Tax & Regulatory Quarter

December 2013

2 Tax & Regulatory Quarter

Dear readers,We are pleased to release the December 2013 edition of EY’s Tax & Regulatory Quarter — a quarterly e-newsletter that summarizes significant ongoing tax and regulatory developments.

This newsletter covers landmark judgments and update on tax treaties. The “In the press” and “What’s new” sections provide links to thought leadership and published articles on various issues in the tax realm and other topics that you may be interested in. This newsletter also includes a compilation of tax alerts released by EY India during the quarter.

We hope you find this edition both timely and useful.

Best regards, EY Tax Update team

What’s new Useful links

For the significant updates on the new Companies Act 2013: India Inc - Companies Act 2013 - An overview

For the latest tax updates from across the APAC region, read our newsletter: APAC Tax Matters

For the latest tax insights for business leaders, read our quarterly magazine: T Magazine

Direct Taxes Code

Tax and Regulatory Services

Tax Library

Doing Business in India 2012-13

India Tax Webcast series

www.ey.com

(Click to navigate)

Contents

Direct tax

VerdictsTreaty connections Tax happenings across the borderFrom the Tax Gatherer’s desk

Indirect tax

Service tax ►CENVAT credit►Excise duty►Customs duty►VAT►Key statutory developments

Regulatory

Foreign Direct Investment ►Reserve Bank of India ►Securities and Exchange Board of India

In the press

Compilation of alerts

Direct Tax►Indirect Tax ►Regulatory

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Verdicts

Direct taxReported decisions supported by our Litigation team

Mumbai Tribunal rules reimbursement of expenses on secondment of employees not FTS

The Mumbai Tribunal, in case of Temasek Holdings Advisors (I) Pvt. Ltd. (Taxpayer) v. DCIT [2013-TII-163-ITAT-MUM-INTL], ruled on taxability of payments made by the Taxpayer to its parent company in Singapore (Sing Co), in relation to secondment of employees to India and certain other expenses incurred by Sing Co for the business of the Taxpayer. The Tribunal ruled that payments made by the Taxpayer toward salary and other employment costs of the seconded employees amount to reimbursement of expenses and not payments for any services rendered by Sing Co to the Taxpayer. Such payments were not taxable in India as the same were reimbursement of expenses and were not Fees for Technical Services (FTS) under the Income Tax Act (ITA) or India–Singapore Double Taxation Avoidance Agreement (DTAA). Furthermore, since taxes had already been withheld on salary payments made by Sing Co to the seconded employees, there was no further withholding of taxes required when such amount was reimbursed by the Taxpayer. Accordingly, such reimbursement cannot be disallowed in computation of income of the Taxpayer.

[For more details , please refer to the EY Tax Alert dated 10 October 2013] [For more details (Samsung), please refer EY Alert dated 30 November 2011]

Employee share reward discount cross-charged by foreign parent company is deductible for the Indian company

The Bangalore Tribunal, in the case of Novo Nordisk India Pvt. Ltd. (Taxpayer) v. DCIT [TS-524-ITAT-2013(Bang)], ruled on deductibility of expenditure incurred on providing shares of the Taxpayer’s parent company, being a foreign company (FCo), to the Taxpayer’s employees under an Employee Share Purchase Scheme (ESPS). The Tribunal held that the ESPS discount cross-charged by FCo was an employee cost, wholly and exclusively incurred for the purpose of the Taxpayer’s business and, hence, to be allowed as revenue expenditure, irrespective of the fact that FCo benefitted indirectly by such an expenditure.

[For more details, please refer EY Tax Alert dated 22 October 2013]

Other significant developments

Significant Supreme Court (SC) rulings

Principles on evaluating “real” accrual of income for levy of tax laid down

The SC, in the case of CIT v. Excel Industries Ltd. (Taxpayer) [TS-506-SC-2013], ruled on whether the benefit of entitlement granted against export obligation to make duty-free imports of raw material is taxable in the year in which the export is made or in the year in which the duty-free import is made. While ruling on this aspect, the SC observed that an income is taxable under the ITA if (a) the income is “due”; (b) there exists a corresponding liability on the other party to pay such sum; (c) there exists a “real”, and not a “hypothetical”, income; and (d) there is a plausibility of realization of benefits by the taxpayer in realistic and practical point of view. Real income can be said to have accrued for the purposes of taxation under the ITA once all these tests are satisfied. In the present case, as no “real” income but only a “hypothetical” income accrued to the Taxpayer in the tax year of export, the same will not be taxable in the said year but in the year in which the import is made and entitlement is actually exploited.

[For more details, please refer to the EY Tax Alert dated 10 October 2013]

No interest on interest in case of refund

The Larger Bench of SC (Larger Bench), in the case of CIT v. Gujarat Fluoro Chemicals (Taxpayer) [TS-491-SC-2013], ruled on whether interest is payable by the Tax Authority on the delayed payment of statutory interest. The Larger Bench held that the Taxpayer is entitled to claim interest only to the extent statutorily payable under the ITA and is not entitled to claim interest on the interest. The Larger Bench reviewed the SC rulings in the case of Sandvik Asia Ltd. v. CIT [(2006) 280 ITR 643 (SC)] (Sandvik) and explained that in Sandvik’s case, interest was awarded by the SC in peculiar facts to compensate the taxpayer for the inordinate delay in Tax Authority refunding the amount of statutory interest. It clarified that Sandvik’s ruling was not to be misinterpreted to mean that it directed the Tax Authority to pay interest on interest.

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Tax Authority can issue notice to gather general information

The SC, in the case of Kathiroor Service Co-operative Bank Ltd. (Taxpayer) v. CIT [TS-564-SC-2013], ruled that, with regard to the object of the provision, the Tax Authority is empowered to issue notice calling for general information, for the purposes of any inquiry even in cases where a proceeding is not pending. The SC further observed that the process of issuing notice to seek general information is effectively to keep a check on tax evasion.

Penalty for concealment of income

In the case of MAK Data P. Ltd. (Taxpayer) v. CIT [TS-545-SC-2013], the Taxpayer surrendered a certain sum as income during assessment proceedings to avoid litigation, buy peace of mind and to make an amicable settlement of the dispute. The Taxpayer had requested for non-initiation of penalty at the time of surrender. However, the Tax Authority imposed penalty on such surrendered income. The SC stated that the Tax Authority shall not be carried away by the plea of the Taxpayer such as “voluntary disclosure,” “buy peace,” “avoid litigation,” “amicable settlement” etc. As the Taxpayer failed to offer any explanation for concealment of particulars of income or furnishing inaccurate particulars of income, the SC upheld the levy of penalty.

Some key issues on which Special Leave Petitions (SLPs) were dismissed by the SC

Citation Particulars Ruling of High Court (HC)

Uday Punj v. CIT [TS-400-SC-2013]

Taxpayer preferred an SLP before SC on denial of capital gains exemption by Delhi HC

Delhi HC had held that sale of shares by promoter during initial public offering (IPO), based on provisional approval from recognized stock exchanges but before listing, is not entitled to capital gains tax relief.

CIT v. Growing Mercantile P. Ltd. [TS-402-SC-2013]

Tax Authority preferred an SLP before SC against Bombay HC’s ruling allowing referral fees and excessive interest paid to sister concerns

The Bombay HC had confirmed Tribunal’s ruling on facts and ruled in favor of Taxpayer by allowing deduction of referral fees and excessive interest paid by Taxpayer to its sister concerns.

HC decisions on what constitutes “Royalty”

Payment for use of a “copyrighted” article does not amount to “royalty”

The Delhi HC, in the case of DIT v. Infrasoft Ltd. (Taxpayer) [TS-592-HC-2013(Del)], ruled on whether consideration received by the Taxpayer for grant of license for use of customized software is “royalty” within the meaning of India-US DTAA. The HC held that the license granted by the Taxpayer is limited to those necessary to enable the licensee to operate the program. Hence, there is no transfer of copyright or right to use the copyright, but is a case of mere transfer of a copyrighted article. Copyright or right to use copyright is distinguishable from sale consideration paid for “copyrighted” article. The consideration is for purchase of goods and is not royalty under the DTAA.

The Delhi HC has also expressly stated that it does not agree with the decision of the Karnataka HC in the case of Samsung Electronics Co. Ltd. [(2012) 345 ITR 494 (Kar)], which had held that a right to make a copy of the software for the purpose of storage and backup is a payment for copyright use and, hence, is taxable as royalty.

[For more details (Infrasoft), please refer EY Alert dated 27 November 2013] [For more details (Samsung), please refer EY Alert dated 30 November 2011]

Payment for dedicated bandwidth is “royalty”

The Madras HC, in the case of Verizon Communications Singapore Pte. Ltd. (Taxpayer) v. ITO [TS-577-HC-2013(MAD)], ruled on whether the payment made by Indian customers to the Taxpayer for providing bandwidth/telecom services by way of International Private Lease Circuit (IPLC) is taxable as “royalty.” The HC held that the payment for use of IPLC is taxable as “royalty.” Even if the payment is not treated as one for the use of the equipment, it should be considered as for use of the process provided by the Taxpayer, whereby through the assured bandwidth, the customer is guaranteed the transmission of data and voice. The provisions of the DTAA, dealing with royalty taxation, are pari materia with the ITA. Hence, the payment is taxable as royalty both under the ITA and the DTAA.

[For more details, please refer EY Alert dated 20 November 2013]

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Income under time charter arrangement for ships is “royalty”

The Madras HC, in the case of Poompuhar Shipping Corporation Ltd. (Taxpayer) v. ITO [TS-528-HC-2013(Mad)], ruled on whether hire charge for chartering Indian coastal shipping vessels (ships) for plying within Indian ports under time-charter arrangement (TCA) and bare-boat charter-cum-demise arrangement, with various foreign shipping companies (FSCs), is taxable in India as “royalty”, under the ITA as well as under the DTAA. While ruling in favor of the Tax Authority, the HC held that payments under TCA are for the “use” and hire of ships and not for rendition of any service. Furthermore, the ship qualifies as “equipment” for the purposes of “equipment royalty” clause under the ITA as well as the DTAA and therefore, taxable as royalty. FSCs cannot avail the benefit of Article 8 of the DTAA as the ships are not plying in “international traffic” but between two ports in India.

[For more details, please refer EY Alert dated 23 October 2013]

HC decisions on taxation of money received by partners on retirement

The Full Bench of Karnataka HC, in the case of CIT v. Dynamic Enterprises (Taxpayer) [TS-556-HC-2013(Kar)] ruled that when a retiring partner takes only money toward the value of his share and there is no distribution of capital asset/assets among partners, there is no transfer of a capital asset and, consequently, no profits or gains is payable under the ITA by the partnership firm.

The Bombay HC, in the case of CIT v. Riyaz A. Sheikh (Taxpayer) [ITA No. 1969/2011], ruled on whether amounts received by partners of a partnership firm on their retirement from the firm is liable to be taxed as long-term capital gain arising on transfer of partnership rights. The HC, relying on its decision in the case of Prashant S. Joshi v. ITO [(2010) 324 ITR 154 (Bom)], held that amounts received on retirement by a partner is not subject to capital gains tax in his hands.

Other significant HC decisions

Depreciation of non-compete fee paid

The Madras HC, in the case of Pentasoft Technologies Ltd. (Taxpayer) v. DCIT [TS-578-HC-2013(Mad)], was concerned about the issue of availability of depreciation on non-compete fee. Considering the facts of the case, the HC held that non-compete fee paid to the transferor under a

composite agreement, inter alia, involved transfer of trade names, trademarks, service marks, patents, copyrights, confidential information, computer programs and all other intangible property rights of software, together with associated goodwill (specified intellectual property rights (IPRs)) of the identified business division and, hence, is eligible for depreciation under the ITA. Furthermore, the HC held that the non-compete clause in the composite agreement should be read as a supporting clause, strengthening the transfer of specified IPRs of the business transferred under the agreement.

[For more details , please refer EY Alert dated 20 November 2013]

NR is entitled to the concessional rate of 10% on long-term capital gains on sale of shares

The Delhi HC, in the case of Cairn UK Holdings Ltd. (Taxpayer) v. DIT [TS-510-HC-2013(Del)] decided on whether a non-resident (NR) is taxable in India at a concessional rate of 10%, under proviso to Section 112 of the ITA, on long-term capital gains from sale of shares of an Indian company in an off–market transaction. The HC overturned the ruling of the Authority for Advance Rulings (AAR) [(2011) 337 ITR 131] and held that the concessional rate of 10% applies to the NR Taxpayer. In doing so, the HC referred to earlier favorable rulings of the AAR [(2007) 294 ITR 513 (AAR)] where a view in favor of the concessional rate was taken. In the HC’s view, the benefit of concessional rate was supported by the clear language of the provisions and was in lieu of indexation benefit. As gain in the hands of the NR Taxpayer is calculated without grant of indexation benefit, the Taxpayer can claim the benefit of concessional rate.

[For more details, please refer EY Alert dated 11 October 2013]

Admission of a subsequent tax year under a pending MAP

In the case of UPS Worldwide Forwarding Inc. (Taxpayer) [TS-535-HC-2013], the Taxpayer had initiated Mutual Agreement Procedure (MAP) under India-US DTAA through its US Competent Authority (US CA) in respect of its Indian transactions for certain specific tax years. With regard to the Memorandum of Understanding (MOU) signed between CAs of India and the US, the Indian Tax Authority had, for these tax years, passed orders confirming nil tax withholding while making payments to the Taxpayer. The Taxpayer thereafter requested US CA to include one more tax year in the pending MAP proceedings. The Taxpayer

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submitted an application to the Indian Tax Authority for zero withholding tax order in respect of such subsequent tax year. This application was not favorably considered on the basis that, up to the date of passing of order for nil withholding tax order, the application for including subsequent tax year in the original MAP application was not formally admitted by the Indian CA. The HC concluded that the MOU specifically refers to suspension of collection proceedings for prior, current or “future” taxable years as well in relation to withholding tax on income that are the subject to MAP proceedings, provided the taxpayer furnishes bank guarantee to protect the interest of revenue. Furthermore, with regard to MOU, it was inappropriate to expect that the relief was conditional upon confirmation from the Indian CA about admission of the proceedings. The Bombay HC, therefore, directed the Indian Tax Authority to issue a nil withholding tax order for the subsequent tax year as well.

[For more details, please refer EY Alert dated 29 October 2013]

Interest for default in payment of advance tax applicable to NR in certain cases

The Delhi HC, in the case of DIT v. Alcatel Lucent USA Inc. (Taxpayer) [ITA Nos. 327, 330, 338, 339, 328, 329, 336, 337 and 340 of 2012] ruled on chargeability of interest under Section 234B of the ITA. The Taxpayer had initially claimed non-taxability of income based on the fact that it does not have permanent establishment (PE) in India. Later, it conceded to taxability of income in India but defended levy of interest under Section 234B for default in advance tax paid on the ground that Indian payers have failed to deduct tax at source on amount paid. The HC ruled that (i) in a scenario where Taxpayer has himself represented that no income is chargeable to tax in India, the payers cannot be saddled with the withholding obligations as it is inequitable and unfair on the Taxpayer’s part to shift the responsibility to Indian payers and expect them to deduct tax from the remittances and (ii) as the Taxpayer deprived the revenue of the advance tax, it was liable to pay compensation by way of interest.

Share sale by promoters held as business income

The Punjab and Haryana HC in the case of Sumeet Taneja (Taxpayer) v. CIT [TS-423-HC-2013(P&H)] was concerned with the issue of characterization of income received on sale of shares by its promoters. Considering various clauses of share purchase agreement (SPA) between the

parties, which, in addition to transfer of shares, envisaged promoters handing over management responsibilities of the company to the buyer and agreeing for no-compete covenant, the HC held that transaction in the present case is not a simple transfer of shares but a transfer of the business with all pervasive control being entrusted to the purchaser to the complete and absolute exclusion of the seller whether as a shareholder or for its management and control. Therefore, the proceeds from this transaction were rightly assessed as business income.

No initiation of assessee-in-default (AID) proceedings on winnings wholly in kind

The Karnataka HC, in the case of CIT v. Hindustan Lever Ltd. (Taxpayer) [TS-505-HC-2013(KAR)], ruled that the person giving gifts “wholly in kind” will not face consequences as an AID under the ITA, as there is no requirement to withhold taxes under Sec. 194B of the ITA dealing with withholding on “winnings from lottery or crossword puzzle.” The HC held that, if the person responsible to deduct tax fails to deduct, or after deducting fails to pay, is deemed to be an AID. However, where the winnings are “wholly in kind” and not in cash, the question of deduction will not arise. The HC further held that if payments are made in kind the payer is required to ensure that the prize is paid after appropriate taxes have been paid and there cannot be any deduction of taxes where entire payments have been made in kind. The HC also observed that the Tax Authority is not rendered powerless if AID proceedings cannot be initiated in cases where there can be no deduction of tax, as the Tax Authority can always initiate proceedings under other provisions of the ITA [Section 271C (Penalty) and Section 276B (Prosecution)].

Capital v. revenue receipt controversies

Taxation of subvention receipts

“Subvention”, from a business perspective, refers to financial support or aid. As regards tax incidence of subvention, the ITA does not specifically provide for its tax treatment.

In the case of CIT v. Handicrafts and Handlooms Export Corporation of India Ltd. (Taxpayer) [TS-440-HC-2013(DEL)], the Taxpayer had received subvention payments from its holding company. The Delhi HC, while relying on its own earlier rulings in the Taxpayer’s own case, held that the amount received by the Taxpayer was

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to recoup its losses, and not to supplement its trading receipts. With regard to the “purpose” test espoused by the SC in various rulings, the HC held that the receipt was capital in nature and not taxable under the ITA.

In the case of CIT v. Siemens Public Communication Networks (Taxpayer) [TS-591-HC-2013(KAR)], the Taxpayer had received assistance from its NR shareholder as it was potentially sick, and its capacity to borrow had reduced substantially leading to shortage of working capital. The Taxpayer treated such assistance as “subvention receipt” in the nature of capital receipt and did not offer it to tax. The Karnataka HC ruled that the object of financial assistance determines the nature of assistance. If the financial assistance was extended for repayment of loan taken by the Taxpayer to set up new unit or for expansion of existing business then the receipt could be termed as capital in nature. On the other hand, if the financial assistance is extended to run the business more profitably or to meet recurring expenses, such payment will have to be treated as a revenue receipt. The HC observed that the Taxpayer received assistance to run its business more profitably and therefore such assistance was held to be revenue in nature.

[For more details (Handicrafts and Handlooms), please refer to the EY Tax Alert dated 12 September 2013] [Also refer to September 2012 edition of this publication for more details on taxation of subvention receipts]

Compensation for termination of Right of First Refusal for grant of manufacturing rights not taxable

The Mumbai Tribunal, in the case of Parle Soft Drinks Pvt. Ltd. (Taxpayer) v. JCIT [TS-467-ITAT-2013(Mum)], ruled on the issue of taxation of compensation received toward termination of “Right of First Refusal” (ROFR) for grant of bottling rights of soft drinks. Such rights provided the Taxpayer with a preferential opportunity to prove its credentials for grant of bottling rights before the grantor could approach any other party. Considering the facts of the case and recognizing the well-settled distinction between capital receipt and revenue receipt, the Tribunal held that such receipt was a capital receipt since it resulted in deprivation of a source of income for the Taxpayer. The Tribunal further held that the receipt was toward breach of contract by another party, which had granted ROFR to the Taxpayer but had decided to set up a bottling plant under the fold of its own subsidiary. Furthermore, the Tribunal

also held that the receipt was not toward termination of ”right to manufacture,” which is liable to capital gains since ROFR, by itself, did not enable the Taxpayer to manufacture any goods but was merely a prelude to granting full-fledged manufacturing rights.

[For more details, please refer EY Alert dated 26 September 2013]

Compensation on transfer of key employees held as capital receipt

In the case of 3i Infotech Ltd. (Taxpayer) v. ACIT [TS-417-ITAT-2013(Mum)], the Taxpayer was engaged in providing back office support services to a Bank. The Taxpayer terminated its agreement with the Bank and transferred its employees to the Bank. The Bank compensated the Taxpayer for the loss of business/future earnings/transfer of knowledge. The Mumbai Tribunal held that takeover of employees by the Bank led the Taxpayer to lose its source of income and accordingly, compensation received for this loss will be a capital receipt. The Tribunal further observed that it was irrelevant that the Taxpayer continued to carry on other activities post takeover of employees. In coming to such conclusion, the Tribunal followed SC rulings1 wherein it was held that compensation was a capital receipt even if the taxpayer had ceased activities or business with one entity, but continued similar activities or business with other entities.

Retrospective amendments cannot adversely impact past tax withholding obligations

The Finance Act, 2012 (FA) introduced many retrospective amendments, which were stated to be clarificatory in nature. Such amendments had the consequence of adversely impacting some earlier payments, which were considered as not taxable under the pre-amended law. In this regard, the Mumbai Tribunal, in the case of Channel Guide [TS-662-ITAT-2012(Mum)] had held that, where an amount paid is not taxable according to the legal position prevalent at the relevant time, the taxpayer is not liable to withhold taxes on the said amount irrespective of the retrospective clarificatory amendment, which seeks to tax such payments.

Relying on the above decision, the Mumbai Tribunal in the case of New Bombay Park Hotel Pvt. Ltd. (Taxpayer) v. ITO

1 Kettlewell Bullen and Co. Ltd. v. CIT [(1964) 53 ITR 261 (SC)] and Oberoi Hotels Pvt. Ltd. v. CIT [(1999) 236 ITR 903 (SC)]

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[TS-522-ITAT-2013(Mum)], and the Agra Tribunal, a co-ordinate bench of Mumbai Tribunal, in the case of Metro & Metro (Taxpayer) v. ACIT [(2013) 39 taxmann.com 26 (Agra - Trib.)] have held that the legal position prevailing at the relevant time of withholding needs to be considered and therefore, when the payments were made prior to the date of a retroactive change to the tax law, the Taxpayers were not required to withhold taxes.

In the case of ACIT v. Capricorn Food Products India Ltd. (Taxpayer) [(2013) 38 taxmann.com 158 (Chennai - Trib.)], the Taxpayer paid and claimed sales commission to NR agents but did not withhold taxes on the basis of a Central Board of Direct Taxes (CBDT) Circular. Such Circular was withdrawn at a later stage retrospectively. In this regard, the Chennai Tribunal held that once the Taxpayer held a bona fide belief that the payment made to NR was not taxable in India, then it could not be fastened with a liability to withhold tax at a later stage on the basis of retrospective withdrawal of the Circular.

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Case law Payment description Ruling

DDIT(IT) v. Reliance Infocom Ltd. (now known as Reliance Communications Ltd.)

[TS-433-ITAT-2013(Mum)]

Mumbai Tribunal

India’s DTAAs with USA, Israel, China, Sweden, Singapore, Japan, Australia, Canada, UK and Netherlands

Indian company (ICo) entered an agreement with another Indian company (ICo2) for ICo2 to supply hardware, software and services for establishing telecommunication network in India. The software supply contract was thereafter assigned by ICo2 to its foreign group company (FCo) under a tripartite agreement between the ICo, FCo and ICo2. FCo supplied software under this agreement and ICo made payment to FCo.

• FCo transferred a license to use its copyright to ICo where FCo continued to be the owner of the copyright. The license granted for making use of the “copyright” in respect of shrink-wrapped software/off-the-shelf software, authorizing the end user to make use of its own network equipment, will also amount to transfer of part of the copyright. Consequently, this will amount to transfer of “right to use the copyright” for internal business.

• Referring to various decisions, including the one in the case of FCo’s group company itself on the same terms of agreement as that of the ICo for supply of software, the Tribunal held that the payments were in the nature of “royalty”.

[For more details, please refer EY Tax Alert dated 11 September 2013]

Bayer Pharma AG, Germany v. DDIT

[TS-458-ITAT-2013-Mum]

Mumbai Tribunal

India-Germany DTAA

Payment for transfer of technology, knowhow and trademark to foreign company (FCo).

• The Mumbai Tribunal, relying exclusively on clauses of the agreement of transfer, observed that the transferee did not have unfettered right or ownership over the technology; transferee could not sell without prior approval of FCo; there were restrictions on licensing or transferring technology to a third party.

• Therefore, looking in to the “real” nature of the transaction, held that the payments are royalty and not capital gains.

DDIT v. A. P. Moller

[(2013) 39 taxmann.com 27 (Mumbai - Trib.)]

Mumbai Tribunal

India-Denmark DTAA

Management fees earned by an NR as a managing owner of the businesses of foreign shipping companies

• For taxing FTS, in case of a NR under the India Denmark DTAA, the basic condition is that there has to be a PE in connection with which such a liability has been incurred. Furthermore, such FTS should be borne by such PE.

• As that was not the case, the Tribunal held that the payments cannot be taxed in the hands of the NR as FTS.

English Indian Clays Ltd. v. ACIT (Intl. Tax.)

[TS-527-ITAT-2013(COCH)]

Cochin Tribunal

Payment by Indian company (ICo) to foreign company (FCo) for marketing survey and identifying potential foreign customers for ICo’s products

• The agreement between FCo and ICo did not enable FCo to market the product of the ICo in foreign jurisdiction. FCo only had to do survey and file a report so that ICo could market their product after considering the report filed by the foreign party. Therefore, the payment made to FCo was for consultancy charges on which taxes were required to be withheld.

Recent decisions on taxation of royalty/FTS payments

Summarized below are some decisions that have analyzed whether the payments are taxable as royalty (FTS), also considering the scope under a relevant DTAA:

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Case law Payment description Ruling

Eruditus Education (P.) Ltd., In re

[(2013) 37 taxmann.com 337 (AAR - New Delhi)]

AAR

India-Singapore DTAA

Payment received by foreign company (FCo) from Indian company (ICo) toward cost of teaching in education programs conducted by ICo in India

• AAR ruled that the services provided by FCo are taxable both under the ITA as well as DTAA.

• However, as the services rendered by FCo fall under the exclusion clause “for teaching in or by educational institutions” according to the India-Singapore DTAA, the payments will not be taxable as FTS.

ADIT v. Mark & Spencer Reliance India (P.) Ltd

[(2013) 38 taxmann.com 190 (Mumbai - Trib.)]

India-UK DTAA

Payment made by Indian company (ICo) toward salary expenditure of employees deputed to Indian company (ICo) under secondment agreement

• Merely providing the employees or assisting the ICo in its business and in the area of consultancy, management, etc., will not constitute “make available” of the services of any technical or consultancy in nature.

• Expatriation of employee under seconded agreement without transfer of technology will not fall under the term “make available” under India-UK DTAA and hence, the payments are not to be regarded as FTS.

Metro & Metro v. ACIT

[(2013) 39 taxmann.com 26 (Agra - Trib.)]

Agra Tribunal

Section 9(1)(vii) of the ITA

Payments made by Indian company (ICo) to foreign company (FCo ) in respect of leather testing charges

• As the entire process is automated, there is no human intervention. When no human intervention is involved in any services, such services cannot be treated to be of nature, which can be covered by FTS and therefore, payments for leather testing charges are not FTS in the absence of human involvement in the testing process.

DCIT v. VSNL Broad Band Ltd.

[(2013) 38 taxmann.com 287 (Mumbai - Trib.)]

Mumbai Tribunal

India-US DTAA

Annual maintenance Charges (AMC) paid by Indian company (ICo) to foreign company (FCo) in connection with rendering annual maintenance services relating to equipment sold to ICo.

• Merely attending to the services by FCo to the complaints/ troubleshooting of ICo and ICo’s customers through online requests does not amount to “making available” technical knowledge, and on this basis held that the payments were not FTS.

US Technology Resources (P.) Ltd v. ACIT

[(2013) 39 taxmann.com 23 (Cochin - Trib.)]

Cochin Tribunal

India-US DTAA

Payments made by Indian company (ICo) to foreign company FCo in respect of management services. Management services include — assistance, advice and support to ICo in management, decision making, sales and business development, financial decision making, legal matters and public relations activities, treasury service and risk management service.

• On the basis of the input, advice, assistance and service provided by FCo, the management decision was taken by ICo in India by selecting suitable solution after considering all the alternatives available.

• FCo’s services to ICo were in the nature of technical services, which facilitated ICo to take correct and suitable decision toward achievement of the desired objects and business goal.

• Services received by ICo were technical advices and such technical advices were “made available” to ICo so as to enable ICo to apply/use the same in its decision-making process and hence, were FTS under the India-US DTAA.

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Treaty connections

DTAA updates

Protocol amending India-Australia DTAA notified

The Protocol amending the India-Australia DTAA was signed on 16 December 2011 and entered into force on 2 April 2013. This Protocol seeks to expand the definition of PE, eliminate the “force of attraction” rule, insert a non-discrimination clause and establish exchange of information and assistance in collection of taxes between the contracting states. The Government of India (GoI) has now notified various dates on which the various Articles of the Protocol amending the India-Australia DTAA will be effective in India and the same are tabulated below:

Relevant Article of the Protocol

Relevant Article of the DTAA

Brief description

Effective date in India

Article 2 Article 5 Expands the definition of PE 1 April

2014 [i.e., applicable for tax year 2014-2015 and subsequent years]

Article 3 Article 7 Elimination of “force of attraction” rule for attribution of profits to a PE

Article 1 Article 2 Definition of “national” inserted

Article 4 Article 24A Non-discrimination

2 April 2013Article 5 Article 26 Exchange of

information

Article 6 Article 26A Assistance in collection of taxes

18 July 2013

Source: Notification No.74/2013 [F.NO.503/1/2009-FTD-II]/SO 2820(E), dated 20 September 2013.

[For more details, please refer EY Alert dated 4 January 2012]

New DTAA between India and Latvia signed

The GoI signed a DTAA with the Government of Latvia on 18 September 2013. The significant aspects of the DTAA are low withholding tax of 10% in case of income in the nature of dividend, interest, royalties and FTS; provisions for effective exchange of information. The new DTAA also

includes a Limitation of Benefit (LOB) provision to ensure that the benefits of the DTAA are availed by genuine residents of the two countries.

Source: PIB Press release dated 18 September 2013

Social Security Agreement (SSA) updates

India’s SSA with Hungary enters into force

The GoI had signed a bilateral agreement on social security with Hungary on 4 February 2010. Recently, the Employees’ Provident Fund Organization (EPFO) notified that it would come into force on 1 April 2013.

Source: Circular of EPF India – [HO No. IWU/7(10)2008/Hungary/9829 dated 29 August 2013]

OECD updates

OECD publishes compliance ratings for 50 jurisdictions

The OECD’s Global Forum for Transparency & Exchange of Information has published compliance ratings for 50 jurisdictions.

No of jurisdictions Rating

18 Compliant (such as, India, Japan, Sweden, China)

26 Largely Compliant (such as, the US, the UK, Singapore)

2 Partially Compliant (Turkey, Austria)

4 Non-Compliant (Cyprus, Luxembourg, The Seychelles, British Virgin Islands)

Source: OECD

OECD plans a tax information superhighway

In April 2013, the G5 (France, Germany, Italy, Spain and the UK) agreed to develop and pilot a multilateral automatic tax information exchange. In their announcement they called on other EU Member States to join the pilot; since April 2013 more than 30 countries are known to have endorsed this plan.

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Meetings took place at the OECD in the week commencing 14 October to discuss at an operational level how to progress the plans that were set out in its report titled A Step Change in Tax Transparency (the Report), which was issued in June 2013 at the request of the G8. The stated aim of the meetings was to develop a model competent authority agreement and a common reporting standard with a view to putting this to the OECD’s Committee for Fiscal Affairs (CFA) for approval in early 2014. Industry responses to this have been generally supportive in that the OECD is seen as best placed to develop a true global standard.

[For more details, refer EY Global Tax Alert dated 14 November 2013] [For more details, refer EY Global Tax Alert dated 12 April 2013]

OECD meets with business on base erosion and profit shifting action plan

On 1 October 2013, the OECD held a meeting with the Business and Industry Advisory Committee (BIAC) to the OECD on the Action Plan on Base Erosion and Profit Shifting (BEPS). The Action Plan, which identifies 15 focus areas for OECD work on BEPS over the next two and a half years, was issued by the OECD on 19 July 2013 in connection with a meeting of the G20 Finance Ministers and Central Bank Governors. On July 2013, the OECD issued more detailed documents on two of the Action Plan focus areas, transfer pricing for intangibles and enhanced transfer pricing documentation. The OECD-BIAC meeting

was the first formal opportunity for business representatives to engage with the OECD on the Action Plan and the 15 focus areas. In the Action Plan, the OECD expressed a commitment to consult with the business community as it works to develop recommendations in each of the focus areas.

[For more details, refer EY Global Tax Alert dated 4 October 2013] [For more details, refer EY Global Tax Alert dated 19 July 2013] [For more details, refer EY Global Tax Alert dated 15 February 2013]

OECD report recommends new approaches to encouraging business innovation via tax incentives

A new OECD report, Supporting Investment in Knowledge Capital, Growth and Innovation, stresses that effective government policies aimed at encouraging business innovation in knowledge-based capital (KBC) — described as a range of intangible assets beyond just research and development (R&D) — are essential for growth in the current global economy.

The report notes that as of 2011, 27 of OECD’s 34 member countries provided tax incentives to support business R&D, more than double the number in 1995. The report also sets out that “R&D tax incentives have proven popular largely because exemptions from international agreements make R&D subsidies one of the few ways that governments can help domestic firms improve competitiveness without direct state aid” while going on to note that “…potential benefits have led many governments to increase the generosity of R&D tax incentives in recent years. Over the period 2006-2011, about half of the 23 countries for which complete data are available increased their generosity, with R&D tax support rising by almost 25% in some countries.”

[For more details, refer EY Global Tax Alert dated 18 October 2013]

OECD releases discussion drafts

On 15 November 2013, the OECD released two public discussion drafts. One of the discussion drafts deals with the “technical changes to be included in the next update to the OECD Model Tax Convention (MC) and the other deals with “proposed changes to the provisions dealing with the operation of ships and aircraft in international traffic.”

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The technical changes include proposals for changes to the OECD MC resulting from the work of Working Party 1 on Tax Conventions and Related Questions on a number of technical issues related to the MC. It is proposed that these changes be part of the next update to the OECD MC, which is currently scheduled to be finalized in 2014.

The discussion draft on “proposed changes to the provisions dealing with the operation of ships and aircraft in international traffic” includes proposals for changes to the MC, which primarily concerns international shipping and airline enterprises as well as their employees. Apart from a change proposed to the introduction, the changes put forward in this discussion draft are not expected to be included in the 2014 update to the MC.

The Committee for Fiscal Affairs has invited public comments on these discussion drafts before 15 January 2014.

Source: OECD

Source: OECD

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Tax happenings across the border

Philippines SC ruled failure to comply with time requirement for tax treaty relief application should not bar taxpayer from treaty benefit

The SC of the Philippines ruled in favor of Deutsche Bank AG, Manila Branch (DB Branch) and held that the failure to strictly comply with the domestic law requirement under Revenue Memorandum Order (RMO) No. 1-2000 to file a tax treaty relief application (TTRA) 15 days prior to the transaction should not deprive a taxpayer of the benefit of a tax treaty. The transaction, in this case, was the remittance of the branch profits to DB Branch’s German Head Office, which would give rise to branch profits remittance tax (BPRT). Few important observations of the SC were:• Every treaty in force is binding upon the parties, and

obligations under the treaty must be performed by them in good faith.

• Each state’s domestic laws must ensure that the reliefs granted under a given income tax treaty are available to the parties who are entitled to such reliefs. The Bureau of Internal Revenue should not impose additional requirements that will negate availability of the reliefs provided for under the treaty.

• The 15-day period for filing the TTRA under the domestic law should not deter entitlement to the tax treaty provision/benefit, since, to do so would constitute a violation of the duty required by good faith in complying with a tax treaty. At most, the TTRA should merely operate to confirm the entitlement of the taxpayer to the relief under the treaty, not denial solely due to failure to produce it.

• The obligation to comply with a tax treaty must take precedence over the domestic law. Non-compliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors.

[For more details, refer EY Global Tax Alert dated 23 September 2013]

El Salvador’s SC declares the Alternative Minimum Income Tax (AMT) unconstitutional

On 15 November 2013, the SC of Justice of El Salvador (SCJ) ruled the AMT statutory scheme unconstitutional. The AMT is a minimum income tax computed by applying a rate of 1% to a taxpayer’s gross income. Income tax is computed by applying the standard corporate income tax rate of 30% to net income and by applying the AMT to gross income. The income tax payable is the increased amount resulting from the computations. The SCJ determined that the AMT statutory scheme violated the constitutional principles of tax fairness and ability-to-pay by not allowing taxpayers to take any deductions on costs and expenses necessary to generate taxable income or to protect the source thereof.

[For more details, refer EY Global Tax Alert dated 22 November 2013]

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Spanish Tax Authority issues ruling expanding capital gains tax to indirect transfer of Spanish real estate by Luxembourg entities

The Luxembourg-Spain DTAA allows Spain to tax gains from the alienation of shares or similar rights in a company (either Spanish resident or NR) the assets of which consist principally of immovable property situated in Spain. Under the Spanish domestic law, such gains are currently taxable at 21%. The literal wording of the DTAA seems to clearly indicate that only a direct transfer of the shares in the property-rich entity may be taxable in Spain. In other words, under such wording, a transfer by Luxembourg resident entity of a company holding shares in another company that owns the Spanish real estate (indirect transfer) will appear to be blocked from taxation in Spain.

Pursuant to the recently published opinion of the Spanish Tax Authority, such indirect transfer of Spanish real estate by a Luxembourg entity is taxable in Spain under the provisions of the Luxembourg-Spain DTAA.

[For more details, refer EY Global Tax Alert dated 23 October 2013]

Ireland publishes proposed law on “Stateless” companies

On 15 October 2013, the Irish Minister for Finance announced proposals to prevent “stateless” Irish incorporated companies avoiding a charge to Irish corporation tax on their profits.

The primary test of corporate residence in Ireland is the location of “central management and control.” From 1 January 2015, an Irish incorporated company (which was incorporated before 24 October 2013) can no longer avoid a charge to Irish tax through maintaining central management and control in a EU Member State or a

territory with which Ireland has a DTAA, where such a company would have been tax resident in that relevant territory had they also been incorporated there. For example, an existing Irish incorporated company, which is managed and controlled in the US after 1 January 2015, would be deemed to be Irish tax resident and would be subject to Irish corporation tax on its income from 1 January 2015. However, the proposals are not expected to create an incremental tax cost for companies incorporated in Ireland before 24 October 2013, as such companies can implement new governance processes ahead of the 2015 effective date.

For companies incorporated in Ireland on or after 24 October 2013, the new legislation takes immediate effect and therefore newly incorporated companies in Ireland, which are managed and controlled outside of Ireland will need to carefully adhere to the new rules going forward.

The proposals do not affect a situation where a tie-breaker in a DTAA provides that an Irish company is resident in the treaty partner location and not in Ireland. The proposals in no way affect the charge to Irish tax on foreign incorporated companies. If the central management and control of such an entity is maintained in Ireland that foreign corporation will be Irish tax resident. NR companies continue to be taxed on profits attributable to a PE in Ireland.

[For more details, refer EY Global Tax Alert dated 24 October 2013]

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From the Tax Gatherer’s desk

CBDT notifies Cyprus as non-cooperative jurisdiction

The CBDT, the apex Indian Tax Administrative body, recently issued a Press Release dated 1 November 2013 notifying Cyprus as a Notified Jurisdictional Area (NJA) under the provisions of the ITA, which seek to strengthen the Indian system of collection of information from foreign tax jurisdiction.

The ITA contains a “tool box” to deal with transactions with entities located in non-cooperative countries or jurisdictions, which do not exchange information with India. The GoI is empowered to notify such jurisdiction as a NJA to discourage transactions by taxpayers in India with persons located in a NJA by providing for onerous tax consequences in respect of such transactions. Since Cyprus has not been providing the information requested by the Indian Tax Authority under the exchange of information (EOI) provisions of the India-Cyprus DTAA, the same has been notified as a NJA.

Subsequently, the Cyprus Government has issued a press release stating that the Cypriot Government is in direct contact with the GoI and is exerting every effort to clarify and resolve the situation that has been created and has directly affected business communities in both countries.

Source: Notification 86 of 2013 dated 1 November 2013 read with Press Release dated 1 November 2013 and Press Release, dated 7 November 2013) [For more details (Notifying Cyprus as NJA), please refer EY Tax Alert dated 2 November 2013] [For more details (Notification prescribing rules), please refer EY Tax Alert dated 1 July 2013] [For more details (tool box), please refer EY Budget Plus 2011 Tax Alert dated 2 March 2011]

Revised rules for furnishing information on payments to NRs

In our September 2013 edition of this newsletter, we had dealt with revision in the rules for furnishing information on payments to NRs. The CBDT has again revised the Rule prescribing the manner and forms for furnishing information electronically by a person responsible for making any payment to a NR. The revised Rule amends reporting of certain additional information and a new format for furnishing information in revised Forms.

[For more details on this development, please refer EY Tax Alert dated 6 September 2013] Source: Income-tax (14th Amendment) Rules, 2013 [F.NO.149/119/2012-SO SO(TPL)]/SO 2659(E), dated 2 September 2013

CBDT notifies rules for application of GAAR

The General Anti Avoidance Rules (GAAR) had first been introduced in the Direct Taxes Code (DTC) in 2009 to curb “Impermissible Avoidance Arrangement” (IAA) entered into by a person to avoid taxes. The GAAR had been introduced to deal with aggressive tax planning involving use of sophisticated structures. Under the current provisions, Chapter X-A, dealing with the provisions of GAAR would come into force with effect from 1 April 2015 (tax year 2015-16).

The CBDT has notified the rules relating to application of GAAR. GAAR Rules have provided for monetary threshold, non-applicability of the GAAR to the Foreign Institutional Investors (FIIs), which do not take the treaty benefit and grandfathering of investments made before 30 August 2010. The Rules cast an obligation on the Tax Authority to undertake thorough exercise before initiating the GAAR proceedings and provides for an opportunity to the taxpayer to prove that the arrangement is not an IAA. The Rules also provide for definite time limit for conclusion of the proceedings. It is also clarified that, where a part of an arrangement is tainted, the tax consequences would be limited to the tainted part only.

Source: Notification No. 75/2013 [F.NO.142/19/2013-TPL]/SO 2887(E), dated 23 September 2013 [For more details, please refer EY Alert dated 27 September 2013]

CBDT clarifies provisions relating to applicability of reference to Dispute Resolution Panel (DRP)

ITA, vide Finance (No. 2) Act, 2009, inserted Sec. 144C, providing for reference to DRP. This provision stated that the Tax Authority shall first forward a draft of the proposed order of assessment to the eligible taxpayer if it proposes to make, on or after 1 October 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. While introducing this provision, it was stated that this amendment will apply from tax year 2009–10 onwards.

However, the CBDT has now, clarified that this provision shall apply to any order, which proposes to make variation in income or loss returned by an eligible taxpayer, on or after 1st October, 2009 irrespective of the tax year to which it pertains.

Source: Circular No. 9/2013 [F. No. 142/20/2013-TPL], dated 19 November 2013

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CBDT issues procedure for handling Return of Income where self-assessment tax is not paid

The Finance Act 2013 introduced a provision stating that a Return of Income (RoI) shall be treated as a defective return if self-assessment tax due is not paid on or before furnishing the RoI. The CBDT has now issued a detailed Standard Operating Procedure (SOP) for handling such electronically filed returns where self-assessment tax is not paid.

Source: Letter [F. NO. DIT(S)-II/CPC/2013-14/Unpaid self-assessment tax]/13798, dated 13 November 2013

CBDT issues instructions for tax withholding from salaries for the tax year 2013–14

Every year, the CBDT issues instructions for withholding tax and explaining certain provisions and rules of ITA so far as they relate to salaries. Accordingly, the CBDT has issued a Circular that contains the rates of withholding tax from the payment of income chargeable under the head “salaries” during the tax year 2013–14 and explains certain related provisions of the ITA and Income tax Rules, 1962.

Source: Circular No. 08/2013 [F.No.275/192/2013-IT(B)], dated 10 October 2013

CBDT notifies statement to be furnished in respect of income distributed by a securitization trust

The Finance Act 2013, w.e.f. 1 June 2013 inserted special provisions relating to tax on distributed income by securitization trusts. The amount of income distributed by the securitization trust to its investors will be chargeable to tax and the trust shall be liable to pay additional income-tax on such distributed income. Pursuant to this, the CBDT has notified a statement to be furnished in respect of income distributed by a securitization trust in Form 63AA. This Form is to be furnished to the Tax Authority and it contains details of the trust along with details of income distributed, tax and interest paid thereon with a requirement of enclosing audited annual accounts of the trust.

Source: Notification no. 68/2013[F.no.142/18/2013-TPL]/SO 2668(e), dated 4 September 2013

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Service Tax

Indirect TaxCESTAT, Mumbai

Service tax not to be levied on one-time maintenance deposit collected by builder, before the formation of co-operative housing society

Finance Act, 1994; in favor of assessee

The assessee, engaged in the development of residential flats, had recovered a one-time maintenance deposit from the buyers of the flats, and deposited the said amount in a separate bank account as fixed deposit. This amount was utilized for the payment of various charges, common electricity bills, water charges, security charges etc. The revenue raised a demand on the assessee on the ground that it was providing “Maintenance or Repair services.” The question before the Tribunal was whether the maintenance deposit collected by the assessee will be subject to Service tax. Held, that the assessee could not be considered as provider of maintenance or repair services, as it was making payments to various authorities and service providers, merely on behalf of the buyers of the flats, and was acting as a trustee or a pure agent. It was further observed that the assessee was merely discharging its statutory obligation under the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963, by utilizing the amount collected as advance for the outgoings. After the formation of the co-operative housing society, the assessee was under an obligation to transfer unutilized fund to such society.

Kumar Beheray Rathi & Ors. v. Commissioner of Central Excise, Pune-III [TS-213-Tribunal-2013-ST]

CESTAT, Mumbai

If storage activity is merely incidental to the main activity of transportation, services to be classified as “supply of tangible goods for use” and not as “storage and warehousing services.”

Finance Act, 1994; in favor of assessee

The assessee had provided shipping vessels to Oil & Natural Gas Commission (ONGC) on charter hire basis and the operation and control of the vessel remained with the assessee. The vessels were used to store crude oil and transport the same to refineries situated onshore. The revenue contended that the vessels were primarily used for storage of crude oil and transportation was merely

incidental to the primary function of storage. Held, that the primary object of charter hiring the vessels was for transportation of crude oil from the place of production to the refineries in India. It was also observed that since the assessee did not undertake other responsibilities such as providing security of the goods, loading, unloading etc., the activity cannot be considered as “storage and warehousing.”

The Shipping Corporation of India Ltd v. Commissioner of Central Excise & Service Tax (LTU), Mumbai [2013-TIOL-1652-CESTAT-MUM]

CESTAT, Mumbai

Transportation of baggage considered to be a component of the principal service of “transportation of passengers by air”

Finance Act, 1994; in favor of assessee

The assessee, engaged in the transportation of passengers by air, charged the passengers for baggage, which was in excess of the free allowance. The revenue contended that the excess baggage charges collected would be liable to Service tax under the category of “transportation of goods by air”. The assessee relied on Central Board of Excise and Customs (CBEC) Circular no. 334/1/2008-TRU dated 29 February 2008 and Circular No. 104/7/2008-ST dated 6 August 2008, and contended that the transportation of baggage was a part of the principal service of transportation of passengers by air. Held, that prima-facie, the transportation of baggage was not an individual or separate service, but a component of the service of transportation of passengers by air. Therefore, the pre-deposit was waived completely.

Kingfisher Training & Aviation Services Ltd. v. Commissioner of Central Excise, Mumbai [2013-TIOL-1463-CESTAT-MUM]

CESTAT, Ahmedabad

Deputation of staff by a composite textile mill to its group companies does not amount to supply of manpower

Finance Act, 1994; in favor of assessee

The assessee, a manufacturer of fabrics and ready-made garments, had deputed employees to its group companies for a limited period of time, and collected salaries of these employees from its group companies. The question before

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the Tribunal was whether this activity would amount to supply of manpower by the assessee. The Tribunal observed that the deputed employees did not work under the exclusive supervision or control of group companies. Held, that the assessee was a composite textile mill and was not a commercial concern, which was primarily engaged in the recruitment or supply of manpower. Hence, Service tax should not be payable.

Arvind Mills Ltd. v. Commissioner of Service Tax, Ahmedabad [2013-TIOL-1455-CESTAT-AHM]

CESTAT, Delhi

Grant of TV channel distribution rights and sale of advertisement time, by foreign broadcasters to Indian entities, not taxable as import of “broadcasting agency services”

Finance Act, 1994; in favor of assessee

The assessees had made substantial payments to foreign-based broadcasters to acquire TV channel distribution rights and purchase of advertisement time inventory. The revenue contended that the assessees were receiving broadcasting service from foreign broadcasters and were liable to levy of Service tax under reverse charge mechanism. The question before the Tribunal was whether the assessees were liable to discharge Service tax liability under reverse charge mechanism. Held, that the assessees were providers of broadcasting service under the inclusive part of the definition of broadcasting, and not service recipients. It was observed by the Tribunal that the definition of “broadcasting” should be read as a whole, and cannot be interpreted to conclude that the assessee was a service recipient under the means and first inclusive part of the definition, and a service provider under the second inclusive part of the definition. Hence, they were not subject to reverse charge.

ESPN Software India (P) Ltd. v. CST, New Delhi & Turner International India Pvt. Ltd. v.. CST, New Delhi [TS-185-Tribunal—013 (DEL)-ST]

CESTAT, Mumbai

Reimbursement made to foreign group company toward the salary of personnel employed by the Indian company, will not constitute supply of manpower service

Finance Act, 1994; in favor of assessee

The assessee employed personnel belonging to their group company in Germany for a specific period. The relevant employees were relieved from respective group company and independently agreed to fresh terms of employment with the assessee. According to the agreement with the individual employees, part of the salary was paid in India and the balance was paid by the group company in Germany. Thereafter, debit notes were raised by the foreign entity on the assessee, toward reimbursement of the salary paid in Germany. The revenue contended that this activity will fall under the category of “Manpower supply or recruitment agency services”, and hence, the assessee will be liable to discharge Service tax liability on reverse charge mechanism. Held, that there was no supply of manpower service rendered to the assessee by the foreign entity, since the employees had an employer-employee relationship with the assessee. It was further held by the Tribunal that the method of disbursement of salary cannot determine the nature of transaction.

Volkswagen India Pvt Ltd. v. Commissioner of Central Excise, Pune-I [2013-TIOL-1640-CESTAT-MUM]

CESTAT, Delhi

Cold storage, being an essential part of the clearing and forwarding (C&F) operations, will be liable to Service tax

Finance Act, 1994; in favor of revenue

The assessee was engaged in providing services of cold storage and clearing and forwarding of frozen products. The revenue contended that the cold storage charges should be subject to Service tax, since it was covered under the C&F operations and was a part of the same agreement. The assessee contended that cold storage services were excluded from the tax net, and hence, should not be brought to tax under a different category. The question before the Tribunal was whether the cold storage services will be subject to Service tax. Held, that storage of goods was an inseparable part of the C&F activity undertaken by the assessee, and hence, cold storage charges were required to be added to the taxable value of C&F agent’s services. However, the matter was ultimately decided in favor of the assessee on the grounds of limitation.

Monsanto Manufacturer Pvt. Ltd. v. Commissioner of Central Excise, Ghaziabad [2013-TIOL-1196-CESTAT-DEL]

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CENVAT credit

High Court, Punjab & Haryana

Transfer of CENVAT credit on transfer of capital goods not allowed, if the new factory is not operating under CENVAT scheme

CENVAT Credit Rules, 2004; in favor of revenue

The assessee shifted its factory from Faridabad to Roorkee and contended that it was entitled to the transfer of CENVAT credit on account of shifting of the entire unit to Roorkee. The revenue contended that the assessee was not eligible to transfer the CENVAT credit under Rule 10 of the CENVAT Credit Rules, as the new factory was not operating under the CENVAT scheme, and hence, the assessee should be liable to reverse CENVAT credit on the clearance of capital goods from the factory under the provisions of Rule 3(5) of the said Rules. Held, that since the factory at Roorkee was not operating under the CENVAT scheme, transfer of CENVAT credit will not be admissible.

Yee Kay Technocrat (P) Ltd. v. Commissioner of Central Excise [2013 (292) ELT 48 (P&H)]

CESTAT, Delhi

Definition of “relevant date” as given in Section 11B of Central Excise Act not relevant for refund claims of unutilized CENVAT credit

CENVAT Credit Rules, 2004; in favor of assessee

The assessee, engaged in the manufacture of yarn, was availing CENVAT credit of the Excise duty paid on inputs. Since the assessee was unable to utilize the accumulated CENVAT credit due to export clearances under bond, without payment of duty, it filed an application for refund of the accumulated CENVAT credit under Rule 5 of the

CENVAT Credit Rules. The revenue rejected the refund claim on the ground that it was partly time barred, as it was filed after the expiry of the “relevant date” as given in Section 11B of the Central Excise Act. Held, that the definition of “relevant date” as given in the Explanation to Section 11B was applicable in respect of rebate claims on export of goods out of India, and not for cash refund of accumulated CENVAT credit, which the manufacturer is unable to utilize on account of export clearances. Hence, the definition of “relevant date” cannot be applied to refund claims under Rule 5.

Deepak Spinners Ltd. v. Commissioner of Central Excise, Indore [TS-163-Tribunal-2013-EXC]

CESTAT, Delhi

CENVAT credit in respect of transportation of goods from the factory to the port will be available where the port is the place of removal

CENVAT Credit Rules, 2004; in favor of assessee

The assessee, engaged in the export of goods, had availed CENVAT credit of Service tax paid on Goods Transport Agency (GTA) services availed for the transportation of goods from the factory to the port from where the goods were loaded on the vessel for export. The question before the Tribunal was whether the assessee is eligible for CENVAT credit of the Service tax paid on GTA services. Held, that the “place of removal” in case of Cost & Freight (C&F) exports or Free on Board (FOB) exports will be the port where goods were loaded and hence, the assessee will be eligible to claim credit of Service tax paid in respect of transportation of goods from the factory to the port. Commissioner of Central Excise, Ludhiana v. Aaren Exports [2013 (11) TMI 332-CESTAT NEW DELHI]

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CESTAT, Chennai

CENVAT credit in respect of service of conducting market research for assessing the performance of dealers in sale of products to be eligible, whereas, CENVAT credit denied for the portion of service for which the cost has been recovered from dealers

CENVAT Credit Rules, 2004; partly in favor of assessee

The assessee, manufacturer of two-wheelers, had discharged Service tax liability on reverse charge basis, in respect of the payments made to foreign entities for conducting market research and to various foreign universities, where its employees were sent for undergoing training courses. The revenue denied CENVAT credit of the payment made toward the market research, on the grounds that survey was done to assess the performance

of the dealers and not the market acceptability of the product, and hence, there is no direct nexus with the manufacture of final products. The CENVAT credit, in respect of the payment made to foreign universities, was denied by the revenue, since a part of the cost was recovered from the dealers on whom the survey was conducted. Held, that prima-facie, the service of conducting market research for assessing the performance of dealers in sale of products and training courses provided by the foreign universities will qualify as “input service”. However, prima-facie, assessee will not be eligible to take credit of that portion of the service for which the cost had been recovered from the dealers as the assessee did not incur the cost but merely routed the payment from the dealer to the service provider abroad.

TVS Motor Company Ltd. v. Commissioner of Service Tax, Chennai [2013 (9) TMI 629-CESTAT CHENNAI]

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Central excise duty

High Court, Mumbai

Assessable value for the purpose of Excise duty must be determined in terms of the Central Excise Act alone, and not on the basis of the VAT Act

Central Excise Act, 1944; in favor of assessee

The assessee, manufacturers of iron and steel products, had sold goods to customers at its factory gate, but agreed to deliver the goods at customer’s premises for a pre-agreed freight charges. The freight paid was shown separately in the invoice and was reimbursed by the customer. The assessee paid Excise duty only on the price of the goods and did not include the amount of freight in the assessable value. The Tribunal had prima-facie held, that the freight charges should be added to the value of goods to arrive at the assessable value as the cost of transportation was included in the value of goods for the purpose of computing the VAT liability. Held, that the assessable value for the purpose of Excise duty must be in terms of the Central Excise Act alone, and not on the basis of the VAT Act. The levy of Excise duty was based on the transaction value, and each transaction should be separately assessed depending on the terms of the contract and the time of passing of the ownership of goods. The Court directed the Tribunal to hear the assessee’s appeal without insisting on pre-deposit.

Bhushan Steel Ltd. v. Commissioner of Central Excise, Raigad [2013-TIOL-833-HC-MUM-CX]

CESTAT, Mumbai

Subsequent reduction in prices by passing on higher discounts to the customers, after clearance of goods, would not alter the Excise duty liability

Central Excise Act, 1944; in favor of revenue

The assessee was engaged in the manufacture of color TVs and sold the same from their sales depots. The assessee had initially filed price declarations and paid duty based on prevailing prices at the depots. However, when the assessee subsequently found that the goods were actually sold at a reduced price due to increased discounts offered to customers, a revised price declaration was filed by the assessee. The depot issued invoices considering the reduced discounts and the balance discount was passed on to buyers by way of credit notes. The question before the Tribunal was whether the assessee was eligible to claim refund arising on account of the revised price declaration. Held, that the revised price declaration filed by the assessee, indicating an increased discount, will be applicable only prospectively. The Tribunal also relied on the Supreme Court (Larger Bench) ruling in the case of MRF Ltd. v. CCE, Madras, wherein it was held that subsequent reduction in price will not have any relevance on the valuation of goods. Hence, in this case it was held that subsequent reduction in prices by passing on increased discounts after the clearance of goods will not alter the Excise duty liability of the assessee.

Videocon International Ltd. v. Commissioner of Central Excise, Aurangabad [TS-200-Tribunal-2013 (Mum)-EXC]

CESTAT, Delhi

Advertisement expenses incurred by dealers to be included in the assessable value only when the manufacturer has an enforceable legal right against the dealers to insist on incurring of such expenses

Central Excise Act, 1944; in favor of assessee

The assessee, engaged in the manufacture of scooters and motor cycles, sold the goods through their dealers. According to the agreement between the assessee and the dealers, the dealers were required to make efforts to promote the sales of the assessee’s goods. The dealers had incurred expenses on advertisement and publicity

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of these products, and a part of these expenses had been shared by the assessee. However, the expenses, to the extent, borne by the dealers, were not included in the assessable value of the goods cleared to the dealers. The question before the Tribunal was whether the advertisement and publicity expenses incurred by dealers, which were not reimbursed by the assessee, will be included in the assessable value of the goods. Held, that advertisement expenses incurred by the dealers can be added to the assessable value only when the manufacturer has an enforceable legal right against dealers to insist on incurring of such expenses. In this case, even though as per the agreement, the dealers were required to make efforts for promoting sales of the goods, since there was no legal obligation on the dealers to incur a certain level of advertisement expenses, the expenses borne by dealers were not to be included in the assessable value.

Honda Seils Power Products Ltd. v. Commissioner of Central Excise, Meerut-III [2013-TIOL-1492-CESTAT-DEL]

CESTAT, Mumbai

Change in Sales tax liability under the package scheme of incentives cannot be a cause for redetermination of assessable value, determined according to Central Excise laws

Central Excise Act, 1944; in favor of assessee

The assessee, engaged in the manufacture of conveyor parts and material handling system, had opted for the scheme of pre-payment of deferred payment of Sales tax at net payment value, introduced by the Sales tax department of the Government of Maharashtra. The assessee had received a certain amount as discount in respect of pre-payment of deferred Sales tax. The revenue contended that since the assessee had collected Sales tax from buyers at a prescribed rate, the discount received should be treated as additional consideration and was dutiable according to Rule 6 of the Central Excise (Valuation) Rules, 2000. Held, that the changes in Sales tax liability under the Package Scheme of Incentives could not be a cause for redetermination of assessable value determined according to Central Excise laws, as it stood at the time of removal of goods. Therefore, the assessee was not liable to pay duty on the discount received in respect of pre-payment of deferred Sales tax.

Automag India P. Ltd. v. Commissioner of Central Excise, Pune-I [2013-TIOL-1275-CESTAT-MUM]

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Customs duty

High Court, Calcutta

Recovery proceedings cannot be considered to be a proceeding relating to adjudication, for the purpose of making an application to the Settlement Commission

Customs Act, 1962; in favor of revenue

The assessee filed an application before the Settlement Commission consequent to the recovery proceedings initiated by the revenue under the Customs Act, 1962. The Settlement Commission rejected the application as the adjudication order had already been passed. The assessee contended that the definition of “case” in relation to settlement of cases should be interpreted to cover proceedings where an order of adjudication has been passed by the adjudicating authority and its execution is pending before the proper officer, thereby allowing it to make an application to the Settlement Commission. The revenue contended that recovery proceedings could not be considered as adjudication proceedings and pendency of adjudication proceedings is necessary in order to approach the Settlement Commission. Held, that on reading the definition of “case” in relation to settlement of cases, together with the provisions for filing an application before the Settlement Commission, it was apparent that there has to be pendency of proceedings before the adjudicating authority and before adjudication, an application must be filed. The recovery proceedings will not contemplate any adjudication order by the adjudicating authority, and hence the assessee will not be eligible to file an application before the Settlement Commission.

Exotica Global Pvt Ltd v. Union of India & Ors. [2013-TIOL-819-HC-KOL-CUS]

CESTAT, Mumbai

Assessment of Countervailing duty (CVD) for pre-packaged products weighing less than 10 grams should be done on the basis of transaction price and not maximum retail price (MRP)

Customs Act, 1962; in favor of assessee

The assessee had imported pre-packaged adhesives and glue sticks and the weight was clearly indicated on the packages. Since the net weight was less than 10 grams, the assessee claimed exemption from the levy of CVD on MRP basis under the provisions of the Legal Metrology

(Packaged Commodity) Rules, 2011. However, the customs authority contended that these goods were sold on the basis of numbers and not on the basis of weight, and hence, the CVD assessment should be done on MRP basis. Held, that since the net weight of the product was less than 10 grams, the assessee was exempted from declaring the MRP. Hence, the assessment of CVD should be done on the basis of the transaction price and not on MRP basis.

Pidilite Industries Ltd. v. Commissioner of Customs (Import), Nhava Sheva [2013-TIOL-1592-CESTAT-MUM]

CESTAT, Mumbai

Sole distribution fee not to be included in the assessable value of imported goods, if it does not form a part of proceeds of any subsequent resale, disposal or use of the imported goods

Customs Valuation (Determination of Value of Imported Goods) Rules, 2007; in favor of assessee

The assessee had executed an agreement with the foreign supplier for sole distribution rights in respect of specified branded items in India. Under the agreement, sole distributor fee was payable irrespective of whether the assessees had made profit or loss in a given year. The revenue loaded the value of the sole distributor fee under Rule 10(1) of the Customs Valuation Rules, which provides that the value of any part of the proceeds of any subsequent resale, disposal or use of imported goods, that accrues directly or indirectly to the seller is to be included in the assessable value. Held, that since the revenue could not bring out any evidence that the sole distributor fee was any part of the proceeds of any subsequent resale, disposal or use of imported goods, it is not liable to be loaded in the assessable value of the imported goods.

Volkswagen Group Sales India Pvt. Ltd. v. Commissioner of Customs, Mumbai [2013 (10) TMI 36-CESTAT MUMBAI]

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VAT

High Court, Madras

Where the nature of work involves not only manufacture but also laying of pipes, it is a composite contract involving supply of materials and not a contract for sale

Tamil Nadu General Sales Tax Act, 1959; in favor of assessee

The assessee was a sub-contractor for the manufacture and supply of pipes along with laying, joining, testing and commissioning of the pipes and other incidental works. The revenue contended that the transaction was subject to Sales tax under the Tamil Nadu General Sales Tax Act, as the contract was predominantly for manufacture and supply of pipes, and laying and commissioning of the same was merely incidental. The question before the Court was whether the contract was a works contract or a contract for sale. Held, that it was composite contract involving supply of materials (along with provision of services) and not a contract for sale, as the nature of work involved is not only manufacture but also laying of pipes thereafter.

Amintiti Fibre Glass Industries India (P) Ltd. v. State of Tamil Nadu [2013 (10) TMI 822-MADRAS HIGH COURT]

High Court, Madras

Franchisee agreement which transfers the right to use the trademark will be liable to Sales tax

Tamil Nadu General Sales Tax Act, 1959; in favor of revenue

The assessee was engaged in the business of operating supermarkets and had entered an agreement with the franchisee, granting an exclusive right to operate the supermarket in a specified location for a franchise fee. The revenue contended that it amounted to transfer of trademark by the assessee, and the transaction will be subject to Sales tax under the Tamil Nadu General Sales Tax Act. The assessee contended that it was purely a service transaction and there was no sale of goods

involved. It was also the contention of the assessee that the franchise fee was an actionable claim and hence, was excluded from the definition of goods. The question before the Court was whether franchise fee will be liable to Sales tax. Held, that the assessee had transferred the right to use (instead of license to enjoy) the trademark, and had granted the right to economically exploit the intangible and incorporeal goods. Hence, the franchise fee will be subject to Sales tax. The Court also rejected the assessee’s claim that the franchise fee received by it was an actionable claim.

Vitan Departmental Stores & Industries Ltd. v. State of Tamil Nadu [2013-VIL-94-MAD]

High Court, Calcutta

Banks/Non-banking finance company (NBFC) liable to pay Sales tax on the sale of hypothecated vehicles for the recovery of loans

West Bengal Value Added Tax, 2003; in favor of revenue

The assessees, banking company/NBFC, had granted loans to borrowers to purchase vehicles, against hypothecation of the vehicles by way of security. The assessees had also obtained irrevocable power of attorney from the borrower to dispose of the vehicle in case of default in repayment of loan. The question before the Court was whether the assessees will be liable to pay Sales tax in respect of the disposal of vehicles for the recovery of loan. Held, that the assessees were dealers under the provisions of the West Bengal Value Added Tax, 2003, and the sales were in the course of their banking businesses. By obtaining irrevocable power of attorney from the borrowers, they were acting as agents of the borrowers in selling the vehicles. Therefore, they are liable to pay Sales tax on the sale of vehicles for the recovery of loan.

Tata Motors Finance Ltd.& Ors. v. Assistant Commissioner of Sales Tax Central Section, Investigation Wing, Kolkata & Ors. [2013-VIL-85 CAL]

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Key statutory developments

Central Excise

CENVAT credit reversal on capital goods cleared as waste or scrap to be on “transaction value”

Rule 3(5A) of the CENVAT Credit Rules, 2004, which provides for the reversal of CENVAT credit on the removal of capital goods, whether as waste/scrap or otherwise, has been amended.

With this amendment, a manufacturer will be liable to pay an amount equal to the duty leviable on “transaction value,” instead of “depreciated value,” on the removal of capital goods as waste or scrap.

Notification No. 12/2013 – CE (NT) dated 27 September 2013

Amendment of Rules 8, 9 and 10 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000, relating to goods cleared for captive consumption and sales to related parties

Rule 8 of the Valuation Rules has been amended to provide that, where excisable goods are consumed in captive by the manufacturer in the manufacture of other articles, and are also sold to customers, valuation of goods for captive consumption has to be done according to Rule 8.

Similarly, where the assessee sells goods partly to related persons or inter-connected undertakings, Rules 9 and 10 will continue to apply.

Vide this amendment, these rules would apply irrespective of whether whole or part of the clearances of manufactured goods are made for captive consumption or to related parties/inter-connected undertakings.

Notification 14/2013-Central Excise (N.T.) dated 22 November 2013

Service tax

Exemption granted to services provided in relation to serving of food or beverages by a factory canteen, with the facility of air-conditioning or central air-heating

Notification 25/2012-ST dated 20 June 2012 has been amended to grant exemption to services provided in relation to serving of food or beverages by a factory canteen, with the facility of air-conditioning or central air-heating.

Notification No. 14/2013 – ST dated 22 October 2013

Time line for quarterly filing by SEZ unit or developer providing details of services without payment of Service tax introduced

Notification 12/2013-ST dated 1 July 2013 has been amended, to provide that, SEZ unit or developer is required to submit form A-3, furnishing details of specified services received by it, without payment of Service tax, by 30 of the month following the quarter. In case of quarter ended on 30 September 2013, Form A-3 is to be furnished by 15 December 2013.

Notification No. 15/2013 – ST dated 21 November 2013

VAT

Delhi VAT Amnesty Scheme introduced

Government of Delhi has introduced the Delhi Tax Compliance Achievement Scheme, 2013, which provides dealers an opportunity to make payment of tax dues for the period starting from 1 April 2005 to 31 March 2013. The key highlights of the said scheme are as below:

• ► The tax dues in respect the Delhi Value Added Tax Act, 2004 (erstwhile Delhi Sales Tax Act, 1975) or Central Sales Tax Act, 1956 or Delhi Sales Tax on works contract Act, 1999 or Delhi Sales Tax on Right to use Goods Act, 2002 or Delhi Tax on entry of Motor Vehicles Act, 1994 shall be covered under the above mentioned scheme.

• ► The scheme does not, however, cover cases of notice of assessment of penalty issued under any relevant Acts, which do not have relation to the tax deficiency.

Cases covered under the Scheme

• ► Those dealers, who have not been issued a notice for assessment, will first determine the commodity wise taxable turnover under a declaration and shall compute tax at the applicable rates as per the schedules and file the same under a declaration in Form DSC- 1.

• ► Those dealers on whom the notice for assessment under Section 32 (default assessment of tax payable) has been served and demand has been raised in Form DVAT-24, the tax shall be calculated by aggregating the amount of tax and interest determined in the form. The penalty under Section 33 of the DVAT Act in relation to such tax will be waived off.

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• ► In case of works contract dealers, the tax will be calculated by multiplying their total turnover (including value of labor and services) as per the following tax rates:

Percent of tax Description of work

1% of total consideration Construction of complex, building, a civil structure or a part thereof

3% of total turnover (including value of labor and services)

Others

Notification No. F. 3(16)/Fin. (Rev-I)/201314/dsVI/786 dated 20 September 2013

Voluntary Disclosure Scheme introduced under Punjab VAT

Government of Punjab has introduced Voluntary Disclosure Scheme, which provides dealers an opportunity to make payment of tax dues.

The key highlights of the said scheme are as below:

Cases covered under the scheme

• ► The taxable person has claimed the input tax credit, but tax has not actually been paid on the goods so purchased.

• ► The taxable person has claimed concessional rate of tax claiming branch transfer/interstate trade, but actually the goods were not sent outside the state.

• ► The taxable person has submitted statutory forms to claim concessional rate, but the same are not proper and genuine.

• ► The taxable person has claimed zero rated sales on account of exports; however, either the exports have not taken place or they were over-invoiced.

Time limit for making application

For availing the benefits under this scheme, a taxable person will make an application before the designated officer before 31 March 2014.

Public Notice for Voluntary Disclosure Scheme issued by Excise and Taxation Department, Punjab

Tamil Nadu

Reduction in eligible input tax credit in respect of goods purchased for sale on interstate basis against Form C or on goods intended for stock transfer

With effect from 11 November 2013, a new proviso has been added to Section 19(2) of the Tamil Nadu VAT law whereby, input tax credit in respect of goods purchased for interstate sale (against Form C) shall be allowed only in excess of 3%.

Furthermore, amendments have also been made in Section 19(4) regarding rate of reversal of input tax credit in case of transfer of goods to a place outside the State otherwise than by way of sale. The rate has been increased from 3% to 5%.

Tamil Nadu Value Added Tax (Fifth Amendment) Act, 2013 dated 8 November 2013

Punjab

Exemption from Entry tax and levy of advance tax in Punjab

The Government of Punjab has exempted all taxable persons registered under the Punjab Entry tax law from payment of Entry tax on all goods covered under Notification dated 18 September 2012 (including goods such as iron and steel products, cement, bitumen etc.).

Furthermore, vide a separate notification, the Government of Punjab has also levied an advance tax on any person importing specified goods in to the State (including goods such as iron and steel products, cement, bitumen etc.). The said levy is based on the premise that the notified goods are being imported for sale unless proved otherwise.

Notifications dated 4 October 2013 under the Punjab Entry tax and VAT laws

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Foreign direct investment

RegulatoryNR permitted to acquire shares on the stock exchange

Existing RBI regulations allow NRs holding shares of a listed Indian company to sell those shares on a stock exchange. However, the NRs were restricted to buy the shares of a listed Indian company on a stock exchange.

The RBI has now allowed NRs including nonresident Indians (NRIs) to acquire shares of a listed Indian company on the stock exchange through a registered broker under the FDI scheme, subject to the following conditions:

• ► The NR investor has already acquired and continues to hold the control in accordance with the Securities and Exchange Board of India (SEBI) Takeover Regulations;

• ► The amount of consideration for transfer of shares to NR consequent to purchase on the stock exchange is paid as below:• By way of inward remittance through normal

banking channels• By way of debit to the Nonresident (External)

Rupee (NRE)/Foreign Currency (Nonresident) (FCNR) account of the person concerned maintained with an Authorized dealer (AD) bank

• By debit to non-interest bearing Escrow account (in INR) maintained in India with the AD bank in accordance with Foreign Exchange Management (Deposit) Regulations, 2000

• Out of dividend payable by Indian investee company, in which the said NR holds control as aforesaid above, provided the right to receive dividend is established and the dividend amount has been credited to specially designated non–interest bearing rupee account for acquisition of shares on the floor of the stock exchange

• ► The pricing for subsequent transfer of shares to NR shareholder will be in accordance with the pricing guidelines under the Foreign Exchange Management Act (FEMA).

• ► The original and resultant investments are in line with the extant FDI policy and FEMA regulations in respect of sectoral cap, entry route, reporting requirement and documentation.

RBI/2013-14/232 A.P. (DIR Series) Circular No. 38 dated 6 September 2013

Amendment to downstream investment condition

The RBI has amended the conditions prescribed in its Circular dated 4 July 2013 on downstream investment by an Indian operating company through internal accruals.(Please refer the September edition of this e-newsletter).

Through this amendment, an Indian operating company has been allowed to make downstream investment from its internal accruals.

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The aforesaid condition mentioned in the Circular is now consistent with the downstream investment regulation as provided in the FDI Policy (Circular No. 1 of 2013).

RBI/2013-14/251 A.P. (DIR Series) Circular No. 42 dated 12 September 2013

Review of FDI policy: definition for control and sector-specific conditions

The RBI has aligned the definition of control as mentioned in the FDI policy vide Press Note No. 4 dated 22 August 2013, and also updated the sector-specific conditions.

The new definition shall read as follows:

“Control shall include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.”

RBI/2013-14/255 A.P. (DIR Series) Circular No. 44 dated 13 September 2013

Foreign investment in India: participation by SEBI registered FIIs, QFIs and SEBI registered long-term investors in credit enhanced bonds

The RBI has decided to allow SEBI registered FIIs, Qualified Foreign Investors (QFIs) and Sovereign Wealth Funds (SWFs), multilateral agencies, pension/insurance/endowment funds, foreign Central Banks, to invest in the credit enhanced bonds up to a limit of US$5 billion within the overall limit of US$51 billion earmarked for corporate debt.

RBI/2013-2014/368 A. P. (DIR Series) Circular No.74 dated 11 November 2013

FDI in financial sector: transfer of shares

On transfer of shares from residents to NRs where the investee company is in the financial services sector, a No Objection Certificate (NoC) was required to be obtained from the respective financial sector regulator of the investee company as well as transferor and transferee entities and such NoC(s) were to be filed with the form FC-TRS to the AD bank.

The RBI has currently dispensed off the requirement of NoC(s) to be filed along with form FC-TRS.

RBI/2013-2014/366 A. P.(DIR Series) Circular No. 72 dated 11 November 2013

Issue of American Depository Receipt(ADR)/Global Depository Receipt(GDR) by unlisted companies

In furtherance to the Press Release issued by the Ministry of Finance on 27 September 2013, the RBI has issued circular notifying conditions for the unlisted Indian companies to raise capital abroad without prior or subsequent listing in India, initially for a period of two years.

The funds raised abroad may be utilized for retiring outstanding overseas debt or for bona fide operations abroad including acquisitions and if the funds are not utilized for such purposes the amount shall be repatriated within 15 days to India and parked with AD Bank.

RBI/2013-2014/363 A.P.(DIR Series)Circular No. 69 dated 8 November 2013

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Reserve Bank of India

Updates in external commercial borrowings (ECB) policy

Liberalization in the ECB policy

According to the extant ECB guidelines, an eligible borrower is prohibited to utilize the ECB proceeds for its general corporate purpose.

The RBI has liberalized the end use restrictions under the ECB policy by permitting eligible borrowers to avail ECB under the approval route from the foreign equity holder company for general corporate purposes subject to the following conditions:

• Minimum paid up equity of 25% should be held directly by the lender

• ECB should not be used for purposes not permitted by the ECB guidelines including on-lending to the group companies/step down subsidiaries in India.

• Repayment of the principal shall commence only after completion of minimum average maturity of seven years. No repayment will be allowed before maturity.

RBI/2013-14/221 A.P. (DIR Series) Circular No.31 dated 4 September 2013

Liberalization of definition of infrastructure sector

The RBI has decided to expand the existing definition for the infrastructure sector for the purpose of availing ECB by aligning it with Harmonized Master List of infrastructure subsectors and institutional mechanism as approved by the GoI vide Notification No. 13/06/2009-INF dated 27 March 2012.

RBI/2013-14/270 A.P. (DIR Series) Circular No. 48 dated 18 September 2013

Trade credits for import into India extension of period

The RBI has allowed companies in all sectors to avail trade credit not exceeding US$20 million up to a maximum period of five years for import of capital goods as classified by Director General of Foreign Trade (DGFT). It has also been decided to relax the ab-initio contract period of 15 months for all trade credits to 6 months.

Earlier AD Banks were allowed to approve trade credit not exceeding US$20 million up to a maximum period of five years (from the date of shipment) for companies in the infrastructure sector only, subject to specified conditions.

RBI/2013-14/290 A.P. (DIR Series) Circular No. 53 dated 24 September 2013

Trade credits for imports into India: all-in-cost ceiling

The RBI has decided that the existing all-in-cost ceiling as provided in the table below, will continue till March 2014 and subject to review thereafter.

Maturity period All-in-cost ceilings over 6 months LIBOR

Up to one year

350 basis pointsMore than one year and up to three years

More than three years and up to five years

RBI/2013-14/301 A. P. (DIR Series) Circular No. 56 dated 30 September 2013.

ECB proceeds for acquisition of shares under the GoI’s disinvestment program of PSUs: clarification

The RBI has clarified that the ECB is allowed for all subsequent stages of acquisition of shares in the disinvestment process under the GoI’s disinvestment program of PSU shares; in other words, facility of ECB is available for multiple rounds of disinvestment of PSU shares under the GoI disinvestment program.

RBI/2013-14/302 A.P. (DIR Series) Circular No.57 dated 30 September 2013

ECB: review of all-in-cost ceiling

The RBI has decided that the existing all-in-cost ceiling, as provided in the table below, will continue till March 2014 and shall be subject to review thereafter.

Average maturity period All-in-cost over 6 month LIBOR

Three years and up to five years

350 bps

More than five years 500 bps

RBI/2013-14/ 303 A.P. (DIR Series) Circular No. 58 dated 30 September 2013

Refinancing/rescheduling of ECB

Currently eligible borrowers, desirous of refinancing an existing ECB, were permitted to raise fresh/reschedule an existing ECB at a higher all-in-cost under the approval route subject to specified conditions.

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The RBI has now decided to discontinue the facility, allowing eligible borrowers to raise ECB at a higher all-in-cost to refinance/reschedule an existing ECB with effect from 1 October 2013.

RBI/2013-14/304 A.P. (DIR Series) Circular No 59 dated 30 September 2013

Overseas Direct Investment (ODI)

Please refer to the September 2013 edition of this e-newsletter wherein it was informed about a circular by RBI on reduction in existing investment limit of 400% of net-worth of Indian Party to 100% of its net worth under the automatic route and other conditions.

Subsequent to this circular, the RBI issued a clarification to the terms mentioned in the previous circular. These clarifications were as follows:

• ► The Financial Commitment (which includes investment made in the form of equity, loan and guarantees) made on or before 14 August 2013, in compliance with the earlier limit of 400% of the net worth of the Indian party under the automatic route will continue to be allowed and will not require any further approval.

• ► The limit of 100% of net-worth will not apply to the financial commitments funded out of EEFC account of the Indian Party or out of the funds raised by issuing ADRs/GDRs by the Indian Party.

• ► The RBI has decided to continue with the limit of 400% of the net worth of the Indian Party for the financial commitments funded by way of ECB raised by the Indian Party.

The above provisions have become effective from the date of issue of the circular and will apply to all fresh ODI proposals on a prospective basis and will not apply to existing JV/WoS set up under the extant regulations.

RBI/2013-2014/220 A.P.(DIR Series)Circular No.30 dated 4 September 2013

ODI: amendment

The RBI has issued an amendment to Para 2(iv)(b) of A. P. (DIR Series) Circular No. 69 dated 27 May 2011.

The para now reads as:

“Further, it has also been decided that issue of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered

under the Approval Route, provided the Indian Party indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued.”

RBI/2013-14/241 A.P. (DIR Series) Circular No. 41 dated 10 September 2013

Third party payments for export/import transactions

The RBI has liberalized the procedure relating to payment of export and import taking into account the evolving international trade practices,

With respect to payments for export of goods/software, AD Banks may now allow payment to be received from third party subject to certain conditions including a firm’s irrevocable order backed by a tripartite agreement and the exported should mention the third party remittance in the Export Declaration Form (EDF).

In relation to import of goods, among other conditions it shall be required to provide in the narration of the invoice that the related payment has to be made to the third party whose name is also provided in the invoice.

The amount of import transaction eligible for third party payment will not exceed US$100,000.

RBI/2013-2014/364 A. P. (DIR Series) Circular No.70 dated 8 November 2013

Liberalized Remittance Scheme (LRS) for resident individuals

Please refer the September 2013 edition of this e-newsletter where it was informed on circular by RBI on reduction of the limit of US$200,000 per financial year to US$75,000 per financial year (April-March).

With respect to the aforesaid circular, many queries were raised from various stakeholders and ADs. Accordingly, the RBI has issued the following clarifications pursuant to those queries:

• ► LRS can be used to acquire both listed and unlisted shares of an overseas company. The master circular dated 1 July 2013 has been suitably modified to provide for the same.

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• ► The RBI has clarified that following remittances can be made by resident individual over and above the annual limit of US$75,000 permissible under the modified LRS:• ► Meeting expenses for medical treatment abroad,

up to the estimate from a doctor in India or hospital/doctor abroad

• ► Up to US$25,000 for maintenance expenses of a patient going abroad for medical treatment or check-up abroad or for accompanying as attendant to a patient going abroad for medical treatment/check-up

• ► Remittances for studies abroad, up to the estimates from the institutions abroad or US$100,000, whichever is higher

• ► Other remittances (other than donation and gifts) as stipulated under Schedules III to FEMA Current Account Transaction Rules, 2000

• ► Resident individual is also permitted to carry out other permissible current account transactions (transactions, which are not explicitly prohibited under Schedule I or restricted under Schedules II and III, to FEMA Current Account Transaction Rules, 2000) without any limits subject to the AD bank verifying the bona fides of the transaction.

• ► The RBI had clarified that the revised LRS limit of US$75,000 will be effective from the date of publication of notification in the Official Gazette. Accordingly, the effective date of the notification is 5 August 2013 (the date of publication of notification in the official Gazette) and not 5 March 2013.

• ► The existing LRS scheme does not permit acquisition of immovable property directly or indirectly outside India. It is now clarified that resident individuals are permitted to make remittances for acquiring immovable property within the annual limit of US$75000 for those contracts, which were entered on or before the date of the circular, i.e., 14 August 2013, which prohibited acquisition of immovable property, subject to satisfaction of the genuineness of the transactions by the AD bank, which have to be immediately reported post facto to the RBI by AD banks.

RBI/2013-14/ 222 A.P. (DIR Series) Circular No.32 dated 4 September 2013

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Security Exchange Board of India (SEBI)

Notification on put and call option

The SEBI has permitted listed companies to enter, inter alia, into put and call options, which were currently not allowed subject to certain conditions, which are as follows:

• “The title and ownership of the underlying securities are held continuously by the selling party to such a contract for a minimum period of one year from the date of entering into the contract

• The price or consideration payable for the sale or purchase of the underlying securities pursuant to exercise of any option contained therein, is in compliance with all the laws for the time being in force, as applicable

• The contract has to be settled by way of actual delivery of the underlying securities”

This prospective notification further provides that the contracts mentioned therein shall be in accordance with the provision of FEMA.

SEBI Notification No. LAD-NRO/GN/2013-14/26/6667 dated 3 October 2013

FIIs for Infrastructure Debt Fund (IDF)

The SEBI had designated the following FII as long-term investors for IDF vide a circular dated 23 April 2013

1. Foreign central banks

2. Governmental agencies

3. Sovereign wealth funds

4. International/multilateral organizations/agencies

5. Insurance funds

6. Pension funds

The SEBI has further decided that regulated foreign feeder funds, which at all times have, at least 20% of their assets under management held by investors belonging to one or more of the above categories of FIIs, will also be categorized as FIIs, which are long-term investors, for the purpose of IDF.

SEBI CIR / IMD / DF / 20 / 2013 dated 28 November 2013

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Click on the links provided below to access some of our recently published articles.

In the press

Attracting FDI is key to India’s future growth prospectsSudhir Kapadia, The Economic Times

Don’t ignore wealth tax liability Sonu Iyer, Mint

Reduction in land area requirement to be game changer for SEZs Rajiv Chugh, The Financial Express

Evading wealth tax is a criminal offence Amarpal S Chadha, Business Standard

No customs duty on Bluetooth headsets Vivek Sharma and Manav Saneja, The Financial Express

How Cos Bill will affect employee benefit schemes Pinky Khanna, The Financial Express

Service tax waived for hotels, lodges in Uttarakhand Amit Bhagat and Jayanta Kalita, The Financial Express

Transfer Pricing rules still fizzy Vijay Iyer, The Hindu Business Line

Capital gains vs interest Prakash Shah, The Hindu Business Line

‘Look at’ or ‘look through’? Ravi Mehta, The Hindu Business Line

High octane: Liquor, petrol to come under GST Vivek Pachisia, The Hindu Business Line

L&T judgment opens a Pandora’s box Harishanker Subramaniam, Business Standard

Know the tax benefits of house rent Mayur Shah and Jay Unarkar, Business Standard

Will you have to pay VAT on your flat? Abhishek Jain and Saurabh Agarwal, The Economic Times – Wealth

Definition of ‘basic wages’ for calculation of PF contribution Puneet Gupta, The Financial Express

VAT on sale of flat under construction Vivek Sharma and Manav Saneja, The Financial Express

Criteria you must fulfil under HRA exemption Jay Unarkar, The Financial Express

No VKGUY credit if tax relief is taken Amit Bhagat and Jayanta Kalita, The Financial Express

Avoiding double trouble in transfer pricing Vijay Iyer, Business Standard

Taxability of expatriate benefits: Some key issues Shalini Jain, The Financial Express

Split benefits: Gain with dual employment Ralph Pinto, The Financial Express

Cenvat credit on inputs sent to job worker Vivek Sharma and Manav Saneja, The Financial Express

States back to pre-VAT chaos Satya Poddar and Rahul Renavikar, The Financial Express

Cementing the future of REIT Avinash Narvekar, The Hindu Business Line

Flat sale in the VAT net B. Sriram, The Hindu Business Line

GST opportunity squandered as the blamegame goes on Harishanker Subramaniam, The Hindu Business Line

Should petrol and alcohol be left out of GST? No Bipin Sapra, The Hindu Business Line

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Direct Tax

Compilation of Tax Alerts

S. No. Title Tax Alert Date Citation/Notification/Circular

1. Mumbai Tribunal, following Karnataka High Court, characterizes payment for computer software as royalty

11 September 2013 DDIT (IT) v. Reliance Infocom Ltd. [TS-433-ITAT-2013(Mum)]

2. Delhi HC reiterates subvention by holding company to its WOS to recoup losses is a non-chargeable capital receipt

12 September 2013 CIT v. Handicrafts and Handlooms Export Corpn. Of India Ltd.[TS-440-HC-2013(DEL]

3. Mumbai ITAT rules that additional consideration received under an open offer agreement is taxable as capital gains and not interest

16 September 2013 Genesis Indian Investment company v. CIT [TS-405-ITAT-2013(Mum)]

4. Ruling of Bombay High Court on maintainability of writ petition on transfer pricing matter

18 September 2013 Vodafone India Services Pvt. Ltd. v. UoI, Ministry of Finance [TS-261-HC-2013(BOM)-TP]

5. Breaking News — Government of India’s (GoI’s) press release on final transfer pricing safe harbour rules

19 September 2013 GoI Press Release dt 18 September 2013, regarding TP safe harbor rules

6. Mumbai ITAT rules that non-recognition of interest income on NPAs as per RBI guidelines would by itself not determine non-taxability thereof

19 September 2013 KEC Holdings Ltd. v. Asst. CIT [TS-438-ITAT-2013(Mum)]

7. Global Tax Alert - Indian Tax Administration issues final rules on transfer pricing safe harbour

20 September 2013 GoI Press Release dt 18 September 2013, regarding TP safe harbor rules

8. Mumbai Tribunal rules reimbursement of expenses on secondment of employees not FTS

20 September 2013 Temasek Holdings Advisors (I) P. Ltd. v. DCIT [TS-418-ITAT-2013]

9. Mumbai Tribunal rules compensation for termination of Right of First Refusal for grant of manufacturing rights is not taxable

26 September 2013 Parle Soft Drinks Pvt. Ltd v. JCIT [TS-467-ITAT-2013(Mum)]

10. CBDT Notifies GAAR 27 September 2013 CBDT Notification No. 75 dated 23 September 2013

11. SEBI notification dated 03 October 2013 permitting pre-emptive rights and put-call options

7 October 2013 SEBI Notification dated 3 October 2013

12. Supreme Court lays down principles on evaluating “real” accrual of income for levy of tax

10 October 2013 CIT v. Excel Industries Ltd. [TS-506-SC-2013]

Home

36 Tax & Regulatory Quarter

S. No. Title Tax Alert Date Citation/Notification/Circular

13. Delhi HC rules that nonresident is entitled to concessional rate of 10% on long-term capital gains on sale of shares

11 October 2013 Cairn UK Holdings v. DIT [TS-510-HC-2013(DEL)]

14. Bangalore Tribunal rules on deductibility of employee share reward discount cross-charged by foreign parent company

22 October 2013 Novo Nordisk India Pvt. Ltd. v. DCIT [TS-524-ITAT-2013(Bang)]

15. Madras HC rules income under time charter arrangement for ships as “royalty”

23 October 2013 Poompuhar Shipping Corporation Ltd. v. ITO [TS-528-HC-2013(MAD)]

16. Bombay HC rules on the procedural aspect of when a subsequent tax year can be said to be admitted under a pending MAP

29 October 2013 UPS Worldwide Forwarding Inc. v. Union of India [TS-535-HC-2013(BOM)]

17. CBDT notifies Cyprus as “Notified Jurisdictional Area” as an anti-avoidance measure

2 November 2013 CBDT Press release dated 1 November 2013

18. Mumbai Tribunal rules on eligibility of a Danish fiscally transparent entity for tax treaty benefits

11 November 2013 DDIT v. A.P. Moller [TS-555-ITAT-2013(Mum)]

19. Global Tax Alert - OECD holds public consultation on BEPS-related reporting and transfer pricing issues

18 November 2013 OECD public consultation held on 12-13 November 2013 on several projects related to its Action Plan on BEPS

20. Madras HC rules on depreciation of non-compete fee paid

20 November 2013 Pentasoft Technologies Ltd. v. DCIT [TS-578-HC-2013(MAD)]

21. Madras HC rules payment for dedicated bandwidth is royalty

20 November 2013 Verizon Communications Singapore Pte Ltd. v. ITO [TS-577-HC-2013(MAD)]

22. Delhi HC reiterates distinction between copyright right and copyrighted article in respect of software transactions

27 November 2013 DIT v. Infrasoft Ltd. [TS-592-HC-2013(DEL)]

Home

37 Tax & Regulatory Quarter

S. No. Title Tax Alert Date Citation/Notification/Circular

1 Larger Bench decision in the case of free supplies for construction services

20 September 2013

Bhayana Builders (P) Ltd. & Ors. vs. CST, Delhi & Ors. [2013-TIOL-1331-CESTAT-DEL-LB].

2 Circulars prescribing the guidelines for arrest and bail in relation to offences under Service tax, Central Excise and Customs laws

23 September 2013

CBEC Circulars dt. 17 September 2013

3 Revenue appeal admitted in the Punjab & Haryana High Court, against the majority order in the Paul Merchants case

27 September 2013

CCE Chandigarh v. Paul Merchants [STA No. 5 of 2013]

4 No recovery proceedings when application is made under VCES

30 September 2013

K. Anand Caterers v. UoI & Ors. [AIT-2013-162-HC]

5 Recent notification issued by CBEC on CENVAT credit reversal of capital goods cleared as waste/scrap

1 October 2013 Ministry of Finance Notification No. 12/2013-CE (NT) dtd. 27 September 2013

6 Supreme Court upholds the levy of VAT on sale of flats under construction, affirming the decision in the K. Raheja case - L&T

1 October 2013 Larsen & Toubro & Anr. vs. State of Karnataka & Anr. [TS-156-SC-2013-NT]

Indirect Tax

Home

38 Tax & Regulatory Quarter

Regulatory

S. No. Title Tax Alert Date Citation/Notification/Circular

1. Amendment to Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012

24 September 2013 SEBI Notification dated 16 September 2013

2. SEBI approves draft SEBI (Foreign Portfolio Investors) Regulations, 2013

9 October 2013 SEBI Press Release dated 5 October 2013

3. The RBI allows unlisted companies to raise capital abroad by way of DRs/FCCBs without requirement of prior/subsequent listing in India

11 November 2013 A.P. (DIR Series) Circular No. 69 issued by RBI on 8 November 2013

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