature. It further noted that the o r i g i n a l s c h e m e o f 1 9 9 0 i n paragraph 6(A) and 6(B), provided for a capital subsidy to set up 'Prestige' units; the Court explained that amounts indicated thereunder were capital in nature. However, under the terms of the supplemental scheme, int roduced in 1991,
Assessee was allowed retention of sales-tax amounts after such industrial unit which could possibly claim benet under the scheme was already set up. Therefore, subsidy could not be considered as being capital in nature. Lastly, Court claried that the prescribed limit on the benet to the extent of hundred percent of capital expenditure, was only a reference point and did not determine the nature of receipt.
Aggrieved by the ruling of the Delhi HC, the Assessee approached the SC.
ISSUES
Whether the Delhi HC was correct in holding that the sum retained by the Assessee was taxable being revenue in nature?
30 Bhushan Steel Ltd. v. CIT, Delhi SLP (C) No. 30728-30732/2017 (SC). 31 0CIT v. M/s Bhushan Steels and Strips Ltd. ITA 315 of 2003 (Delhi HC).
Assessee claimed that sales-tax amount so collected and retained was capital in nature. It was also argued that the state government provided the subsidy for establishment of industrial units in specic areas. Even under an earlier notication, its benet could be availed only after Assessee's cold-rolled unit went into production. The exemption applicable to its 'Prestige' unit was also available only on fresh investment on behalf of Assessee. Further, benets of original scheme that was amended in 1991 were extended to existing units only on expansion of their capacity. In a nutshell, it was the case of the Assessee that the subsidy was meant to recoup capital expenditure incurred in setting up a new unit or expansion of capacity of an existing one and thus, was entitled to the exemption of paying sales tax to the State.
In rebuttal , IRA submitted that lack of conditionality dictating that the received sum must be expended only for capital purposes, and consequently, as freedom was available to Assessee to utilize it for any other end, meant that State intended to increase the protability of the recipient. As absence of obligation, to pay the collected sales-tax amounts to the State, led to augmentation of Assessee's income, subsidy was revenue in nature. In this regard, IRA placed
32reliance on decision of the SC in Sahney Steel. wherein it held that character of subsidy had to be determined keeping in mind purpose behind granting it. Therefore, if the purpose was to help the recipient in setting up its business, subsidy would be capital in nature. However, if it was given for assisting recipient in carrying on business operations, and given only after and was conditional upon production, subsidy had to be treated as assistance for purpose of trade i.e. revenue in nature. Further, IRA urged that the quantitative limit, i.e. amount that could be retained, being specied in reference to capital expenditure did not indicate the nature of the subsidy. Lastly, IRA submitted that as the subsidy scheme operated only after expansion, i.e. after capital expenditure had already been incurred
and capacity expanded, it could not be construed to be a capital receipt.
DECISION
The petition led by the Assessee seeking a leave to appeal the above-mentioned judgment and order of the Delhi HC, is pending before the SC. Division Bench of the SC has issued notices for the hearing of the same. Further, it has stayed the operation of the impugned judgment of the Delhi HC.
SIGNIFICANT TAKEAWAYS
Whether amount received under a subsidy is capital or revenue in nature has been subject matter of litigation on numerous occasions. The SC has also addressed the debate in several cases, including the case of Sahney Steel (supra).
It is pertinent to note that the SC in that case enunciated the following principles to determine the nature of receipt:
l Character of subsidy in the hands of the recipient, i.e. its capital or revenue nature, will have to be determined having regard to the purpose for which the subsidy was given;
l Source of the fund from which subsidy is given is immaterial;
l Manner in which the subsidy is given is of no consequence;
l If subsidy is given to the assessee to assist him in carrying on his trade or business, it is a revenue receipt;
l If the monies are given only after and condi t iona l upon commencement o f production, such subsidy must be treated as assistance for the purposes of trade or business;
While this ruling has been cited on several instances, judicial precedents on the topic suggest that the conclusion is largely factual in nature. In this background, it remains to be seen how the apex court would determine the nal outcome in the matter.
32 Sahney Steel and Press Works Ltd. v. CIT 228 ITR 253 (SC).
Retrospective or prospective applicability of circular
issued by the CBDT has been one of the most 35debated issue. In Gemini Distilleries, the SC held
that the CBDT cannot issue instructions or circular
having retrospective operation.
FACTS
Section 268A of the IT Act empowers the CBDT to
issue instructions or orders or directions for xing
monetary limit for regulating ling of appeals by
income tax authorities.
The CBDT by exercising the power
provided under Section 268A of the IT 36Act issued instructions wherein
monetary limits and other conditions for
ling departmental appeals before ITAT,
HC and SC were prescribed and revised
from time to time. The monetary limits
were set with the objective of reducing litigation and
taxpayers' grievances.
Further, the instructions provides that all the appeals
led on or after the date of coming into force of such
instructions shall be governed by such instructions,
i.e., the instructions to be considered before ling any
departmental appeal shall be the instructions as in
force on the date of ling of such appeal.
ISSUES
Whether the instruction or circular issued by the
CBDT has retrospective operation or not?
ARGUMENTS
Gemini Distilleries (“Assessee”) by placing reliance 37on para 10 of CBDT circular issued on December
10, 2015 contended that the circular directs
retrospective application of the monetary limits. Para
10 of the said circular reads as under,
“This instruction will apply retrospectively to pending
appeals to be led henceforth in High Courts /
Tribunals. Pending appeals below the specied tax
limits in para 3 above may be withdrawn / not pressed.
Appeals before the Supreme Court will be governed by
the instructions on this subject, operative at the time
when such appeal was led.”
Therefore, Assessee by placing reliance on the above
mentioned para contended that the monetary limits
are applicable retrospectively, as in
various judgements it has been held that
circulars which are benecial to the
taxpayer are applied retrospectively
while oppressive circulars are applied
prospectively.
DECISION
The SC examined the issue relating to the
retrospective or prospective applicability of circular
issued by the CBDT and by setting aside the ruling of
the Karnataka HC held that CBDT cannot issue any
instruction or circular having retrospective operation.
Further, it was held that the instruction or circular
issued by the CBDT on February 9, 2011 is not
retrospective in nature and will nor govern cases which
have been led before 2011. The said circular or
instruction is meant to govern cases which are led
after the issuance of the instructions.
In its ruling, the SC placed reliance on Suman 38 Dhamija case, wherein it was held that the CBDT
circular dated February 9, 2011 is not retrospective in
nature and shall not govern cases which have been
led before 2011.
35 CIT v. Gemini Distilleries TS-476-SC-201736 Instruction no 3/2011 dated February 9, 2011 and Circular no 21/2015 dated December 10, 201537 Circular no 21/2015 dated December 10, 201538 CIT v. Suman Dhamija TS-480-SC-2015.
The Assessee submitted that the mobilization of rigs
from ports outside India to India was the obligation of
the ONGC for the purpose of conducting exploration
activities in India. The Assessee performed it on
behalf of ONGC and ONGC merely reimbursed these
expenses which did not have any prot element and
that is the reason why the contract had two different
types of payment viz. (a) mobilization fees and (b)
compensation for the work undertaken. It was
emphasized by the Assessee that the expenditure
incurred by the Assessee on mobilization was much
higher than the actual payment received. In view of
the same, it was submitted that the mobilization fees
was in the nature of reimbursement of expenses and
the same could not be treated as 'amount' within the
meaning of sub-section (2) of section 44BB of the IT
Act.
It was further submitted by the Assessee that India
follows a territorial system of taxation specially qua
business income of non-residents, which is taxed only
as it is attributable to operations within the Indian
territory and the same would be discernible on the
conjoint reading of section 4, 5 and 9 of the IT Act i.e.
income of a non-resident is taxable in India only if it is
received or deemed to have been received in India or
accrued or deemed to have been accrued in India. In
so far as business income is concerned, it becomes
taxable only if it is attributable to the operations
carried out in India.
In view of the same, while the Assessee submitted
that mobilization fees was not received/deemed to
have received in India and it was in respect of services
outside India, and therefore, does not accrue/arise or
deemed to have arisen in India. In so far as section
44BB of the IT Act is concerned, the Assessee
submitted that it merely provides computation
mechanism for the purpose of simplication of
computation of income of certain non-residents as 45 explained in CBDT Circular and therefore, the rst
pre-requisite is always to nd out as to whether
particular income had accrued or arisen or deemed to
have accrued or arisen in India by relying on various
46decisions, including A.Sanyasi Rao & Ors., 47Ishikawajima-Harima Heavy Industries Ltd., etc.
DECISION
The SC observed that the provisions of section 44BB
of the IT Act is a special provision providing
computation mechanism for computing prots and
gains in case of non-resident tax payers engaged in
providing services and facilities in connection with the
exploration and production of mineral oil. Therefore,
provisions of section 4, 5 and 9 of the IT Act cannot be
sidetracked and it agreed with the contention of the
Assessee that, in the rst instance, it is to be seen
whether a particular income arises or accrues or
deemed to have accrued or arisen in India and the
question of computation of said income would arise
only after the determination of taxable income in India.
To this extent, the SC overruled the decision of the HC.
Insofar as characterization of mobilization fees as
reimbursement expenses in concerned, the SC
upheld the decision of lower authorities by holding that
mobilization fees received by the Assessee has no
nexus with the actual expenses incurred for
transportation of rigs to India. It referred to the clauses
in the agreement entered into with Indian operators
viz. ONGC and Enron Oil Ltd. In terms of which a xed
amount had been agreed to be paid as mobilization
fees to the Assessee for transportation of drilling units
from outside India to India and further that the clauses
of the agreement nowhere mention that the same is for
reimbursement of expenses. Therefore, in view of the
fact that Assessee was entitled to receive the said
xed sum as mobilization fees without having any
regards to the actual cost incurred by it for the
transportation of drilling units, the SC held that the
payment of mobilization fees cannot be construed as
reimbursement of expenses and that the same needs
to be considered as 'income' and according clause (a)
section 44BB(2) of the IT Act, any payments
(irrespective of whether it is received in India or outside
India) would be taxable in India, if it relates to
exploration activities in India.
45 Circular No. 495 dated September 22, 1987.46 Union of India & Anr. v. A.Sanyasi Rao & Ors. (1996) 3 SCC 465.47 Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408.
Recently, the Bangalore ITAT in the case of Electrical material Center Co. Limited v. Deputy Director of
58Income Tax held that for establishing a service PE in India, only solar days should be considered and not man days, i.e., the days when two or more partners/employees were present in India together, the number of days in India should be counted as only once. The ITAT also held that the fact that the India-Saudi Arabia DTAA does not provide for the FTS clause, the services provided by the engineers in India cannot be taxed as FTS and would fall under the residual clause of 'other income' under Article 22(1) of the India-Saudi Arabia DTAA.
FACTS
Electrical material Center Co. Limited (“Assessee”), a company based in Saudi Arabia sent four service engineers in India to provide services to an Indian entity. The total number of days that the engineers stayed in India were 90. However, the AO held that the due to the presence of four service engineers in India for 90 days each, the total number of days should be 360 days.
Further, the AO also ruled that payments received by the Assessee should be taxable as royalty under the IT Act. Further, the AO also held that in the absence of FTS clause in India-Saudi Arabia DTAA, the denition of FTS as provided in the IT Act should be applied. Accordingly, the AO taxed the receipts as FTS as well as Royalty. The DRP conrmed the order and aggrieved by order of the AO/ DRP, the Assessee led an appeal before the ITAT.
ISSUES
(1) Whether solar days or man days should be considered for counting the number of days for
which the employees were present in India so as to constitute a service PE in India?
(2) Whether the services provided by the engineers in India should be taxable in the absence of FTS clause in the India-Saudi Arabia DTAA?
ARGUMENTS
The Assessee argued that the AO was wrong in considering the man days of the services rendered instead of the period for which the activities continue in India (i.e. the solar days). For this purpose, the Assessee relied on the decision of the Mumbai ITAT in
59the case of Clifford Chance v. DCIT (“Clifford Chance”). Further, the Assessee argued that the receipt in question is not Royalty and it is FTS and therefore, it is not taxable because there is no specic provision for taxability of FTS in the India-Saudi Arabia
DTAA.
However, the IRA by relying on the recent Bangalore ITAT case of ABB
60FZ-LLC v. DCIT (“ABB case”) argued that service PE could be established even without the p h y s i c a l p r e s e n c e o f t h e employees in India. The ITAT in the ABB case also held that service PE is not dependent upon the xed place of business as it is only
dependent on the continuation of the activity, which does not mandate physical presence in India.
Further, the IRA argued that where the DTAA does not contain a specic provision for the taxability of a particular payment, the provisions of the IT Act would be applicable. Thus, the fees received by the Assessee is taxable as FTS under section 115A of the IT Act.
“
”
Multiple counting of more than one employees present in India
has to be avoided for determination of PE and the receipt should be
taxed as ‘other income’ under Article 22 (1) of the India-Saudi Arabia DTAA.
58 Electrical material Center Co. Limited v. DDIT TS-451-ITAT-2017 (Bang. ITAT).59 Clifford Chance v. DCIT [2002] 82 ITD 106 (Mum. ITAT).60 ABB FZ-LLC v. DCIT [2017] 83 taxmann.com 86 (Bang. ITAT.)
ITAT reached its conclusion by placing reliance on the decision of the Mumbai ITAT in the case of Clifford Chance which ruled that only solar days should be considered and not the number of man-days that the individuals were present in India. The Court in Clifford Chance held that “Multiple counting of the common days is to be avoided so that the days when two or more partners were present in India, together, are to be counted only once. Multiple counting would lead to absurd results. For example, if 20 partners were present in India together for 20 days in one scal year, multiple counting would result in 400 days. There cannot be more than 365 days in a year”.
Therefore, ITAT was of the opinion that multiple counting of more than one employees present in India has to be avoided. Since in the present case, the engineers were present in India for only 90 days, it was less than the number of days prescribed under the DTAA for a service PE to be formed in India. Thus, the Assessee could not have been construed to have a PE in India.
Notably, the ITAT rejected the argument of the IRA which, relying on the ABB case, argued that service PE could be established even without the physical presence of the employees in India. The ITAT in ABB case also held that service PE is not dependent upon the xed place of business as it is only dependent on the continuation of the activity, which does not mandate physical presence in India. In the present case, ITAT distinguished the ABB case on the difference in facts. The ITAT observed that in the case of ABB, managerial and consultancy services were provided which could also be provided without a physical presence in India. Whereas, in the present case, engineers provided personalized services in India and there is no evidence of online services being rendered by the Assessee. Therefore, based on these differences in facts, the ITAT ruled that ruling of ABB is not applicable to the present facts of the case.
On the taxability of income earned by the Assessee on account of FTS, the ITAT accepted the contention of the Assessee and held that since the DTAA does not contain a clause on taxation of FTS, FTS should not be taxable in India. The Taxpayer placed reliance upon the judgment of Madras HC in Bangkok Glass
61 Industry Co. Ltd. vs. ACIT, wherein the IRA had argued that payment receipts were not taxable as Business Prots under the India- Thailand DTAA, however, the receipts would fall under 'other income'
clause of the DTAA. The HC, in that case, held that FTS was not taxable as royalty and rejected AO's nding that FTS was taxable under residual clause under the DTAA.
Similarly, in the present case, ITAT held that there are no provisions under the DTAA addressing taxability of FTS and this should be taxed as 'other income' under Article 22 (1) of the India-Saudi Arabia DTAA. There are some exceptions provided in Article 22 (2) where Article 22 (1) is not applicable but those exceptions do not include FTS. Therefore, FTS is not taxable in India because it will fall in Article 22 (1) and as per this Article, income is taxable in the state of residence i.e. Saudi Arabia. The ITAT held that in the absences of adequate facts to determine the nature of receipts, the matter must be remanded back to the AO for examining taxability as royalties.
SIGNIFICANT TAKEAWAYS
This judgment has conrmed the basic principle of Service PE i.e. 'solar days' would be considered and not 'man days' for the purpose of determining Service PE in India. This is also in accordance with the OECD Commentary of 2014 (“Commentary”), which states that when a foreign enterprise is performing services through atleast one individual over a substantial period, then the period does not apply in relation to the individual but in relation to the enterprise. Thus, the same individual does not have to be present throughout these periods, as long as an individual is present, it would be counted as a one day. The Commentary further states that this would apply regardless of how many individuals are performing such services.
This judgment is also important as it discusses the decision of ABB case, which discussed the principles of virtual PE. It could be argued that the ITAT by distinguishing from the ABB case, on the ground that since no services were provided from outside India has implicitly accepted the correctness of the decision that were services are provided, then physical presence of employees is not required.
Lastly, the ITAT has claried that in absence of the 'FTS' clause in the DTAA, the receipts would fall under Article 22 of the DTAA i.e. the residual clause. This is a welcome ruling as it would provide some relief to the taxpayers, where the revenue tax the receipt as per the provisions of the IT Act in absence of specic clause in the DTAA.
61 Bangkok Glass Industry Co. Ltd. vs. ACIT TS-5375-HC-2012(MADRAS)-O (Madras HC).
71 CST Noida v. Computer Science India Pvt. Ltd 2015 (37) STR 62 (All.); Volkswagen India Pvt. Ltd. v. CCE, Pune 2014 (34) STR 135 (Tri. Mum).72 ibid.73 Volkswagen India Pvt. Ltd. v. CCE, Pune 2014 (34) STR 135 (Tri. Mum.).74 Microsoft Corporation India Pvt Ltd v. CST, New Delhi, 2014 (36) STR 766 (Tri.-Del.).
services in nature of marketing and sale of cars in
India?
(3) Whether Service Tax could be charged on the
amounts received from BMW AG on account of
services rendered in relation to the International
Purchasing ofce in India?
ARGUMENTS
In relation to the Service Tax liability of the Appellant
for manpower supply services, it contended that the
following were the essential requirements for a
service to qualify as a manpower recruitment or a
supply agency, under Section 65(105) (k) of FA.
(1) There has to be a service provided or to be
provided to any person;
(2) The service has to be provided by manpower
recruitment or a supply agency; and
(3) The service must be provided in relation to the
recruitment or a supply of manpower, temporarily
or otherwise, in any manner.
BMW AG was not manpower recruitment or a supply
agency, therefore, the services did not qualify as a
manpower recruitment or a supply agency. In this
regard, the Appellant placed reliance upon a plethora 71of judgments to establish that the element of
taxability had not arisen in the case of the Appellant.
The Appellant claried that the said employees of
BMW AG were not under the employment of BMW
AG, at the time they were engaged in employment
with the Appellant. Such employees were contributing
toward the provident fund as per Indian Laws and
were paying Income Tax in India. The Appellant
substantiated its arguments by providing the
employment agreement of some of the concerned
employees.
Further with respect to the commission received from
BMW AG and charges for International Purchasing
Ofce, the Appellant argued that the market
operations undertaken by the Appellant were not at
the behest of any Indian customer but for BMW AG,
and were exported outside India.
The Respondent contended that the Appellant made
remittances in foreign currencies to BMW AG for the
salaries of the employees/expats deputed to the
Appellant. The Respondent alleged that BMW AG had
supplied the concerned employees to the Appellant.
Accordingly, the services provided by BMW AG was in
the nature of manpower supply services. Further, the
Respondent contended that the Appellant had
provided taxable services to BMW AG by promoting,
marketing and selling their goods.
The Respondent also contended that the services
rendered for International Purchasing Ofce by the
Appellant were services provided in India and such
services were being used in India, hence such service
could not be considered as an export of service.
Accordingly services rendered were exigible to
Service Tax in India.
DECISION
The CESTAT analysed the agreement between the
Appellant and BMW AG, dated November 17, 2008,
and observed that the employees were deputed by
BMW AG and employees were now under direct
control and supervision of the Appellant. These
employees had paid Income Tax in India and made
provident fund contributions. The amount remitted to
BMW AG was in relation to the amount payable for
social security and other benets in the foreign
jurisdiction. Thus, CESTAT by relying upon the 72Computer Science India Pvt Ltd. and Volkswagen
73India Pvt. Ltd., held that BMW AG was not providing
manpower supply services to the Appellant and
accordingly no Service Tax was payable by the
Appellant under RCM.
In relation to the commission received for rendering
service in relation to promotion and sale of cars in India
for BMW AG, the CESTAT stated that the Appellant
provided Business Auxiliary Services. The CESTAT
relied on the case of Microsoft Corporation India Pvt.
discharge its obligation to pay tax to the Government.
THE BENEFIT OF INPUT TAX CREDIT UNDER
THE DELHI VAT ACT, 2004.
BONA FIDE PURCHASERS CANNOT BE DENIED
75 In Arise India Limited, the Delhi HC upheld the 76constitutional validity of Section 9(2)(g) of the Delhi
VAT Act, 2004 (“DVAT Act”), subject to the condition
that the no bona de purchasing dealer who had
complied with all requirements under the DVAT Act
was denied the benet of ITC.
FACTS
Section 9(2)(g) of the DVAT Act disallowed the ITC to
dealers or class of dealers, if the taxes paid by
purchasing dealer was not deposited to the
Government by the selling dealer or unlawfully
adjusted against the its output tax liability.
In pursuance to restriction on the availability of ITC
under Section 9(2)(g) of the DVAT Act, several
purchasing dealers inter-alia including
Arise India Limited (“Petitioners”) were
denied the benet of the taxes paid on
the input on grounds inter-alia including
that:
(a) The selling dealer defaulted in
payment of the taxes to the
Government;
(b) The ITC availed on purchases by
SCT did not match the sale details led by the
selling vendors;
(c) The details provided by the selling dealer was
suspicious; etc.
The Petitioners therefore, challenged the assessment
orders (“Impugned Orders”) as well as the validity of
Section 9(2)(g) of the DVAT Act before the Delhi HC.
ISSUES
Whether Section 9(2)(g) of the DVAT Act was
unconstitutional and violative of Article 14 and Article
19(1)(g) of the Constitution?
ARGUMENTS
The Petitioners argued that Section 9(2)(g) of the
DVAT Act treated both the 'guilty purchasers' and
'innocent purchasers' at par, whereas they constituted
two different classes. Therefore, inasmuch as the
aforesaid provision treated both the innocent and
guilty purchasers alike, it was violative of Article 14 of
the Constitution.
Further, the Petitioners argued that Section 9(2)(g) of
the DVAT Act qua the purchasing dealer was arbitrary,
irrational and unduly harsh as the ITC was denied to
him because of the default of the selling
dealer over whom he had no control.
The Petitioner contended that if at all the
selling dealer had defaulted in payment
of tax, the authorities had the power to
recover the tax from him under Section
43 of the DVAT Act, instead of denying
the benet of ITC to the innocent
purchasing dealer.
It was also contended by the Petitioners that they had
complied with all requirements under the DVAT Act i.e.
to ensure that the selling dealer was a registered
dealer, and issuance of a valid tax invoice. Once these
requirements were complied with, the ITC could not be
denied to the Petitioners, merely due to the default of
the selling dealers.
75 W.P. (C) 2106/2015, Delhi HC, Decision dated October 26, 2017.76 The relevant extract of Section 9(2)(g) of the DVAT Act reads as: “(2) No tax credit shall be allowed – (a).. (g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully
adjusted against output tax liability and correctly reected in the return led for the respective tax period.”
Respondent was agreed to, it would have to be held to
be violative of Article 14 of the Constitution. The HC
further held that in an event where the Respondent
has the evidence to show that the purchasing dealer
and the selling dealer acted in collusion to defraud the
authorities, then the Respondent could proceed
under Section 40A of the DVAT Act.
Accordingly, the HC set aside the Impugned Orders.
SIGNIFICANT TAKEAWAYS
This decision of the HC is an important jurisprudence
as the HC has for the rst time interpreted the phrase
'dealer or class of dealer' in the aforesaid provision.
The HC restricted the meaning of the said phrase to
'selling dealers and to the guilty purchasing dealers
colluding in non-payment of the taxes to the
Government'. The HC clearly held that under no
circumstances, purchasing dealers who had no
control on the actions of the selling dealer could be
denied the benet of ITC due to the default of the
selling dealers.
This judgment of the HC is also signicant due to the
possible impact it may have under the GST regime.
The GST legislations also allow the benet of ITC to
the purchasing dealers only after the selling dealer has
actually paid the tax collected from the purchasing
dealer to the Government and led the requisite
returns in this regard. The Purchasing dealer has no
means to ensure that the selling dealer deposits the
tax to the Government. Besides this, provisions similar
to DVAT Act is also contained in the GST legislation
which provides for recovery of tax from the selling
dealer. Accordingly, the current interpretation is
completely applicable to the GST legislations.
Though this decision of the HC is a welcome respite to
the dealers who are denied the benet of ITC merely
due to defaults by the selling dealer, the interpretation
given by the HC may lead to challenges to Section
16(2)(c) of the CGST Act by the assessees on the 78aforesaid ground.
Under the GST regime also, notices have been issued
to a few purchasers denying the ITC. In light of the
above decision, the purchaser may also evaluate the
option of ling writs in such circumstances. It will be
interesting to see how HCs react to similar challenges
under GST.
78 The relevant extract of Section 16 reads as: “(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or
both to him unless,––(a) .. (c) subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of ITC
82In WS Retail Services (P) Ltd., the Karnataka HC
held that the provisions of Karnataka VAT Act, 2003
(“KVAT Act”) could not override the objects and
purpose of Karasamadhana Scheme, 2017 (“KSS
2017”). Accordingly, the deposits made by an
assessee under the KSS 2017 would be rst adjusted
against the taxes due and thereafter against interest
and penalty.
FACTS
The Government of Karnataka had introduced KSS
2017 vide Notication G.O. No. FD 24 GSL 2017
dated March 31, 2017, for providing a waiver of 90%
of interest and penalty, on payment of tax along with
remaining 10% interest and penalty by May 31, 2017,
under various State legislations inter-alia including
Karnataka Sales Tax Act, 1957, CST Act, KVAT Act.
The waiver was subject to the conditions inter alia
including that assessees would withdraw their
pending litigation before any Court or Tribunal.
WS Retail Services (P) Ltd. (“Petitioner”) had led
applications under KSS 2017. The applications of the
Petitioner were rejected on the grounds that the
payments of taxes or deposits (“Pre-deposit”) which
had been made at the time ling an appeal before
higher forum against the assessment orders passed
by the assessing authorities, were to be rst adjusted
by such authorities against the outstanding 'interest' 83 in terms of Section 42(6) of the KVAT Act and not
against the amount of outstanding tax, so as to
determine the 'arrears of tax' or 'arrears of interest and
penalty', as dened in the KSS 2017.
Therefore, the Petitioner led the present case
challenging the application of Section 42(6) of the
KVAT Act on KSS 2017.
ISSUES
Whether the Pre-deposit made at the time of ling
appeal against the assessment orders would be set off
against interest initially, and thereafter for payment of
arrears of tax and penalty under KSS 2017?
ARGUMENTS
The Petitioner contended that the adjustment of Pre-
deposit should have been made rst against the tax
liability under the assessment orders, and then the
balance amount of tax and 10% of interest and penalty
was required to be paid off, availing the benet of KSS
2017. The Petitioner contended that the dues were to
be determined in accordance with the original
assessment orders only and not by any further
adjudication while undertaking the scrutiny of the
Applications under KSS 2017. Therefore, the
Revenue Authorities (“Respondents”) were not
entitled to make an adjustment of Pre-deposits
towards interest rst, and then claim the recovery of
remaining arrears of tax.
It was further argued that Pre-deposits were in the
nature of deposits and not payments under specic
heads such tax, interest, penalty, etc. Therefore,
adjustment of such deposit was to be rst made
against the tax payable, and if any balance amount
remains, such adjustment could be made against
interest and penalty.
The Petitioner contended that the language of KSS
2017 clearly indicated the intent of the legislators was
not to distort the purposes of the said scheme, but to
provide benet to the assessees.
The Petitioner also argued that KSS 2017 was a
special delegated legislation and Section 42(6) of the
KVAT Act cannot override such legislation, in a manner
82 WS Retail Services (P) Ltd. v. State of Karnataka [2017] 87 Taxmann.com 187 (Karnataka).83 Section 42(6) of the KVAT Act reads as: “(6) Where the amount paid falls short of the aggregate of the tax or any other amount due and interest payable, the amount so paid shall rst be adjusted towards interest
payable and the balance, if any, shall be adjusted towards the tax or any other amount due.”
With regard to the ling of Form 3CEAB, it is relevant
to determine if there are more than one CEs of an
International Group, resident in India. If there is only a
single entity resident in India, then Form 3CEAB is not
required to be led. Otherwise, the International
Group may opt to designate one of the entities as
responsible for ling Form 3CEAA (as discussed
above), and intimate the Directorate General of
Income Tax, regarding the same, in Form 3CEAB.
This form is required to be led thirty days prior to the
specied due date (i.e., by February 1, 2018 for AY
2017-18; for successive AYs, relevant date is October
31 of the respective AY).
Country-by-country Report – Rule 10DB
This new rule prescribes the threshold for the
applicability of provisions concerning CbCR on an
entity, the information required to be maintained, the
format as well as the timeline for furnishing the report.
The relevant information related to the CbCR is
required to be led in Forms 3CEAC, 3CEAD and
3CEAE. The due date for ling CbCR is on March 31,
2018 being extended vide Circular No. 26 of 2017
dated October 25, 2017.
It should be noted that the provisions pertaining to the
ling of the CbCR would be applicable only if the
consolidated group revenue of the International Group
is in excess of INR 5500 crores in the accounting year
preceding the reporting accounting year.
Case
Parent entity or alternate reporting entity, resident in India
CE resident in India, of parent entity not resident in India
CE resident in India, of parent entity not resident in India in cases specied under section 286(4) of the IT Act (i.e. when India does not have an agreement with the country where the parent resides for exchange of CbCR; or
there has been a systemic failure of such country or territory, and said failure)
Requirement
File CbCR in Form 3CEAD
File CbCR notication in Form 3CEAC with Director General of Income Tax (Risk Assessment), intimating the following:
a) Whether the entity is the alternate reporting entity of the International Group; or
b) Details of the parent entity or the alternate reporting entity, as the case may be, of the International Group and the country or territory in which the said entities are resident
File CbCR in Form 3CEAD (for every reporting accounting year).
File Form 3CEAE only if there are mo re t han one CEs o f an International Group resident in India, to designate one of the entities as responsible for ling Form 3CEAD (as discussed a b o v e ) , a n d i n t i m a t e t h e Directorate General of Income Tax, regarding the same.
Due Date
Required to be furnished two months prior to the specied due date i.e., March 31, 2018 for AY 2017-18 (for successive AYs, the relevant date is November 30, 2018 of the respective AY)
Required to be led two months prior to the due date as specied in section 139(1) of the IT Act, i.e., January 31, 2018 for AY 2017-18 (for successive AYs, the relevant date is September 30, 2018 of the respective AY)
Required to be led by the due date mentioned above.
Due date has not been prescribed so far.
The requirements in case of each form pertaining to CbCR are as tabulated below:
87The Delhi HC in Gmmco Limited , has allowed the assessee to claim the input tax credit provisionally, without any restriction on the time limit of 1 year of the invoice date, till its nal order. The writ petition was led to challenge the discriminatory treatment between taxpayers having invoices and taxpayers not having invoices pertaining to the purchase of inputs. The CGST Act, provides for the benet of input tax credit to the taxpayers having invoices for their pre-GST stock only for goods purchased during the period of 1 year prior to the roll out of GST. However, where the taxpayers were not having invoices for such pre-GST stock, they were allowed deemed input tax credit in the prescribed range without any time limit.
2. RELIEF FOR LOGISTICS SECTOR
Post the implementation of GST, the logistics sector faced various difculties on account of detaining of goods during their inter-state movement. Such detention was made by the seizing ofcer/ detaining authority on the grounds of unavailability of prescribed documents such as transit declaration form, e-way bill, etc. Pursuant to the same, the following writ petitions, seeking relief, were led before the UP HC and the Kerala HC:
88(a) In Asics Trading Company , the Kerala HC held that the power to prescribe documents that were to be carried during the inter-state transport of goods is with the Central Government. The Central Government has not prescribed such documents, therefore, the detention of goods on account of the absence of documentation was not legally sustainable.
89(b) In Shankar Mohan , the Kerala HC ordered for the release of goods where the transporter executed a bond for the value of goods and security in the form of a Bank guarantee equivalent to the amount of tax, interest and penalty payable, in the manner prescribed.
90(c) In M/s M K Enterprises , the Allahabad HC set aside the order for seizure of goods on the ground that the petitioner was provided no opportunity to explain his conduct with respect to the discrepancy in tax invoices.
91(d) In Ramdev Trading Company , the goods in
transit from Rajasthan to Assam via UP, were
seized in UP and a seizure order was passed to
that effect, on the grounds of absence of transit
declaration form and mis-declaration of goods.
However, the adjudication order passed
subsequently imposed penalty on the said
grounds and stated for the rst time that the
assessee had an intention to evade payment of
tax by selling goods in State of UP. The Allahabad
HC observed that though, the absence of transit
declaration form was a breach of the GST Rules, it
was purely a technical breach. Further with
respect to mis-declaration of goods, it was held
that since the State of UP was a transit state, the
proper ofcer at the most should have made an
endorsement to the effect of such mis-declaration
and allowed the goods to pass through State of
UP. In addition, it was observed that no allegation
as to the intention of assessee to evade tax was
made in the seizure order. Therefore, the said
order was set aside and the penalty was held to be
unsustainable.
92(e) In M/s Sameer Mat Industries , the Kerala HC
permitted the release of goods on the execution of
bond without sureties, as expeditiously as
possible. In this case, the detaining ofcer had
alleged misclassication and undervaluation as
the grounds for detaining the goods. The Kerala
HC observed that the issue of misclassication
and under valuation has to be looked into by
assessing ofcer and not the detaining ofcer.
3. RELIEF TO ISSUES PERTAINING TO GSTN
PORTAL
The assessees were facing various difculties while
using the GSTN portal. Such issues were on account 93of allotment incorrect user id and password , 94erroneous nature of constitution of the tax payer , 95failure of the system to opt for composition scheme ,
etc. In this regard, several HCs have issued guidelines
to prevent any coercive actions against the assessees
and to seek instructions/ rectify mistakes for resolving
such kind of problem faced on the GSTN portal.
87 Gmmco Limited, Hafele India Private Limited v. Union of India and Anr. 2017 (12) TMI 1069.88 M/s Asics Trading Company v. Asst. State Tax Ofcer, the State of Kerala 2017 (10) TMI 831.89 Shankar Mohan v. Intelligence Ofcer, Commissioner of Goods and Service Tax Authority, State of Kerala, 2018 (1) TMI 179.90 M/s M.K. Enterprises v. State of U.P. and Ors. 2017 (12) TMI 34291 M/s Ramdev Trading Company and Ors. v. State of U.P. and Ors. 2017 (12) TMI 341; 92 M/s Sameer Mat Industries and Ors. v. State of Kerala, the Asst. State Tax ofcer and Ors. 2017 (12) TMI 202.93 Radhey Lal Jaiprakash Neadarganj Dadri v. State of U.P. 2017 (11) TMI 1022.94 M/s Modern Pipes Industries v. State of UP 2017 (10) TMI 1017; Sachdeva Overseas v. State of UP 2017 (1) TMI 252.95 Rajasthan Tax Consultants Association v. Union Of India and Ors. 2017 (10) TMI 254.